The insolvency exclusion in professional indemnity
Reviewed by Apex Insurance Brokers · Last reviewed 2026-08-05
Insolvency is one of the trickier exclusions in a professional indemnity policy because it can point in two directions at once: at your own firm, or at someone you dealt with. Understanding which version sits in your wording — and how tightly it is drafted — matters, because insolvency is exactly the kind of event that triggers a wave of professional negligence claims.
What the exclusion actually does
A professional indemnity policy is designed to respond to your legal liability for negligent professional work — bad advice, a mistake in a design, a missed deadline, a flawed valuation. An insolvency exclusion carves out losses that flow from an insolvency event rather than from your professional error.
The insurer's logic is that PI cover is not meant to be a guarantee against commercial failure. If a business collapses, someone almost always loses money, and without the exclusion the policy could be turned into a backstop for ordinary trading risk. So insurers add wording that excludes claims "arising directly or indirectly out of" insolvency, liquidation, administration, receivership or bankruptcy.
The two versions you will see
Read the clause carefully, because "insolvency exclusion" describes at least two quite different animals.
| Type | What it excludes | Who it typically affects |
|---|---|---|
| Insured's own insolvency | Claims arising from your own firm's bankruptcy, liquidation or administration, or your inability to meet obligations because you have failed financially. | Any professional firm in financial distress or winding down. |
| Third-party / client insolvency | Claims where the loss is caused by the insolvency of a client, counterparty, provider or investment you were involved with. | Financial advisers, accountants, corporate finance, surveyors, insolvency practitioners. |
The first version rarely causes surprise — a firm cannot sensibly insure against the consequences of its own collapse. The second is the one that catches people out, because a genuinely negligent piece of advice can be dressed up by an insurer as an "insolvency loss" if the wording is broad enough.
Where the line falls: insolvency vs. negligence
The exclusion is meant to bite where the insolvency itself is the cause of loss, not where your negligence is. Take a financial adviser who recommends an investment that later fails when the provider goes into administration. Two things could be true:
- The provider's failure was an unforeseeable external event — here an insolvency exclusion may fairly apply.
- The adviser failed to carry out proper due diligence, ignored warning signs, or put a cautious client into an unsuitable, high-risk product — here the real cause is negligent advice, and cover should respond.
The problem is the phrase "directly or indirectly." An aggressively drafted clause can argue that because the loss "involved" an insolvency, the whole claim is excluded — even where negligence was the driving cause. That is why the precise wording, and any carve-back for negligent advice, is worth scrutinising before you buy.
Not sure whether your PI wording excludes third-party insolvency? We will read the clause and tell you plainly.
Get a PI quote →Regulated firms and minimum PI terms
If your firm is authorised by the Financial Conduct Authority, you may not have a completely free hand. The FCA sets minimum professional indemnity requirements for certain regulated firms in its Handbook — for example under MIPRU for insurance and mortgage intermediaries, and under IPRU-INV for personal investment firms. These rules specify minimum limits of indemnity and restrict the exclusions an insurer can apply.
The practical effect is that a policy sold to meet an FCA capital-resources or PII requirement should not contain exclusions that gut the cover the regulator expects you to hold. If you operate in a regulated sector, check your wording against the relevant Handbook rules, or ask your broker to do it — an insolvency exclusion that reaches too far could leave you non-compliant as well as exposed.
What to check in your wording
- Does it name third-party insolvency at all? Many policies only exclude the insured's own insolvency. If yours is silent on client or counterparty insolvency, that risk is likely covered.
- Is there a carve-back? Better wordings preserve cover for claims where your negligent act or omission is the cause, even if an insolvency is in the chain of events.
- How broad is the trigger language? "Directly or indirectly arising from" is far wider than "solely caused by."
- Does it interact with run-off? If your firm ceases trading, run-off PII cover is what protects you against claims made afterwards.
If any of these are unclear, that is a conversation to have before renewal, not after a claim. A short review of your PI wording can flag an over-broad insolvency clause while there is still time to negotiate it.
Common questions
Does the insolvency exclusion mean I'm not covered if my client goes bust?
Not automatically. Many PI policies only exclude the insured firm's own insolvency and say nothing about a client's. Even where a third-party insolvency exclusion exists, a well-drafted policy should still respond to a claim caused by your negligent advice rather than by the insolvency itself. Check the exact clause.
Can the exclusion be removed or narrowed?
Often, yes. Insurers may agree to delete a broad third-party insolvency exclusion or add a carve-back preserving cover for negligence, particularly where your risk profile supports it. This is a negotiation point at placement or renewal, which is where a broker earns their keep.
What happens to cover if my own firm becomes insolvent?
Your professional work does not stop attracting claims just because you cease trading. Run-off PII cover is designed to respond to claims made after a firm winds down. Regulated firms often face minimum run-off requirements, so plan for this before you close.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This guide is general information, not advice on a specific policy or a substitute for your policy wording.