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Professional Indemnity Insurance 101

June 1, 2017

Professional Indemnity insurance is an insurance which many more businesses are becoming exposed to, either as regulatory bodies are requesting it, or clients are demanding businesses have it in place prior to taking on a new contract. So what is it?

 

Colne Risk Advisory have put together the following overview outlining the basics and what some of the key terminology is within the policies.

 

What is Professional Indemnity Insurance

 

In short professional indemnity insurance protects your business, and it’s employees and directors, from claims by your clients about alleged negligence or a breach of your professional duty of care (we’ll pose an article on this later) which has arisen from an act, error or omission, however policies are now extending coverage to civil liabilities in general as long as it is caused within the undertaking of your profession.

 

Because professional indemnity covers not only actual but also alleged incidents it can provide great piece of mind for the business owner.

 

Who buys Professional Indemnity

 

Traditionally the main professions who bought Professional Indemnity were architects, lawyers and accountants. Overtime that list has continually expanded and as the courts find that more and more industries have their clients rely on the advice they provide then the list of industries who have professional indemnity has extended to include Beauticians, Natural Therapy, Real Estate Agents and designers.

 

Take away point is that if your client pays for knowledge and advises, therefore relying on it, then you should consider Professional Indemnity Insurance

 

What causes a claim against you and what is covered

 

As outlined above claims can come against you which stem from both real or perceived negligence etc… these don’t always come from the most likely source which the claims examples below highlight.

 

Once a claim is lodged against you the Professional Indemnity policy has provisions in place for both legal defence of the action as well as a compensatory payment. The insurer generally handles the claim process and will outsource the defence to specialised Professional Indemnity lawyers. Your broker should act as the liaison between you and the insurer and be able to assist you throughout the process taking away some of the stress of a claim.

 

Claims Examples

 

Industry: Market Research

 

Details: Insured won a contract to provide market research on the viability of new courses to be offered before the expenses of design, offering and running those courses was finalised. The project was deadline specific in order to allow the claimant to implement the offering.

 

Insured undertook the work by utilising contractors around the country to undertake pre-agreed market research with the required demographics. The contractors were then to file the reports with the insured who in turn would compile a report and forward to the claimant.

 

The work was undertaken as expected and lodged within the deadline. Unfortunately, it came to light that one of the contractors had essentially made up the information they supplied. As the report had been submitted it required the claimant to recheck and verify all the information supplied was correct. This involved engaging further consultants to do this. The upshot was that whilst it was only the one consultant who had falsified the information it meant that the deadline was missed.

 

What was alleged: The claim lodged stipulated that the insured had not provided service fit for purpose, or delivered in full. Furthermore, it was stated that the insured had breached the contractual terms about how the contract would be fulfilled along with methodology which would be used to collect the data.

 

As the contractor did not have their own Professional Indemnity policy in place the claim was unable to be subrogated (passed on) to the contractor as such the insured bore the full cost of the claim as they were the ones who had the contract with the claimant.

 

Outcome: The quantum of the payout was argued down by the insurer stipulating that the claimant did not require the complete set of data from all contractors as it would not have dramatically changed the wider decision making on the viability of those courses to be offered as there was enough data already held. With this in mind the insured incurred a fraction of the loss which was initially sought by the claimant. This however took numerous hours of research and compiling a defence by the insurer not to mention the mediation which took place.

 

Take Away Points: Ensuring that you have adequate resources in place to fulfill contracts that you win, ensuring that sub-contractors who you work with carry their own insurance policy, to have in processes which allow the double checking of work undertaken by contractors and that claims can be very expensive to defend.  

 

Key Terminology

So you have bought your policy but are unsure as to what the terminology is within the policy. Please note a brief explanation as to the key phrases within a policy schedule /certificate of currency.

 

Claims Made:

Professional Indemnity is a claims made policy, basically this means that for a claim to be covered then insurance cover must be in place at the time of lodgement of the claim. It does not matter if you held insurance when the work was done, you must also have it in place when a claim is lodged.

 

Costs inclusive /exclusive (in addition) policy limit:

This is quite a big one which is often overlooked. Costs inclusive and exclusive basically is whether the defence costs from a claim form part of the limit of indemnity (costs inclusive) or are covered in excess of the policy limit.

 

Costs inclusive /exclusive for excess:

This is whether or not an excess applies for defence costs or not.

 

Retroactive Date:

This is the date with which the insurer will extend the policy coverage back to. It either has an actual date or the words unlimited or inception. These words extend the cover back to the formation of the business.

 

Continuity Date:

How long you have been with the current insurer.

 

Key Areas to Consider with Professional Indemnity Insurance

  • Use an insurance broker who you both trust and who has the required knowledge and experience to understand your business, your exposures and how these relate to the PI insurance market;

  • Outline exactly the activities which you undertake. Most insurers will specify the business activities as per the proposal form presented and cover will be restricted to those;

  • Claims on a PI policy are subject to the policy limits, excesses and terms and conditions of the policy in force at the time of the notification. As such it is imperative that when changing insurers or reducing policy limits that there are no terms within the new policy which remove cover you had previously;

  • Ensure that your broker substantiates the recommendations for choosing one insurer over another and why other options were discounted; and

  • That your cover meets with any regulatory requirements which you have for your industry. Also check the policy wording carefully, you would be surprised how often something you would expect to be covered is not!

 

How we can help

Colne Risk Advisory specialise within Professional Indemnity. We have in excess of a decade working within Professional Indemnity, both within the Australian and UK markets as both an insurer and broker.

 

Should you want us to quote, review, offer a second opinion or simply answer a question on your policy program please get in contact with Robert Fleming on robert@colne.com.au 0410 677 515 or 1300 395 755

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