In times gone by, the term ‘professional person’ usually described a person engaged in the learned professions. Back then doctors, lawyers, scientists and even bank managers (remember those?) would readily come to mind.
Fast forward to now and ‘professional persons’ in a myriad of occupations are thick on the ground and can be identified, at least for insurance purposes as: anyone who gives to another person advice and/or services of a skilful nature according to an established discipline in return for payment.
This means there are vast numbers of people out there earning fees in return for providing advice – which translates to vast numbers of people in need of the protection of Professional Indemnity Insurance to protect them and their businesses from financially crippling and often reputation-damaging claims by dissatisfied clients.
In this ‘everything-wanted-by-yesterday’ world, even the most respectable companies can find themselves in dispute with a client over a mistake. Can’t happen to you? Don’t you believe it! Some of the danger areas you and your business could be exposed to include:
- Negligence: or breach of professional duty of care
- Intellectual property: unintentionally infringing on others’ copyrights, trademarks, broadcasting rights, any act of passing off information
- Loss of documents/data: damaged, lost or stolen data and documents belonging to your clients
- Dishonesty: liability arising from the theft of your clients’ funds
So what Policy Limit is adequate? The time is long past when a $1 million sum insured was adequate for most Professional Risks policies.
Up till recent times, small to medium-sized professional practices had considered $1 million a reasonable limit for Professional Indemnity policies. But a significant number of claims today are now exceeding $1 million, even when the annual fees or revenue received by professional firms and individuals are much less than that amount.
A leading Professional Risks Insurer reported that of their 46 largest claims:
- 16 were for amounts equal to or exceeding the client’s policy limit, and
- 11 of these claims were on policies with a sum insured limit of $1 million or less.
The corresponding fee income received by those Insured’s were also well below $1 million, clearly showing that fee income is not a reliable indicator of an appropriate sum insured.
The ‘claims made’ nature of Professional Indemnity Insurance means that the policy limit in force today applies to any new claim that you learn about in today’s mail until the dispute is finally settled. But this may be many years away and by then may involve a sum many times greater than originally anticipated.
As a guide, these are the things to consider when deciding on the Policy Limit for your situation:
- What is the likely i nancial loss to third parties in a worst-case scenario?
- What is the potential for consequential economic loss to any third party?
- Coverage must include legal defence costs – no matter how baseless the allegations
- You cannot control the costs incurred by a claimant pursuing their case and if you lose the action, their costs will be added to any award made in their favour
- Claimants’ legal costs are covered within the limit of indemnity you choose, even though your Policy Limit may be exclusive of your defence costs
In general, a sum insured of less than $5 million is unlikely to be adequate for even a small practice which assesses its exposure as low.