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Professional indemnity explained
A liability cap is a contract term setting the most you will pay a client for a claim; your PI limit is the most your insurer pays. Matching them matters because any gap is uninsured.
Part of: Professional indemnity insurance
In short
A contractual liability cap and a professional indemnity limit are separate numbers. The cap is what you agree to pay a client at most; the PI limit is what your insurer pays at most, subject to the policy terms. If the cap is higher, or there is no cap, the difference is uninsured. In business contracts, a cap must usually pass the Unfair Contract Terms Act 1977 reasonableness test, and section 11(4) asks how far you could have covered yourself by insurance. Align the cap with your PI limit and basis, and consider a net contribution clause.
Your contractual liability cap is the most you agree to pay a client if things go wrong. Your PI limit is the most your insurer will pay on your behalf. They are separate numbers set by separate documents, and nothing links them unless you write the link in. If your cap is higher than your PI limit, or there is no cap at all, the gap is paid from your own business.
The safest position for most professionals is a cap at or below the PI limit, on the same basis (each and every claim or aggregate), with clear exclusions for indirect loss. Our guide to choosing between £1m, £2m and £5m PI helps size the limit first, so the cap can follow it.
| Contract position | What happens on a large claim | Risk to you |
|---|---|---|
| Cap equal to PI limit, same basis | Insurer pays up to the limit, subject to the excess and policy terms | Usually lowest |
| Cap above PI limit | Insurer pays up to the limit; you pay the rest up to the cap | Uninsured gap |
| No cap | Liability limited only by the law on damages | Potentially unlimited |
| Cap per claim, PI in aggregate | Several claims can exhaust the aggregate while each stays under the cap | Hidden gap across a year |
| Cap "equal to the PI limit" | Cap moves with the limit, but check whether costs and excess are counted | Depends on drafting |
Basis matters as much as the figure. A £2m aggregate policy and a £2m each and every claim cap are not the same promise. See aggregate vs each and every claim limits and whether defence costs sit inside or outside the limit, because costs inside the limit reduce what is left for damages.
In business to business contracts, the Unfair Contract Terms Act 1977 (UCTA) can make a cap unenforceable unless it is reasonable. It applies where you exclude or restrict liability for negligence, and where you deal on your own written standard terms of business. Under section 11, a term must have been fair and reasonable given the circumstances known to the parties when the contract was made, and the person relying on it has to prove that.
Section 11(4) is directly relevant to PI. Where a term limits liability to a specified sum, the court looks in particular at the resources you could expect to have to meet the liability, and how far it was open to you to cover yourself by insurance. In plain terms, a cap set well below the cover you could reasonably have bought is harder to defend, while a cap aligned with a realistic PI limit is easier to justify.
Consumer contracts are dealt with under different rules, mainly the Consumer Rights Act 2015, so take advice if you work for private individuals. Some regulators also restrict caps: the SRA Indemnity Insurance Rules, for example, require SRA-authorised firms not to exclude or attempt to exclude liability below the minimum level of cover the rules require.
Whichever you use, apply it consistently, explain it to clients at the start, and be ready to show why the figure is reasonable for the size and risk of the work.
A net contribution clause limits your liability to the share of the loss that is fairly yours, where another party (such as a contractor) is also responsible. Without one, joint liability can leave you paying the whole loss and chasing others for contribution. In West v Ian Finlay & Associates [2014] EWCA Civ 316, the Court of Appeal upheld a net contribution clause in an architect's appointment as reasonable and effective. That does not mean every such clause will survive; it depends on the wording and circumstances. Our page on net contribution clauses goes further.
A large client's procurement team asks a consultant to accept unlimited liability. The consultant holds £2m each and every claim. If they sign, any loss above £2m is uninsured. A common compromise is a cap at a multiple of fees or at the PI limit, with unlimited liability kept only for matters the law does not allow you to limit, such as death or personal injury caused by negligence.
An IT consultant caps liability at £1m per claim but holds £1m in the aggregate. Two £800,000 claims in one policy year would exceed the aggregate, leaving £600,000 uninsured even though each claim is under the cap.
Insurers generally prefer to see caps, net contribution clauses and exclusions of indirect loss in your standard terms. They do not usually require them, but proposal forms commonly ask about your contract terms, and a portfolio of uncapped contracts may affect terms offered. A PI policy usually covers your legal liability, but cover for liability you have taken on purely by contract, beyond what the law would impose anyway, may be restricted. Check your wording.
Accountants can also read liability caps in engagement letters, and technology firms limitation of liability in IT contracts.
Apex arranges professional indemnity insurance with limits that fit your contracts; a broker reads every enquiry.
Usually that is the sensible starting point. A cap at or below your PI limit, on the same basis, means a large claim should fall within cover, subject to the excess and policy terms. A cap above the limit leaves an uninsured gap that your business would have to pay itself.
In business contracts it is often enforceable if it passes the Unfair Contract Terms Act 1977 reasonableness test, which you must prove. Under section 11(4), courts look at your resources and how far you could insure. A cap aligned with available PI cover is generally easier to defend than a token figure.
You can, but your PI will only pay up to its limit, subject to the policy terms. Anything above that is paid by your business. Most professionals negotiate a cap, often tied to the PI limit or a multiple of fees, and keep unlimited liability only where the law does not allow a limit.
It limits your liability to the share of a loss that is fairly attributable to you, where others such as contractors also caused it. The Court of Appeal upheld one in West v Ian Finlay & Associates [2014] EWCA Civ 316, though enforceability always depends on the wording and the facts.
PI usually covers your legal liability arising from your professional services, subject to the policy terms. Liability you take on purely by contract, beyond what you would owe anyway in law, such as indemnities or guarantees of results, may be excluded or restricted. Send unusual contract terms to your broker before you sign.
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.
