Professional indemnity is a promise to make good a financial loss somebody else suffered because your professional work was wrong. As insurance, it is the policy that keeps that promise: it pays the client's loss and the cost of arguing about whether the loss was your fault.
What indemnity means
To indemnify somebody is to put them back in the position they would have been in. In insurance it means the insurer meets a liability on your behalf up to the limit. Professional indemnity applies that idea to professional work: the liability it meets is your liability for financial loss caused by a negligent act, error or omission.
What it does not reach
Injury and property damage, which are public liability. Deliberate acts. Fines imposed on you. The cost of redoing work you did badly, as opposed to the client's loss. And a guarantee of outcome, because the cover answers for negligence rather than for a promise that the result would be achieved.
Claims made, which makes it behave differently
The policy that answers is the one in force when the claim is made, whenever the work was done. That is why it has to be kept continuous long after a project ends and why a retroactive date matters when changing insurer. Almost every other business policy responds to events instead.
Who ends up buying it
Regulated professions, because their regulators require it. Consultants, contractors, designers and agencies, because their clients require it. And anybody whose work somebody relies on, whether or not they have ever been asked, because the exposure exists regardless.
Questions people ask about what is professional indemnity
What does indemnity mean?
To put somebody back in the position they would have been in. In insurance, the insurer meets a liability on your behalf up to the limit.
Is it the same as public liability?
No. Public liability covers physical injury and property damage; professional indemnity covers pure financial loss from your work.
Why must it be continuous?
It is claims made, so the policy in force when the claim arrives is the one that answers, whenever the work was done.