Professional Indemnity Exclusions: What Tech Founders Overlook

Identify the standard policy exclusions that turn valid claims into expensive personal liabilities

Standard professional indemnity exclusions for UK tech companies include: deliberate acts and fraud, known circumstances at policy inception, contractual liability beyond common law duties, intellectual property infringement (often requires endorsement), fines and penalties, trading losses, cyber incidents affecting own systems, betterment costs, insolvency-related claims, warranty breaches and loss of or damage to physical property.

• Retroactive date exclusions eliminate cover for prior work.
• Territorial limits typically restrict cover to UK, EU or worldwide excluding USA.
• Professional Indemnity covers negligence, errors and omissions but not intentional breaches or guaranteed outcomes.
• A typical exclusion based claim denial costs £35,000 in unrecovered defence costs.

Review exclusions before purchasing, negotiate endorsements for critical gaps, disclose all potential claims at inception and renewal.

Most professional indemnity exclusions are buried in policy schedules that founders skim rather than study. You focus on the limit, the premium and whether it satisfies client requirements. The exclusions section gets a cursory glance at best.

But here’s what that oversight costs: The average technology company discovers a critical exclusion only when filing a claim, at which point you’ve already spent £15,000 to £40,000 on legal advice before learning your insurer won’t pay. Those defence costs don’t get refunded when an exclusion applies.

It’s not just about reading your policy wording more carefully, it’s about understanding which exclusions are standard versus negotiable, which gaps you can fill with endorsements and which risks you’ll carry uninsured. Because every founder assumes their insurance will respond until the day it doesn’t.

The deliberate acts and dishonesty exclusion catches more claims than you’d expect

Every professional indemnity policy excludes deliberate wrongdoing, fraud and dishonest acts. This seems reasonable until you see how insurers interpret “deliberate” in practice.

If you knowingly deliver code you recognise as inadequate, that’s a deliberate act even if you intended to fix it later. If you miss a project deadline you knew was impossible when you accepted the contract, insurers may argue that’s deliberate failure to perform. If you make statements about software capabilities you suspect are exaggerated, that borders on dishonesty even if you hoped to deliver eventually.

The exclusion extends beyond obvious fraud to cover reckless indifference. These aren’t cases of outright fraud, they’re situations where founders took shortcuts, ignored warnings or made optimistic commitments they couldn’t deliver.

Consider a scenario where your CTO flags critical security vulnerabilities in code you’re about to deliver. You deliver anyway, planning to patch later. The client suffers a breach. Your insurer argues you deliberately delivered inadequate work despite knowing the risks. The exclusion applies, leaving you personally liable for a £200,000 claim.

The line between honest error and reckless conduct depends on what you knew and when you knew it. Documentation proving you genuinely believed your work adequate provides your best defence against deliberate act allegations. Internal communications suggesting you knowingly cut corners destroy that defence entirely.

Prior known circumstances elimination creates retroactive exposure

The circumstances exclusion eliminates cover for any situation you were aware of before policy inception or renewal that might reasonably lead to a claim.

This matters more than founders realise. If a client emails you complaining about bugs, performance issues or missed deliverables before your renewal date, you must disclose that circumstance to your insurer. Failing to disclose means any subsequent claim arising from that situation will be excluded.

The exclusion applies even if no formal claim exists. A client expressing dissatisfaction, threatening legal action or withholding payment all constitute circumstances requiring disclosure. According to insurance market guidance, “aware or ought reasonably to have been aware” sets the standard. If a competent business owner in your position would recognise potential claim exposure, you’re deemed aware regardless of whether you actually noticed.

Many declined claims trace back to undisclosed circumstances at renewal. You had a difficult client conversation three months before renewal, didn’t think much of it, didn’t disclose and renewed your policy. Six months later that client files a formal claim. Your insurer reviews correspondence, identifies the earlier complaint and excludes the claim as a known circumstance.

The consequence isn’t just declined claims, it’s potential policy voidance. Material non-disclosure of known circumstances can void your entire policy, leaving every claim uninsured. This makes honest disclosure at renewal absolutely essential even when you’re confident circumstances won’t develop into claims.

Contractual liability exclusions eliminate protection for guaranteed outcomes

Standard professional indemnity covers common law negligence, meaning the duty of care you owe clients regardless of contract terms. It typically excludes liability you assume solely through contract that exceeds those common law duties.

If your contract guarantees specific outcomes, performance metrics or delivery dates, and you fail to deliver, that’s a contract breach rather than professional negligence. Many policies exclude such contractual liability or provide very limited cover for it.

This creates problems when clients impose liquidated damages clauses, performance penalties or service level agreement guarantees. Your contract promises 99.9% uptime. You deliver 98.5%. The client claims £50,000 in contractual penalties. Your professional indemnity policy excludes contractual liability, leaving you personally exposed.

The distinction between negligence and contract breach becomes critical. If you failed to deliver adequate uptime because your architecture was negligently designed, that’s covered professional negligence. If you simply failed to meet a contractual promise despite competent work, that’s excluded contractual liability.

Some insurers offer contractual liability endorsements that provide limited cover for breach of contract claims. These typically come with sub-limits of £100,000 to £250,000 and higher excesses. If your contracts include substantial performance guarantees or penalty clauses, securing contractual liability coverage becomes essential before signing.

Intellectual property infringement requires specific policy inclusion

Many standard professional indemnity policies exclude intellectual property claims entirely, whilst others provide limited cover that excludes patents. This matters enormously for software developers.

If a third party claims your code infringes their patent, copyright or trademark, your professional indemnity won’t respond unless specifically endorsed. The claim could cost £200,000 to defend and £500,000 to settle, but without IP cover you’re funding it personally.

Even policies that include IP coverage often exclude patent infringement. Copyright and trademark might be covered, but patent claims remain excluded. For technology companies where patent trolls routinely target successful products, this gap creates enormous uninsured exposure.

The exclusion extends to your clients’ IP issues. If your client gets sued for infringement based on code you wrote for them, they’ll claim against you for providing infringing work. That’s a professional indemnity scenario, but if your policy excludes IP claims it won’t respond.

Some professional indemnity policies include IP infringement cover up to a sub-limit, typically £250,000 to £500,000. Larger businesses should consider separate IP litigation insurance providing dedicated limits for patent defence and infringement claims.

Cyber incident exclusions create gaps between PI and cyber insurance

Professional indemnity policies increasingly exclude cyber incidents, reasoning that dedicated cyber insurance should respond. This creates a coverage gap that catches founders unprepared.

If hackers steal client data from your systems, is that a professional indemnity claim based on inadequate security practices or a cyber insurance claim based on a security incident? The answer depends on specific policy wordings, and increasingly professional indemnity policies exclude any claim involving cyber events.

Your professional indemnity might cover your inadequate security advice to clients. But it probably excludes losses arising from actual cyber incidents affecting your own systems. That distinction becomes critical when a breach of your development servers exposes multiple clients’ data simultaneously.

According to Lloyd’s underwriting guidance, the trend is towards absolute cyber exclusions in professional indemnity policies. Insurers expect technology companies to carry separate cyber insurance rather than relying on professional indemnity to respond to cyber claims.

This creates a gap for smaller businesses who can’t afford multiple policies. If you’re buying professional indemnity for software developers without separate cyber cover, verify whether cyber incidents remain covered or whether you’re carrying that risk uninsured.

Fines, penalties and regulatory sanctions fall outside policy scope

Professional indemnity covers compensation you become legally liable to pay clients for negligent work. It doesn’t cover fines imposed by regulators or penalties from government authorities.

If your inadequate data protection practices lead to an ICO fine of £100,000, your professional indemnity policy won’t pay that fine. Under UK law, penalties imposed by regulators typically aren’t insurable because allowing insurance to pay them defeats their deterrent purpose.

The policy will usually cover your legal defence costs for regulatory investigations. So whilst you can’t insure the £100,000 ICO fine itself, your insurer will fund the £40,000 you spend on lawyers defending against the investigation. This partial protection provides some value but leaves the penalty itself uninsured.

Some policies extend this exclusion to contractual penalties as well. Liquidated damages clauses, late delivery penalties and performance shortfall payments all potentially fall outside standard professional indemnity scope.

Understanding this exclusion matters for businesses in regulated sectors. If you handle health data, financial information or operate in FCA-regulated territory, regulatory fines create uninsurable exposure that needs managing through compliance programs rather than insurance.

Retroactive date restrictions eliminate cover for prior work

Your policy’s retroactive date determines how far back in time your coverage extends. Work performed before that date isn’t covered even if claims arise during your current policy period.

When purchasing professional indemnity for the first time, your retroactive date typically matches your purchase date. This means prior work remains uninsured. If you started trading two years ago but bought insurance today, those two years of work generate uninsured claim exposure that will persist for six years after completion under limitation periods.

Some insurers offer unlimited retroactive cover, meaning all prior work is covered from day one. This costs more but eliminates the gap. Others set the retroactive date at your first insurance purchase date, providing continuity as long as you maintain continuous coverage.

Changing insurers creates retroactive date risks. If your new insurer sets a retroactive date matching when you switch to them rather than honoring your prior policy’s retroactive date, you create a gap. Work done under your old policy might not be covered by either insurer if claims arise after you switch.

This makes maintaining continuous coverage with consistent retroactive dates essential. It is not uncommon for a professional indemnity claim to arise years after work completion. Those claims only get covered if your retroactive date extends back to when the work was actually performed.

Territorial limits restrict where your work is protected

Most professional indemnity policies include territorial limits defining where your work is covered and where claims must be brought.

Common territorial scopes include:

UK only cover protects work performed in the UK for UK clients, with claims brought in UK courts. This provides the cheapest cover but leaves international work uninsured.

UK and EU cover extends to European work and clients. Post-Brexit this requires specific inclusion since EU isn’t automatically included anymore.

Worldwide excluding USA cover protects work anywhere except the United States and Canada. This balances broad protection with affordable premiums by excluding the most litigious jurisdiction.

Worldwide including USA provides complete territorial protection but typically costs significantly more than worldwide excluding USA cover.

If you work with international clients, sign contracts requiring you to submit to foreign jurisdiction or have users in multiple countries, your territorial scope needs careful attention. A claim brought in a US court won’t be covered by UK-only professional indemnity regardless of how valid your defence might be.

Decision framework: Identifying exclusions that matter for your business

If you build software sold to multiple end users → Verify IP infringement coverage, ensure cyber exclusions don’t eliminate product defect claims, confirm territorial scope covers user locations.

If you provide consulting and advisory services → Check whether contractual liability endorsements are available, verify retroactive date covers all prior advice, ensure professional opinion cover is included.

If your contracts include performance guarantees or SLAs → Secure contractual liability cover or negotiate contracts to align with standard negligence-based professional indemnity scope.

If you work internationally or have foreign clients → Confirm territorial scope covers jurisdictions where you operate and where clients could bring claims.

If you’ve been trading without insurance → Negotiate the earliest possible retroactive date to minimise uninsured prior work exposure, consider run-off cover for prior periods.

The exclusions that matter most depend on your specific work type, client base and contract terms. Generic professional indemnity might cover 80% of technology businesses adequately, but you need verifying you’re not in the 20% whose exposures fall outside standard policy scope.

 

Simplify Stream provides educational content about business insurance for UK companies, especially those with high growth business models that require specialist insurance market knowledge. We don't sell policies or provide regulated advice, just clear explanations from people who've worked on the underwriting and broking side.