We all make mistakes. But some mistakes are more costly than others – such as the $1.6 million worth of defects in a West Australian commercial development that a design company was recently held responsible for. Luckily, the company had professional indemnity insurance and was able to claim the full amount on their policy. Without this insurance, the designers would have incurred a massive financial loss, which might even have caused their business to collapse.
What is professional indemnity insurance?
If you’re a business owner, professional indemnity insurance (PI) can similarly help protect you against the financial consequences of any mistakes you – or your staff – might make. It also protects against accusations that you’ve done something wrong (even if you haven’t), and safeguards your personal and business reputation.
Who is a Professional?
Think of a professional and you’re likely to conjure up an image of the typical office worker: an accountant, lawyer or architect.
But as far as professional indemnity insurance is concerned, a professional is anyone who is relied upon for their expertise.
That could be a surveyor, engineer or IT consultant. A naturopath, real estate agent, personal trainer, hairdresser or management consultant could also be considered to provide professional services, as could a pilates instructor or a reiki healer.
How does Professional Indemnity Insurance work?
Professional Indemnity is a specialist area of insurance which protects business owners against:
- Allegations of negligence, and
- Claims of malpractice and professional misconduct.
Professional indemnity insurance protects policyholders against two types of financial loss:
- The legal costs of investigating and defending a claim made against you and/or your business, and
- Any amounts payable in relation to the claim.
Examples where Professional Indemnity Insurance could apply include:
- An accountant who incorrectly advises a client that an expense is tax deductible
- A chiropractor who manipulates a client’s neck and causes injury
- A beautician who applies a facial peel to a client which damages the client’s skin
- A solicitor who provides incorrect legal advice
- A financial adviser who recommends investments which don’t match a client’s risk profile
Buying Professional Indemnity Insurance
Professional indemnity insurance is a specialist area and should be arranged through an insurance broker with expertise in this field.
You and your broker should discuss:
- The level of insurance cover you require. However, some professions’ governing bodies set strict guidelines specifying the level of professional indemnity cover required to trade, and some contracts for services specify a minimum level of professional indemnity cover. In these situations, be sure to make sure you’re aware and comply with the specified level of cover.
- The relevant excess (the amount you need to pay when you make a claim before the insurance kicks in).
- The entities and people that should be insured under the policy.
Before an insurance policy is issued, you will be required to fill in a proposal form to provide details about your business. Armed with your completed proposal, the broker will obtain quotes from insurers who specialise in insuring your profession to get the best cover to suit you at the right price.
After ‘broking the market’, your broker can then recommend the policy which best suits your business needs. Once you pay for the policy, you will receive a policy schedule containing details of your insurance cover.
When it comes to renewing your policy at the 12-month anniversary, that is a good time to discuss with your insurance broker any changes that have happened to your business during that time to make sure that the cover you have for the next 12 months continues to meet the changing needs of your business.
5 top tips for taking out Professional Indemnity Insurance
- Find an insurance broker you can trust and who understands your business needs.
- Make sure your broker explains the information you must disclose (also known as your ‘duty of disclosure’) on your proposal form.
- Talk to your broker about any specific cover your business requires so they can have the insurer tailor the policy to your needs.
- Get your broker to explain the policy details (also known as the ‘policy wording’), especially the exclusions (ie what is not covered) and endorsements (ie amendments to the standard wording).
- Make sure your broker explains what you have to do if a claim is made against you, or if there is a circumstance which could give rise to a claim against you.
Making mistakes is part of life. But how would your business cope if a professional negligence claim was made against you?
Gallagher can help mitigate your risks and minimise what can be a significant financial impact on your business should the unexpected happen.
Professional indemnity insurance forms part of a comprehensive insurance program that we can help you to develop for your business.
If you would like to know more or discuss this further, please contact one of our broking experts.