Professional indemnity insurance is a type of business insurance that provides protection to professionals in the event that they are sued for negligence or malpractice. This type of insurance can help protect professionals from expensive legal costs and damages awarded in a lawsuit. We'll intricately explain what professional indemnity covers, what it is, why it is important, and all the details in between to keep you informed about this type of cover.
Note: This blog refers the 'the insured' throughout the different section. This refers to the person or business taking out the insurance policy.
The purpose of Professional Indemnity (PI) Insurance is to protect professionals against financial losses from lawsuits filed against them by clients alleging any of the below:
• Negligence
• Breach of contract and/or
• Breach of statutory obligations such as the Competition and Consumer Act (previously known as the Trade Practices Act) or any Fair Trading legislation.
Professional Indemnity Insurance is a ‘claims made’ class of policy coverage.
• This refers to the policy that is in place at the time the insured is notified of a claim being made.
• This might not necessarily be the policy that was in force at the time of the claim as these time of policies are not annually renewable. Each year, a new application much be made, and policy taken out. The coverage under any previous policy is completely ceased at the expiry date.
• The ‘Claims made’ class of policy is different from other policies such as Broadform Liability, which is commonly based on a ‘claims occurring’ or ‘occurrence’ based policy wording i.e. the cover is based on the policy that was in place at the time the loss occurred.
• Retroactive Date is the date the insured will be covered by the PI policy in the event a claim is made.
• It must be noted that this date is different from the inception date, which is the start of the policy period.
• Retroactive dates can the policy inception, a specified date (such as the commencement date of the business), or unlimited.
• Unlimited is the preferred retroactive date for the insured, however, insurers may not wish to grant this, especially for those operating high-risk businesses, or those who have not had PI cover for a number of years.
A PI policy is not a renewable contract of insurance – it is a single period of cover and will expire on the expiry date.
• It is critical that the insured complete all declarations prior to expiry, to ensure adequate time for a new contract to be offered, prior to expiry of the existing single contract.
• If the insured does not complete the declaration prior to the expiry date, it is more than likely that the insured will not be covered.
As PI insurance is not a renewable contract, the insurer is within their rights to refuse to offer terms for another period of cover. This decision can be based on new information provided in the declarations made.
Under Section 58 (2) of the Insurance Contracts Act, Statutory Notice of Expiry refers to notice being provided by the insurer to the insured or a person acting as agent (e.g. insurance broker).
• This notice must be not later than 14 days before the day in with the insurance expires.
• As PI insurance is not a renewable contract, it is generally accepted within the industry that this is not a statutory requirement to provide this notice.
• Claims made policies are not renewable contracts.
• Once expired, there is no cover going forward unless the insured buys ‘run off’ cover for past liabilities.
• When changing insurers, if you are using an agent or broker, it is important that this is highlighted to the insured - any claims or circumstances that could give rise to their claim is communicated to their insurer before the policy expires.
• If this is not done, the previous insurer will probably not accept the claim or circumstance because it was not notified during the correct policy period and their policy has now expired and the new insurer will probably not accept it because it is a prior known circumstance, leaving the insured without cover.
Continuous cover extension is an option that is available to the insured on some professional indemnity insurance policies. This business insurance provides cover for claims that have been made on a known circumstance where the insurer should have been notified in a prior period, providing:
• The failure to notify was not a result of fraudulent activity or misrepresentation;
• The insured was only notified of the claim after the Continuity Date specified in their policy; and
• The insurer will reduce its liability to the extent that prejudice was suffered as a result of not notifying them prior to the commencement of the policy period.
These policies vary with different insurers:
• Some will require cover to be continuous with the same insurer.
• Others will just require that the insured has held continuous professional indemnity insurance (not necessarily with the same insurer.
Some professionals will require cover for longer periods, which can be covered by run-off cover. Examples include professionals in the building industry such as engineers or architects.
• Run-off over is a separate insurance to cover potential past liabilities.
If the insured is deciding to retire or sell their business, there may be gaps in the policy cover. This may be for claims that arise from activities before their date of retirement or sale, but are not notified to the insurer until after the date of retirement or sale.
• Often, run-off cover is not offered by insurers other than that who provided/is providing the PI insurance for the insured's operations.
• This policy can generally be purchased annually, until the insured no longer thinks its necessary.
Those that conduct professional duties within their business operations, which may include those who:
• Provide professional advice e.g. quantity surveyor advising a construction project
• Provide a professional service e.g. accountant completing business financials
• Provide advice or service for a fee e.g. mortgage broker finding a home loan
• Undertake design work or formulate a design e.g. architect designing a house
• Provide advice on how to use a product e.g. beauticians with health products
It is If there are any risks of bodily injury and/or property damage as a result of professional services, it is important that these are insured under a PI insurance policy as Public Liability insurance will often exclude these risks.
An example:
• A tenant advises their property manager that the service lift in the apartment is playing up, and the real estate does not address this issue.
• The tenant is in the lift at the time the lift malfunctions and injures themselves.
• The property manager's PI insurance will respond to this incident as the injury to the tenant is a result of a breach of their professional duty.
All legal entities need to be listed on a professional indemnity insurance policy.
An example:
JC Construction Pty Ltd atf JC Family Trust trading as JC Construction Services. All parties must be listed, including the trustees.
In the event a party is not named, there is a possibility the insurer may decline a claim. Note that trusts are not legal entities in their own right, so they cannot sue be sued.
There is generally a cost inclusive and cost exclusive excess for a professional indemnity insurance cover policy.
What is cost inclusive excess?
If a claim is made against the insured, the insured must pay the amount of the excess towards defending the claim upfront.
• The insurer will provided cover to the costs above the excess (up to the policy limit).
What is cost exclusive excess?
If a claim is made against the insured, the insured does not any excess towards defending the claim and will only pay the excess amount towards the payment/settling claims in the event damages are awarded against them.
• The excess structure is beneficial to the insured as they are not required to pay any excess in the event there are no damages awarded against them, meaning the insurer covers all of the legal costs/claims investigation costs associated with defending the claim.
There are a few different ways to get professional indemnity insurance.
One way is to speak to a business insurance broker, who can search for a policy that meets the needs of the business.
• This will start with an initial consultation to understand your business, associated risks and the impact of those risks should they materialise.
• The insurance broker will work with insurers and underwriters to seek out the best terms and cover for you, saving extensive time and leveraging their expertise in navigating your options.
Another way is to contact the insurers that provide/is providing the public liability insurance for the business. It's possible to obtain insurance packages that include both the professional indemnity and public liability insurances together.
If you own a business, there's a good chance you've heard of professional indemnity insurance.
...but what exactly is it?
...do you need it?
...and if so, how can get it?
• PI Insurance is type of insurance coverage that protects business owners from financial losses incurred as a result of professional negligence, resulting from claims being made against them.
• If you are a business providing professional services and professional advice, it is common practice to have this insurance as the financial losses from settling claims arising can be catastrophic.
• This insurance can be sought out from insurers directly, or via insurance brokers.
If Professional Indemnity Insurance is something you require, or are seeking, reach out to Ensura, a Sydney-based insurance broker.
Disclaimer: As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy document. The information contained on this webpage is general only and should not be relied upon as advice. The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific insurance product. It is only intended to provide education about the financial and insurance industry. The views reflected in the commentary are subject to change at any time without notice.
