Professional Indemnity Insurance is Essential for all Professionals

Professional Indemnity Insurance is essential protection for professionals who provide a service, including design and advice. It provides indemnity for claims brought against you for financial loss, injury or damage arising from a breach (or an alleged breach) of your professional duty in the course of conducting your business. Professional Indemnity Insurance aims to protect your assets in the event of a claim to ensure you can still carry on your business.

The need for Professional Indemnity Insurance is not to be confused with Public Liability, as the latter will expressly exclude claims arising from advice or design where a separate fee is charged in the absence of a product sale.

Every business has associated risks, and whilst risk management procedures and controls are paramount, these must be underpinned by a robust insurance program to defend you if the unthinkable occurs.

If, in business, we could control all outcomes, we would not need insurance – unfortunately due to the unreliability of clairvoyants, a sound understanding of both insured and uninsured exposures is critical. For example, a third party, being a customer, supplier, competitor, regulatory authority such as the ACCC, ASIC, EPA, Industry bodies and others can make a claim against you, if they have allegedly suffered a loss due to negligence (or alleged negligence) arising from you professional services. Claims can arise from various allegations including:

• Breach of your duty of care
• Negligence / Common Law Matters
• Civil Liabilities
• Conflicts of Interest
• Breach of Confidentiality 
• Competition and Consumer Act or similar commonwealth legislation designed to protect consumers

Commonly Asked Question

Who is a Professional adviser?  Anyone who provides an individual or company advice and/or services of a skilful character (according to an established discipline) might be regarded as a 'Professional'. That means persons other than those in 'traditional' Professions, such as doctors, lawyers and engineers, are now considered to be ‘Professionals’ i.e. Computer consultants, advertising agents, acoustics consultants, trade associations and fund managers.

Why do Professionals need Professional Indemnity Insurance? A professional will hold himself or herself out as having a special skill, which can be relied upon by another. Consequently the law requires that the professional exercise the required skill to an appropriate level expected by that profession.  Professionals are only human and mistakes do happen. Any financial loss, injury or damage arising from a mistake or failure by the professional to exercise the required level of skill may mean that an award is made in favour of a person or company who suffers a loss, damage or injury. A professional may also be held liable for a mistake even though there was no negligence.  Defence costs under the policy are quickly made available to dispose of such allegations.

What is a ”Claims Made” policy?  Professional Indemnity Insurance is offered on a "claims made" basis, which means that it only covers claims made or possible claims that you become aware of (or could reasonably be expected to give rise to a claim) that are notified to the insurer within a current or active policy period.  This is distinct from an “occurrence” based policy that covers any claim provided the loss “occurred” during the policy period, no matter when the claim is brought against you. Under claims made policies, an act or omission may have occurred in a prior period and as long as that act or omission was on or after the retroactive date, the policy will extend to those prior acts (assuming the claim was not intentionally withheld at the last renewal and reported within a reasonable timeframe) and you have maintained continuity of cover with the same insurer It is essential to maintain continuity of PI insurance cover as claims made against you or circumstances which you become aware of could give rise to a claim will not be covered if they are not disclosed within the period of insurance where they first arise.   If there is any claim or potential claim or even a circumstance that could reasonably be expected to give rise to a claim, it must be reported to your insurer immediately, regardless of your own view as to fault. If you know of a claim or circumstance and it is not reported within the insurance period in which it arises your insurance policy is unlikely to respond.

What is a ‘circumstance’ that could give rise to a claim? This varies from insurer to insurer, so always check your policy first. Generally, the definition of “claim” will define what a notifiable event is.  The advice we commonly provide our clients with is that if an employee reports a mistake that could give rise to a future claim you should report it.  Consider if the error is likely to cost your client money or be a breach of your company or professional guidelines. We should also dispel any beliefs that any incident reported to an insurer will cause premiums to rise.  Not true, unless the issue is likely to result in a claim.  Instead what this does is demonstrate an understanding of the policy holder’s obligations to report any issue that might later require the policy’s assistance – something that is viewed very favourably by insurers in most cases.

How much cover should you buy?  Some questions to contemplate;

• In a worst-case scenario, if something went wrong, what would be the financial loss to third parties?
• What is the potential for bodily injury claims, and even multiple injuries?
• What is the potential for consequential economic loss to any third party?
• What is the potential for multiple claims in any one policy year?
• What is the level of potential legal and investigation costs which may be incurred by a successful claimant or claimants over the life of the claim?
• What is the level of potential defence and investigation costs incurred by or on the insured’s behalf over the life of the claim?
• Is the policy limit inclusive of defence costs or not?
• How long may a claim take to settle? Sometimes this can be eight to ten years or longer, which means the legal costs and interest liability will mount, as will the effect of inflation.
• How many parties are likely to be implicated in any claim or action?
• The more parties there are,the more difficult and costlier it is to settle a claim.
• What is the nature, scale, and complexity of work done in the past and during the policy period? (Note: a policy covers exposure from past work where the retroactive date has been extended to do so.)
• What is the overall contract/project value the insured works on? 
• The insured may have a small part and only earn a small amount of fees, but their acts, errors or emissions could delay the entire contract/project.
• How many prior years are there where risk exposure may arise?
• In some cases it may take years before a liability becomes apparent to the Insured.
• What is the exposure from ‘incoming principals’ risks at prior corporate entities, or merged or acquired entities?
• In general, a sum insured of less than $1 million is unlikely to be adequate for even a small practice which assesses its exposure as low.