Professional Indemnity Analysed Part 2

Part 1

What won’t professional indemnity insurance cover?

Each policy will have its own set of exclusions whereby the insurer will not be liable to pay compensation to the insured in the event that a claim is made. Some typical exclusions listed on professional indemnity policies include:

Claims arising following cancellation of policy:

It is not unusual for many claims to be made against businesses and/or professionals a significant period of time following the provision of the service and even after they have ceased business. As many professional indemnity policies expire when they are cancelled, the policy owner may not be covered for claims made against them even if they have already retired. This can be avoided by taking out a policy with a “run off” extension discuss in the section below

Claims arising following switching insurers:

If the policyholder is covered by a policy provided by their employer and they have changed employers and switched insurers, it is unlikely that they will be covered for claims made for the business they provided with their previous employer. It is also unlikely that any compensation will be provided as the previous cover is likely to have expired. In this event it is worth the worker checking with their new insurer what provisions they have for previous claims

Known circumstances:

Generally, the insurer will not receive compensation for events that they were aware of prior to the commencement of the policy period

Professional fees:

Compensation will not be paid for any claim arising from the insured for claims by clients for fees or charges for their professional service. No refund of fees or charges from the insured will be paid by the insurer

Asbestos:

Claims or legal costs that arise in respect of asbestos

Radioactivity and pollution:

Claims that are attributable to or are the consequence of radioactivity or pollution

Dishonest, fraudulent or criminal acts:

Claims arising where the policyholder has intentionally engaged in dishonest, fraudulent or criminal acts

Fines and penalties:

Claims arising for compensation to cover fines or penalties suffered by the insured

Directors or officers:

Liability arising from claims where the insured was acting in the capacity of the director or officer of a company or organisation

Insolvency:

Claims made against the insured where all or part of the claim is attributed to the insolvency of the insured or their suppliers/contractors

Licensing enquiries:

Claims made against the insured for failing to be properly licensed, registered or accredited to provide their professional service

Manufacturing, efficacy, faulty workmanship:

Claims for loss arising out of poor manufacturing or faulty workmanship by the insured

Owners and occupiers liability:

Claims arising from occupation, leasing or ownership of any rental or other property

Retroactive date:

Claims for things done or that are thought are to have taken place prior to the retroactive date

Superannuation trustee:

Any claim arising from connection or conduct between the insured and a superannuation trustee

War or act of terrorism:

Any claim arising from war or terrorism regardless of any cause or event.

These are very broad definitions of some typical exclusions that may be placed on certain policies. It is essential that anyone looking to take out cover is aware of all policy exclusions and the conditions for claim payment prior to application

 

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How much does professional indemnity insurance cost?

As with most types of protective insurance, the cost for cover to be taken out can vary dramatically depending on the insured’s cover needs. In the case of professional indemnity insurance, this will depend on whether the policy is for a sole trader or for a business looking to provide cover for a significant number of employees. While sole traders may be able to get adequate cover for just a few hundred dollars, the cost of insuring a multinational company could run into the hundreds of thousands of dollars.

Key factors that impact what you pay include:

Number of staff employed by company and annual turnover. Sole traders or companies with say 15 employees won’t require the same level of cover as large-scale organisation.

Types of clients that company/professional services. Professionals that work on large-scale,. multi-million dollar projects will require a higher level of cover than smaller firms.

Industry. The nature of the service provided and the level of risk for claims being made will impact how much is paid for cover.

Policy inclusions and exclusions. Obviously more comprehensive protection packages with increased levels of cover will cost more than more basic policies.

The cost of professional indemnity insurance is largely based on the percentage of your companies total legal spend and the likelihood of the company being taken to court. The insurer that you go with and the policy that you choose will also play a major role in the final cost of cover.

How much cover do I need?

Unfortunately there is no set answer for how much cover you should take out. Every business is different and there are different regulations in place for minimum cover required for certain professions.

Some other factors to consider that will impact what you pay for cover include:

Clause of contract. Most contracts will specify a minimum amount of cover that the worker must have in place to carry out the project.

Type of project and value. This is the correlation between the value and size of the project being undertaken and the workers exposure to claims for professional negligence

Perceived exposures. Assessment of possible causes of loss, injury or damage that may lead to a claim being brought against you.

Number of parties relying on advice. If the nature of the project means that advice will be passed onto more than one party, the worker may be liable for claims from other parties affected.

Cost of defending a claim. Some policies will have an additional limit applied for the actual cost of defending a claim. Lengthy court cases can quickly run into the tens if not hundreds of thousands of dollars.

Willingness to carry risk. This requires the worker to assess how much of the risk they are willing to carry themselves with a lower policy limit or by transferring the risk to other parties.

Cover for previous claims. Professional Indemnity Insurance is of a “Claims Made Basis” . This means that cover can apply for claims made against the worker for previous activities. With this in mind it’s important to consider the potential value of claims in the future following inflation.

Determining an appropriate level of cover is no easy task. It’s worth taking the time to speak with an experienced broker to help you assess the risks you are exposed to and what protection packages may be suitable.

How do I make a claim?

In the event that a claim is made against the insured, it is their duty to inform the insurer as soon as possible. Notice is to be put in writing and sent to the insurer by courier, fax or certified mail. The insurer will recognise that notice has been received once their underwriting division has received the notice.

Every letter, demand, writ, summons and legal process pertaining received by the insured related to the claim must also be forwarded across to the insurer.

Most insurers will have claims form located on their website for the insured to complete. These will usually be comprised of the following sections:

Details of the insured
Policy details
General information about the claimant or potential claimant
Details of the insured’s retainer/contract
Details of the claim or circumstance
Details of the insured’s response
List of relevant documents that have been attached to the claim form
Insured’s declaration

 

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Professional Indemnity Analysed

Professional indemnity insurance provides you, your business and your employees, with protection for financial claims made against you or your business. This type of cover is designed for employees or businesses that give advice and/or provide a service to individuals or businesses, and are looking for a form of protection against legal claims not covered under general insurance policies. Professional indemnity insurance does not generally provide cover for criminal prosecution and a number of other liabilities recognised under criminal law, though other forms of insurance may cover these.

Do I actually need professional indemnity insurance?

Any worker that provides another person advice and/or a service of skilful nature that has required previous training for an established discipline is recognised as a professional.

There is legislation in place in Australia to regulate the provision of services by professionals. Despite this, mistakes can and do happen in the workplace and will often lead to the professional’s client seeking compensation for damages. A professional can still be liable for losses even if the mistake was not a result of their own negligence. Professional indemnity insurance ensures your business can continue to operate despite having to cover legal costs.

Do you own your own business or provide a service?

Most Australian workers are covered under their employer’s liability cover, however any worker carrying out any consulting or contracting work must ensure that they have adequate and appropriate professional indemnity insurance in place. All professionals should take the time to review the current cover they have in place and assess whether it is worth them taking out additional cover to ensure they are protected from claims against errors or omissions they have made in the provision of their professional activities.

Professions that generally require professional indemnity insurance

As mentioned previously, anyone that provides advice or a service to another in an established discipline is a potential candidate for professional indemnity insurance. Some typical professions that will usually require professional indemnity insurance include:

  • Consultants
    IT professionals
    Accountants
    Architects and designers
    BAS Agents
    Engineers
    Finance and mortgage brokers
    Nurses
    Real Estate Agents
    Recruitment Consultants
    Beauty, Massage and Physiotherapists
    Psychologists
    Travel Agents and Tour Operators
    Veterinarians

Many professions work closely with Australian governing bodies to determine an appropriate level of professional indemnity cover that is required for their profession. Regulations around what types of insurance are mandatory for different industries can vary from state to state. It might be best to consult with your industry body to get a clear understanding of the specific types of cover you require.

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Does work that is supervised require professional indemnity insurance?

Just because the work is supervised by a principal of the company is no reason for workers to think that they may not be liable to defend claims for negligence. In the event that they end up in court on claims for negligence, the cost of legal fees and advice alone could quickly amount to tens of thousands of dollars. This may only be the start of a potential financial nightmare if they are found to be liable.

Do contract workers need professional indemnity insurance?

There have been cases in Australia where contract workers and consultant have still been found to be negligent despite carrying out duties given by principal with whom they were employed. Many companies will now require contract workers to have both professional indemnity insurance and public liability cover in place. If the work the contract worker performs causes damages, they are liable for claims from the employing company.

What does professional indemnity insurance actually cover?

Essentially, professional indemnity is designed to cover the policyholder for any legal costs that may be incurred if a client files a claim. Any ensuing compensation that may be required to be paid to the client from the individual or business is also covered. Comprehensive policies will offer cover for claims from clients for financial loss, bodily harm or damage to property due to errors in the provision of the service.

Typical civil liabilities covered under a policy include:

  • Breach of duty. Indemnifies the insured for claims arising out of breach of duties including confidentiality, privacy or fiduciary duty
  • Consumer protection liability. Claims for compensation resulting from violation of statutory duty
  • Contractual liability. Claims breach of contractual agreement that can be enforced in court
  • Breach of Competition and Consumer Act and Fair Trading Acts. Indemnifies policyholder for claims arising for breach of Competition and Consumer Act and Fair Trading Acts (Australia and New Zealand)
  • Intellectual property. Claims made for the infringement of the use of intellectual property. Most policies will require for the act to be unintentional and for the purpose of the provision of the service
  • Unintentional defamation. Unintentional publication of words believed to be defamatory of the client if the insured made the comments innocently
  • Contractors or consultants. Liability arising from services provided by contractors or consultants. Indemnity will only provide cover for the policyholder and will not extend to the contractors and/or consultants that have provided the service
  • Libel or slander: Liability arising from libel or slander by the insured to the client provided that it was committed during the provision of their professional service and that it was unintentional
  • Loss of documents. Loss or damage to the clients documents during the provision of the insured’s service
    Misleading and deceptive conduct. Claims arising where the policyholder has engaged in conduct that is misleading or deceptive in the provision of their service as outlined under the ASIC Act 2001
  • Compensation for court appearance. In the event that the policyholder’s legal advisers require the principal or employee of the policyholder’s business to appear in court, the policyholder will be provided with compensation equal to their daily salary to a maximum amount
  • Claims investigations costs. Compensation for costs incurred to investigate claims paid in addition to the maximum limit provided under the policy for Australian and New Zealand jurisdictions
  • Dishonesty of employees. Policyholder will be compensated for liability in respect of claims made that were the result of dishonest, fraudulent, criminal or malicious acts or omission by an employee of the insured during the provision of their service
  • Inquiry costs. Compensation for costs arising out of inquiries into the insured’s liability
  • Joint venture liability. Compensation arising from the insured’s participation in any joint-venture related to their professional service
  • Legal consultation costs. Compensation for costs incurred from legal consultation to the policyholder in the event of a claim
  • Public relations expenses. Indemnifies the policyholder for adverse public relations expenses that arise during the policy period
  • Spouse liability. In the event that a claim is made against the policyholders spouse, the claim will be treated as the liability of the insured’s
  • Extension of claim period. In the event that a claim is made against the insured up to a specified number of days following the expiry of the policy, the insured will still remain covered under the policy

The conditions of the cover features listed above will each have their own set of conditions for compensation to be paid which may vary greatly between policies. It is crucial that anyone looking to take out cover is absolutely clear on the requirements for a claim to be paid and the maximum compensation that they stand to receive under claim.

 

Who Is Covered Under A Professional Indemnity Insurance Policy?

Professional indemnity insurance must be able to provide adequate cover for the insured to be protected from any civil liabilities that may arise from the provision of their service either from themselves or by others working on their behalf. This cover must be broad enough to extend to past, current and future work. Professional indemnity policies will generally provide cover for:

  • Each party identified in the policy schedule. This may include people, firms or incorporated bodies
    Past, present and future principals
  • Any entity that is created or under the control of the insured that performs a professional service during the policy period
  • Past, present and future employees of the insured. This may extend to include volunteer workers and students
  • Liability of the principal from previous business conducted for the same service that is listed under the current schedule
  • Entities that have previously traded with the business insured under the policy
  • Subsidiary companies of the insured
  • The insured’s spouse
  • Legal entities of the insured
  • Some (but not all) policies may also include cover for:
  • Joint venture liability
  • Liability for professional service that has been provided by an agent or consultant

How is professional indemnity insurance different to public liability insurance?

Everyone is regulated under common law to not cause damage to anyone or their property or to cause them any financial loss. This liability is known as ones general duty of care and is separate to the professional liability that professionals have in the provision of their business to ensure that their client does not suffer any injury, damages to property or financial loss.

Professional Indemnity Public liability Insurance
  • Covers legal liability for claims arising from an act, error or omission of duty by the professional
  • Cover can include claims for personal injury, professional injury or financial loss
  • Provides cover for claims made for actual breaches of professional duty
  • Provides cover for legal liability due to personal injury or property damage caused by your business
  • Product liability is an extension of public liability providing cover for personal injury or damage caused by the use of your products
  • Cover may not always extend to claims for financial loss if there has been on injury or damage
  • Event giving rise to the claim will often have to occur within the period of insurance for cover to apply
  • The claimant must be able to establish that the cause of the loss has direct connection to the business.

 

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