Professional indemnity insurance. Cover for the day a client says your advice cost them money.

At its core it covers breach of professional duty: work below the standard a reasonably competent person in your line of work would have delivered. That might be an accountant's advice that triggered a tax penalty, an engineer's calculation that under-specified a structure, or a consultant's report that missed something material.

Most policies also extend to breach of confidentiality or privacy, unintentional infringement of intellectual property and defamation arising from your work. Cover for an employee's dishonesty is automatic on some wordings and an optional extra on many others, usually only once fraud is proven and usually excluding the owner's own dishonesty.

The limit of indemnity is rarely your choice alone, because contracts, tenders and regulators often set a minimum. Most of the clients we place carry between $1 million and $2 million.

Two mechanics inside that limit matter as much as the number. An aggregate limit, rather than one that applies to any one claim, can be worn down by an earlier claim. And if defence costs sit inside the limit, every dollar spent defending you is a dollar less for damages, so a $1 million costs-inclusive limit can leave far less than a $1 million costs-exclusive one. Most policies also carry an excess you pay on every claim.

When a client's contract names E&O, check two things. First, the limit: the contract sets the figure, so check whether yours applies to any one claim or in the aggregate. Second, where a claim could be brought. Most of the professional indemnity wordings we compared exclude claims brought in the United States, and many exclude Canada too. Some add North America through the schedule and some do not. If your client is in North America, raise it with us before you sign.

In technology contracts the American name is still common, often as technology E&O. If you sell IT services, a small business cyber policy is the wrong answer to that clause. One widely used wording excludes claims because IT services you provide for a fee have failed. That cover belongs in an IT liability policy or a technology package.

Three moments catch people out: switching insurers without checking the retroactive date, sitting on a problem instead of notifying your insurer in writing as soon as you know, and stopping work without run-off cover. How each one works is set out in what happens to your professional indemnity cover when you switch insurers or stop work.

An online PI quote will not ask when your last retroactive date was, whether your contracts require a specific limit, or what happens to your cover if you take on a business partner next year.

The retroactive date is the first thing we check, against your actual practice history rather than just the policy you are replacing, because a gap two insurers back can still be sitting there unnoticed. We check your limit against what your contracts, tenders or licensing body require. And we flag run-off when you take on a partner, change your business structure or start talking about winding down, not after the policy has lapsed.

Many insurers issue a separate professional indemnity wording for particular professions, while others cover the same work under a general wording tailored through the schedule and an occupation-specific proposal form. The occupation-specific part is rarely the grant of cover. It is the definition of your professional business, and the extensions and exclusions built around it.

Across the nine professional indemnity wordings we compared, defence costs sit on top of the limit on some and inside it on others, so we read what your schedule says. On seven of the nine, the continuous cover clause only helps if the same insurer covered you throughout. That clause matters when you knew about a problem job, never notified it and are now switching, so we check it before you move.

We also look past the label. Many professional services and information and technology (ICT) consulting clients who ask us for "a PI quote" have their biggest risk somewhere else. A business that designs websites, builds brands or runs SEO or digital marketing is giving advice, but its heaviest exposure is usually a client data breach, a copyright or trademark infringement, or a content dispute. Standalone professional indemnity was not built to carry those at the scale a digital business faces, so a combined policy bundling professional indemnity, cyber and public liability is usually the answer. See Cyber Insurance.

Some professions have no choice. Solicitors, accountants who hold a public practice certificate or are registered tax or BAS agents, financial advisers, architects and most medical and allied health practitioners must hold it, by law, by their licensing body or by their professional association. Engineers are required in some states and not others, as our engineers page sets out, and so are building certifiers and consulting surveyors, often at a set figure. How an Australian Financial Services Licence brings in professional indemnity is set out on our accountants page.

Whether a law, licence or professional body requires you to hold cover is a question for that body, and for your own adviser where the answer matters. What your policy does about it is our side of the table.

A much larger group assume it is not for them. In our own book that group is dominated by professional services firms and ICT consultants. It runs well beyond them too: marketing agencies, web designers, recruitment consultants, project managers, interior and building designers, mortgage brokers, property valuers, bookkeepers who are not full accountants, and freelancers who give clients recommendations.

The test is not your job title. It is whether a client could say your professional opinion, not a physical accident, cost them money.

Sitting on a problem instead of notifying it. In our experience this is by far the biggest and most costly mistake small business owners make with this cover. You must notify your insurer once an event occurs, even if nobody has formally complained yet. Wait until renewal and you may have lost the right to claim on it at all.

Assuming public liability covers advice. It does not.

Switching insurers for a cheaper premium without checking the retroactive date. A quote that looks 20% cheaper is not a saving if the date resets to today. Ask what date the policy goes back to, and whether it matches what you already had.

Cancelling the policy the day you stop trading. Without run-off cover, a claim about a job from three years ago has nothing to respond to it.

Setting the limit to whatever is cheapest. Government and corporate tenders, head contracts and some licensing bodies commonly set a $10 million minimum, so check before you quote, not after you sign.

Assuming a subcontractor's work is covered. If other consultants or tradespeople you engage get something wrong, whether that flows back to your policy depends on the wording. Check it before the job starts.