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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