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Professional indemnity explained
Director personal liability is the risk that a client sues you as an individual instead of, or as well as, your limited company. It matters because a personal judgment can reach your home and savings unless an insurance policy responds.
Part of: Professional indemnity insurance
In short
In most cases a client unhappy with professional work has to sue the company it contracted with, because a limited company is a separate legal person. A director can still be personally liable in a few situations: where they personally assumed responsibility to the client and the client relied on that, where they committed fraud or deceit, where they signed a guarantee or contract in their own name, or where a duty attaches to them as an individual professional. A professional indemnity policy usually covers directors and employees as insureds for negligence claims, subject to its terms, while D&O insurance covers claims about how the company is run.
If you trade through a limited company and the client's contract is with that company, a negligence or breach of contract claim is normally brought against the company. The company is a separate legal person, and its directors are not automatically liable for its debts or its mistakes. That is the point of limited liability, and it is one reason professionals incorporate. Sole traders and general partners do not have the same separation; our guide to limited company, sole trader and partnership PI compares the three.
The protection is not absolute. The courts look at what you personally did and said, not just at the name on the letterhead. The leading case is Williams v Natural Life Health Foods Ltd [1998] UKHL 17. Franchisees sued the managing director of a franchisor that had gone into liquidation, relying on a brochure that highlighted his personal experience. The House of Lords held he was not personally liable: nothing he said or did conveyed that he was personally assuming responsibility, and the franchisees had not reasonably relied on him rather than on the company. Our note on Williams v Natural Life sets out the test.
So the real question is whether you, as an individual, stepped outside your role as the company's agent in a way the client relied on.
The table sets out the main routes to personal liability. Each depends on the facts, and a claimant usually has to show more than the fact that you did the work.
| Route | What it means | Typical PI position |
|---|---|---|
| Personal assumption of responsibility | You conveyed to the client that you personally stood behind the advice, and they reasonably relied on you. This builds on Hedley Byrne and the wider assumption of responsibility principle. | Usually covered where the work is within the firm's professional business and you are an insured person, subject to the terms. |
| Individual professional duty | Some professionals owe duties as individuals. In Merrett v Babb [2001] EWCA Civ 214 an employed surveyor who signed a mortgage valuation was held personally liable to the buyer after his employer's practice had failed and its PI had been cancelled. See Merrett v Babb. | Usually covered while the firm's policy is in force; the case shows why run-off matters. |
| Fraud or deceit | A director who personally makes a fraudulent statement cannot hide behind the company, as the House of Lords confirmed in Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2002] UKHL 43. | Dishonesty is commonly excluded for the person who committed it; some wordings protect innocent colleagues and the firm. |
| Personal guarantees and personal contracts | If you sign a guarantee, or a contract in your own name, you have taken that liability on yourself. | Not a PI matter. PI covers civil liability from professional services, not debts you agreed to stand behind. |
| Regulatory action | Regulated professionals, such as solicitors, can face disciplinary action as individuals whatever the firm's structure. | PI responds to civil claims; cover for regulatory defence costs depends on the wording. |
Most professional indemnity policies define the insured broadly. The definition commonly includes the firm, its present and former directors, partners and employees, and sometimes consultants, for work done on the firm's behalf. If a client names you personally in a claim about the firm's professional work, the firm's professional indemnity insurance is usually the first place to look, subject to its terms.
Section 233 of the Companies Act 2006 expressly allows a company to buy insurance for its directors against liabilities, so it is normal for the company to pay the premium for cover that protects its people.
Directors are often unsure whether a claim belongs under PI or directors and officers insurance. The dividing line is usually what the allegation is about, not who is named.
| Professional indemnity | Directors and officers | |
|---|---|---|
| Who typically claims | Clients and third parties who relied on your professional work | Shareholders, liquidators, creditors, regulators and employees |
| What is alleged | Negligent advice, design, error or omission in professional services | Wrongful acts in running the company, such as breach of directors' duties |
| Who is insured | The firm and its people for professional work | Directors and officers personally, and often the company for some claims |
| Overlap | Does not usually cover management decisions | Commonly excludes professional services claims, leaving them to PI |
Many professional firms need both. Our page on D&O for professional service firms explains how the two usually fit together.
Illustrative example 1. A director of a small engineering consultancy signs off a structural report on company letterhead. The client sues the company and names the director too. Unless the director said or did something showing a personal assumption of responsibility, the personal claim is likely to be weaker, and the firm's PI policy would usually defend both, subject to its terms.
Illustrative example 2. A one-person consultancy closes and the director stops paying for PI. Two years later a former client alleges negligence. The company has been dissolved, so the client looks for a route against the director personally. With no run-off in place, the director may face the claim and the defence costs alone.
Illustrative example 3. A director signs a personal guarantee for the company's office lease. When the company fails, the landlord pursues the director. That is a contractual debt, not a professional negligence claim, and PI would not respond.
Apex arranges PI and D&O cover for UK professional firms; a broker reads every enquiry.
A claim against the company generally cannot proceed once it is dissolved unless the company is restored to the register. Claimants may then look for a route against you personally, such as an assumption of responsibility. Run-off cover arranged before closure is usually what protects former directors in that position, subject to its terms.
Usually, yes, if the claim relates to professional work you did for the company and the policy defines directors and employees as insureds. The claim normally shares the policy limit with any claim against the company. Cover is subject to exclusions, such as dishonesty, and to the claim being notified promptly.
Not usually. The company, as employer, is generally the party liable for employees acting in the course of their employment. A director becomes personally exposed only if their own conduct creates a separate liability, for example a personal assumption of responsibility to the client or a fraudulent statement.
Engagement letters are usually issued in the company's name, with the director signing on its behalf. Clear wording that the contract is with the company and that individuals do not accept personal responsibility can help, although it will not protect against fraud. A solicitor can advise on the exact wording for your firm.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Get a PI quote Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
