Professional Indemnity Insurance
Is the limit on your professional indemnity insurance policy enough? Planned Cover’s Kerrie McLeish explores the issues.
Running a successful business requires more than the professional aptitude of you and your colleagues. Success requires skill but also practical and careful business management – particularly in times of industry downturn, when practices are more vulnerable to economic instability. In such an environment, the level of client expectation does not always correlate to a preparedness to pay adequate remuneration. Pressure to streamline business practices and maintain profitability can often force an uneasy balance between client expectations and fee income, and that environment can often lead to adversarial attitudes when “working through issues on site”, and as often a corollary, lead to claims.
There are many things that can be done to minimise loss and interruption to professional practices, but insurance is perhaps one of the most effective forms of risk management and/or risk transference. It represents an acknowledgement of a certain cause of risk and provides, at a cost, a level of protection against that risk. That is, of course, provided that you have the right type and an adequate amount of cover.
Who requires Professional Indemnity (PI) insurance and what does it cover?
We live in a litigious society. Rightly or wrongly, causes of action and duties of care are constantly evolving and expanding. In almost every case, it is preferable that any person or business has PI insurance if they are providing a specialist service, giving professional advice or providing particular expertise and skill to paying clients. In many cases, legislation or entitlement to certain professional memberships makes such insurance mandatory.
PI insurance policies come in various shapes and forms but all are designed to provide individuals and practices with support in circumstances where an allegation is made by a client or third party that an insured person or practice has not met the standard of professional care expected of a practitioner in his/her relevant profession. Some policies have extensions or “additional benefits” to this basic cover. Examples include (but are not limited to) the provision of insurance support when responding to registration boards or coronial inquiries, where allegations relate to intellectual property or to breaches of contract. It is important to remember that while cover under different policies may vary, all policies will be limited by a pre-determined and agreed “sum insured”, which will cap the amount of relief or “indemnity” an insured person or practice will be entitled to. Any liability for a claim over that sum insured will necessarily be an uninsured risk and will render the person or practice responsible for that portion of loss.
How much cover do you need?
There are a number of considerations that should be taken into account when determining how much cover you or your practice will require to be confident of adequate insurance protection. This is something that you should discuss with your broker or account manager to ensure advice is specific and relevant to your practice, but as a starting point, practices should be mindful that many industries have minimum “sums insured” required for professional association and membership. Think about the sort of work that you do and consult the agreements you are bound by. Are there minimum insurance requirements for any particular projects you are working on? The type of projects you are involved with may require special consideration when it comes to determining if you have adequate cover. For example, if you are working on a novel (and therefore higher risk) design, you may need to consider what exposure you may have if the design fundamentally fails and if the amount of cover you have elected to purchase will suffice.
Consider also who will be relying on your advice and with whom you will be working on a project. Are your project colleagues and clients reputable or do they have a history of past conflict and litigation? As with many things in life, the past experience can often indicate future behaviour and a serial claimant with a propensity for litigation can materially affect the capacity you may have to settle disputes quickly, commercially and within your sum insured.
Finally, you must consider your appetite for risk and what you are prepared to pay for your preferred insurance cover. Policy prices are affected by many factors including for what monetary sum you are seeking to insure under your PI policy. You would do well to try to find a policy that suits your financial budget while providing the maximum amount of cover you are able to justify after considering all the risks.
An example of how quickly an inadequate sum insured can be eroded:
Consider that you are a sole practitioner working on a high-end multi-million-dollar luxury residence. It is your client’s dream home and they have a lot of time, money and emotional expectation invested in the project. You have $1,000,000 of PI insurance cover (which sounds a lot to you!).
Perhaps the project is let down by poor workmanship issues which you may have had an opportunity to detect, but which cannot now be easily rectified by the party at fault, as the builder has disappeared - leaving the home with significant defects and a client looking for compensation. A claim is levelled against you for $2,000,000 by your client, who is an experienced litigant. It is an ambit claim but the rectification costs are still significant, say $800,000. The matter is litigated and defended. Experts, lawyers and barristers are engaged and the matter proceeds to a full hearing. The client obtains a judgment against you from a generous judge who allows $850,000 for the rectification of defects. An award for costs and interest is also made and the client alleges that they have incurred $400,000 in legal costs to bring the claim against you. All of a sudden you are faced with a debt of in excess of $1,250,000 with only $1,000,000 insurance cover. The balance over your sum insured will come from you and your practice, as once a claim is made it is too late to adjust your sum insured. There is no “top up” insurance available.
Of course, the example above is a grim cautionary tale, but it is a telling example of how important it is to properly consider your insurance needs and the awareness of the professional risks you may confront in the running of your practice. Therefore, it is imperative to regularly review your PI policy and satisfy yourself that you have the right level of cover comparable to your business practices and risk appetite. If you are in doubt, you are well advised to contact your broker or account manager to undertake a review of your professional needs.
Kerrie McLeish is a Claims Manager with Planned Cover.
Planned Cover is an ACA Corporate Sponsor.