The Indemnity limit needs to be sufficient to meet the size of a future claim
To determine if an indemnity limit will be sufficient to cover a future claim, consider the following:
- All potential claims that might be brought today or in the future arising from your professional services.
- The likelihood that claims will not be finalised during the current policy period. Litigants have substantial time to commence proceedings. All jurisdictions have enacted various Limitations of Actions statutes that prescribe the time in which an action can be commenced against an insured. Generally, the time allowed to bring an action is six years and this period begins at the point the damage is discovered. Damage may not be discovered for several years. Asbestosis and concrete cancer are examples of latent defect or damage, where the claims are brought many years after the completion of the initial contract but within six years of discovery of the damage. In certain circumstances the limitation period can be longer, for example in cases of bodily injury, particularly where a person is considered to be a minor, i.e. under 18 years, additional time to bring the action can be allowed.
- Estimate the worst possible outcome that could result should the advice given or services rendered prove to be negligent. Whilst the insured’s largest contract or estimated future earnings can act as indicator of their exposure to loss, it may be grossly misleading. For example, an insured, a building surveyor, took out a PI policy with a sum insured of $1 million. The sum insured was based upon his largest contact involving the certification of a building with a value of $1 million. Unfortunately, a young man fell over the building’s handrail, as a consequence of which he was rendered a paraplegic. The building surveyor was sued on the grounds that he had negligently certified that the handrail met the statutory minimum height requirement when, in fact, it did not. The Plaintiff sought damages of $6 million against the surveyor, therefore the insured was substantially under insured.
- Contemplate the type of clientele you have or who you are working for. If you are a consultant or sole contractor a large company won’t hesitate to sue you if you are the cause of a claim. You may feel that you are only one ‘link in the chain’, but your portion of a settlement may indeed by sizeable.
- Consider how many people may be relying on your advice. This is particularly important for financial service providers who may be providing advice for one financial product; the product will then have numerous clients. Numerous clients utilising the one product can equate to multiple claims if the advice on that product is repeatedly incorrect. The policy limit needs to be large enough to respond to the total number of claims within a year and have sufficient reinstatements as required;
- Projecting potential quantum of damages into the future. Increased court interest rates, inflation fluctuations, increased hourly legal representation costs, decisions of courts relating to how damages are calculated, e.g. compound as against simple interest, etc, and unforeseen Acts of Parliament, all impact on the level of damages.
The Indemnity limit needs to be sufficient to cover claims from past activities
In addition to considering your current and future liability, it is also essential to consider potential claims from past activities that arose from work within the retroactive period stated in the policy. The retroactive date is the date after which acts, errors or omissions of the Insured are covered. If the policy has an unlimited retroactive date, the policy cover will be available for any claim that comes within the terms and conditions of the policy, however far back in the past the event giving rise to the claim may have occurred. If the policy sets the retroactive date, then any claim must arise out of an event which occurs after that retroactive date. The policy limit must be sufficient to cover a claim arising from work completed in the past, as well as in the future. Before reducing your Indemnity in the future it is important to consider the possibility of any potential liabilities arising from past activities.
For example, an insured architect was involved in a multi-storey office construction, valued at $20 million. For the period of the contract, the insured took out a PI policy with a sum insured of $30 million with an unlimited retroactive date. On completion of the above project when his practice reverted to domestic and small-to-medium commercial projects, the insured reduced the sum insured on his PI policy to $2 million. Subsequently, the insured was served with legal proceedings in relation to his work on the $20 million project, in which the damages claimed were $10 million for losses allegedly said to have resulted from his negligence. The current $2 million policy applied to the claim.
The need to determine how the policy treats the payment of legal defence costs
The Professional Indemnity Insurance limit needs to be enough to encompass the dollar value of both the claim and the costs in defending it. Consider whether legal costs are ‘inclusive’ or ‘exclusive’ of the indemnity limit in the policy. This affects whether the indemnity limit covers the claim with a separate limit for defence costs or is intended to cover the claim, plus the insured’s defence costs.
You may consider requesting a larger indemnity limit where costs are inclusive of the limit to ensure coverage of the claim and costs. Preferably and where possible you will have legal (defence) costs in addition to the indemnity limit, i.e. exclusive of defence costs.
You should be aware that, if the legal costs and award exceed the sum insured, then the insured will have to meet the difference.
Where costs to resolve the claim exceeds the indemnity limit, most policies require that the defence costs incurred be pro-rated between the insured and the insurer in such a ratio as the indemnity limit to the total amount of the claim. It further provides that any “overpayment” of costs be offset against the limit available to settle the claim, e.g. indemnity limit $1 million, claim settled for $2 million, defence costs incurred $600,000. The ratio of sum insured to the claim settlement is 1 to 2 or 50%. Therefore, in the above example, 50% of the defence costs ($300,000) would be offset against the sum insured. The amount available to satisfy the judgment would be reduced to $700,000 (indemnity limit $1 million, less $300,000).
Other requirements to consider
- Are you part of a specific industry group, scheme, association or have an industry standard that requires you maintain a certain indemnity limit?
- Is there Government legislation that impacts the size of the indemnity limit required?
- Do you have specific contracts in place that require a particular indemnity limit and a set period of time in which it needs to be maintained;
- How much can your reasonably afford to pay for your cover? This will determine the indemnity limit you are able to buy.
These considerations will provide a base from which to set an appropriate indemnity limit and whilst the size of a claim is an unknown factor, hopefully you will have a reasonably suitable indemnity limit in place at the time of claim.
“Spending time meeting with insurance brokers, understanding more about what makes them unique and sharing how reputations, especially online reputations, matter more than ever!”
Our CEO and Founder, Andy Jamieson, is excited to announce that Advisr will be part of the NIBA Convention for 2018.
As part of our NIBA Convention 2018 special we are offering all the insurance brokers and brokerage principals the following benefits:
One-on-one consultations sessions
One-on-one consultation sessions are focused on your business. Explore your business opportunities and challenges – with Advisr CEO & Founder, Andy Jamieson
Sit down for a one-on-one session with Andy Jamieson, CEO & Founder of Advisr. Spend time discussing your business, and the opportunities and challenges you are facing.
Interested to understand why reputations matter more than ever? Keen to take your business, marketing and reputation to the next level? Lets talk.
To secure your consultation session, REGISTER YOUR INTEREST NOW: email Andy today.
Business Card Draw – WIN 12 mths Advisr Premium
Looking to accelerate your business and reputation in 2018. One lucky winner will receive 12 mths of Advisr Premium for free. Giving you great exposure to people who are looking for exactly what you provide.
To be eligible you need to:
1: Drop off a business card
2: Create your profile on Advisr
Winner will be notified in Hobart at the close of the conference.
Risk. That four-letter word that strikes fear in the hearts of businesses — or, on the flip-side, a sense of steely resolve and frank excitement for companies who are well-equipped to respond to any situation. For businesses smart enough to think ahead and exercise their foresight with proper coverage, a risk isn’t scary. It’s controlled.
That’s precisely what small business insurance, when done right, can do. The right insurance will:
- Manage risk
- Protect a business
- Support a business during times of critical expansion and growth
What is a small business?
The term ‘small business’ covers a whole host of business formats and types of operations in a range of diverse industries. Just think about it: a family business, a drop-shipping business and lean marketing agencies are all considered small businesses. In other words, ‘small business’ is not a one-size-fits-all.
‘There is no ‘typical’ small business. It is a very diverse sector, covering many different types of business activity. The vast majority (over nine in ten) of Australian businesses are small businesses. They account for 33% of Australia’s GDP, employ over 40% of Australia’s workforce, and pay around 12% of total company tax revenue’ — Kate Carnell, AO Australian Small Business and Family Enterprise Ombudsman
So, it’s fitting that insurance policies vary to suit and serve their businesses needs.
In Australia alone, small businesses are the most popular format and they’re on the rise. Small businesses can be defined as those employing anywhere from one to 19 people.
And, with the rise of the Internet in the decade since then, numbers are up: active businesses have risen from June 2016 to June 2017 by 3.1%.
Clearly, small businesses are a vibrant and necessary part of any economy’s growth. And they’re more than surviving.
What can small business insurance cover?
To get from surviving to thriving, small businesses need to think through a plan of action. And this includes planning for the unexpected.
Small business insurance is exactly what it sounds like: An insurance policy that is tailored specifically to cover small businesses in various niches and industries to protect their assets, their employees, both internally and externally, as well as against legal liabilities.
While products do vary, there are two compulsory forms of business insurance:
Workers’ compensation: Varying by state and territory, workers’ compensation protects employees in the event of an accident or sickness.
Compulsory third party: Again, each of the states and territories has their own CTP but, generally speaking, this is car insurance which covers individuals operating a vehicle for claims made against the individuals, in the event that personal injuries occur from the use of a car.
Furthermore, home-based businesses have their own set of needs, besides the two listed above, including:
- Public liability
- Equipment insurance
- Fire, storm and theft
- Business interruption insurance
- Insurance policies taken out for loss of income due to accident or illness
What does a small business insurance leave out?
There are many aspects of small business insurance that are ‘optional’, in the sense that they only apply to particular business or types of situations that are likely to occur.
These policies are quite common and focus on protecting the assets, revenue, liabilities and employees. A few examples include:
- Property insurance
- Product liability insurance
- Tax audit insurance
- Insurance for deterioration of stock
- Machinery & equipment breakdown insurance
- Goods in transit/property in transit insurance
- Computer and electronic equipment insurance
Why can insurance brokers help you find the right small business insurance policy for you?
Finding a quote for insurance that matches your business is one thing.
Finding a quote for a policy that covers everything that is essential while still honing in on a premium that doesn’t blow the bill, so to speak — well, that’s a different animal altogether.
Finding insurance can be a quite a confusing, tedious and time-consuming task.
Insurance Brokers form an invaluable link from small businesses to the insurance company, bringing both sides into a mutually beneficial package. They can use their expertise and knowledge about a client’s business to find matching policies and bundles that would serve the business best.
It’s the job of a broker to actually choose providers and companies that specialise in or have knowledge about the industry the business operates in.
An insurance broker’s connections and past experience with insurance providers will often also net businesses access to a ‘deal’ or insurance policy that may not have otherwise been available to them.
Industries that need small business insurance
Small business insurance policies can cover all sorts of formats — some of them even quite surprising.
For example, while farms, restaurants and accounting firms are all relatively standard and common small businesses that call for insurance, have you ever thought about backpacker hostels, food trucks, nightclub venues and 24-hour convenience stores?
These are less-frequently considered small business formats that call for insurance and their own specialised policy needs.
Connect with Small Business Insurance Brokers that you can trust. Connect today on Advisr.
Running a business, it’s inevitable that you’ll come across other businesses in your daily dealings. From vendors and clients to manufacturers and suppliers, you’ll realise, every business has their own strengths — and their own challenges.
To offset the so-called challenges and build up their strengths, businesses of various sizes and formats rely on non-formulaic and customisable solutions where they can.
So why should insurance be any different?
What is a business pack?
Do you know what your business needs to be covered for? Chances are, it’s not what you may have anticipated.
As operations are increasingly moving online and going digital, the demands on small businesses as well as the potential directions for their growth have changed.
Expansion and growth now occur in an inevitable shorter cycle. Businesses get off the ground faster.
Essentially, Australia is already a land of entrepreneurs.
In such a climate, a business pack aims to bundle up 12 to 15 of the most common insurance policy ‘products’ a business might need — as they operate locally and expand globally.
Business packs are innovative products intended to provide a broad scope of cover and, therefore, protection. The idea is that the policy remains flexible, customisable and, best of all, competitive.
What can a business pack cover?
Business packs vary and, of course, the suite of products rests in the client’s hands. Areas of cover can include:
- Business interruption
- Burglary and money
- Breakage of glass
- Liability (personal injury or property damage)
- Machinery breakdown
- Employee fraud or dishonesty
- Tax investigation/audits
- General property (such as tools, excluding livestock)
- Electronic equipment
These are standard covers that can be chosen from as part of your business pack insurance.
What can an Insurance business pack leave out?
Now, here’s where it gets a bit tricky. Since it is customisable, a business pack can be tailored to a business’s unique needs. That means, for example, that a technology agency with remote workers might need coverage for glass and electronic equipment but perhaps not burglary and money or business interruption.
On the other hand, a 24-hour convenience store would require burglary and money, glass, electronic equipment, property and employee dishonesty. They might also need business interruption or machinery breakdown.
Some covers vary based on the insurance provider. The above list is quite standard but newer products/policies can include:
- Cyber liability
- Environmental protection
- Public and products liability
- Business ‘special risks’
- Engineering plant risk insurance
- Business pack insurance specifically tailored for ‘tradies’
Why can brokers help you find the right business pack for you?
It’s not only insurance products that vary from company to company. Providers also vary the policy specifics. This means that cover amounts and terms can differ so businesses will have to do a lot of upfront research to find the right policy.
Meanwhile, there are plenty of insurance providers that focus their efforts on a single kind of client, operating in a particular industry. It can be time-consuming to find the right one, particularly if every insurance provider continually advertises the same 12 to 15 covers to choose from.
How can you really figure out if a provider has experience with and expertise in your particular business type?
It’s pretty simple, actually: Leave the heavy lifting to a broker while you focus on what truly matters.
Using an insurance broker to find the right business pack cover for your business is exactly like the process of picking your pack. You’ll be presented with a suite of vetted offers that suit your budget and your business needs.
Businesses can enjoy a tailored approach to both the policy as well as the research that goes into finding that perfect policy match. Brokers help you to not only find that match but to give you multiple options that are well suited to your needs.
Business packs are designed to give businesses flexibility. Brokers help you tap into that flexibility with ease.
There’s a reason why:
- Insurance brokers handle around 90% of the commercial insurance transacted in Australia
- Play a major role in risk assessment, risk financing and insurance distribution, handling over $16 billion
- Account for around half of Australia’s total general insurance business
According to National Insurance Brokers Association of Australia (NIBA), the traditional role of brokers is to, essentially, act as a representative on behalf of the client. This goes above and beyond the more commonly-held idea of a broker as someone who streamlines the search process.
In fact, insurance brokers create relationships of trust with their clients — relationships that call on a broker to provide expert assistance, ‘assisting customers to assess and manage their risks, providing advice on what insurance is appropriate for the customer’s personal or business needs’.
This necessary core of trust is why insurance brokers are required, in Australia, to have an Australian Financial Services (AFS) licence to operate.
How small businesses can find and select a broker
Finding an insurance broker can help eliminate the overwhelm and helps get you laser-focused on your specific needs in finding the right policy cover for your business.
The process all starts with you.
Before you can approach a broker, you’ll want to understand what your business needs. There are two types of insurance that are absolutely compulsory in Australia: These are workers’ compensation and CTP (compulsory third party).
Besides these, take a moment to take stock of where you may be vulnerable. This is your due diligence on risk management in relation to your business.
When evaluating each insurance broker, keep the NIBA’s guidelines for what constitutes the traditional broker role in mind:
- Is the insurance broker able to provide advice on what insurance is appropriate for my business needs?
- Does the insurance broker demonstrate detailed technical expertise including knowledge of prices, terms and conditions, benefits and pitfalls of the wide range of insurance policies on the market? Can they and are they willing to explain this to me in an accessible and understandable way?
- Can the insurance broker provide assistance in interpreting, arranging and completing insurance documentation?
- Do they have demonstrable experience in predicting, managing and reducing risks as well as a history of assisting in the resolution of claims?
How brokers work with small businesses
Many businesses choose an insurance broker because they can usually offer products and policies that match your specific requirements and have understanding across the vast range of insurance products taht are available.
Businesses are essentially benefitting from the expertise as well as the relationship the insurance broker has with the insurer. Buying insurance through a broker often allows businesses to tailor their specific needs under one policy, avoiding paying for covers that don’t apply to the business.
Calculating Insurance Premiums
It’s part of a broker’s job and role to calculate premiums, break down coverage and explain the advantages and disadvantages of each policy.
Despite the fact that brokers can avail their business clients of competitive premiums, some of the factors that determine cost are beyond them:
- Nature of the business, as well as internal size and structure and what kinds of products or services, will be sold
- Business income
- Claims history
- Nominated sum insured
- Interaction of the business with third parties
- Risk factors involved in running operations
Discounts and savings
Here’s where businesses can benefit the most from having an insurance broker on their side. Besides highly-qualified, expert advice on the critical nature of risk within the business, brokers provide significant multi-policy discounts.
Insurance Brokers can also communicate with businesses to inform them of what they can do in order to benefit from discounts. For example, a business could benefit from a discount right off the bat if certain safety and security measures are in place.
Advising on risk management
This is where insurance brokers go above and beyond for their clients, bringing a technical level of expertise.
It’s not only about finding the right policy but about making you, the business owner, aware of the fact that there is always risk present in a business. It’s a broker’s job to know the nature of the market, as well as to understand the ins and outs of your business, before ever giving advice on which policy will mitigate as much of this risk as possible.
In this case, it can be a good idea to find an insurance broker who specialises in your specific kind of business or industry.
Find the ‘perfect match’
There are many different kinds of insurance policies. There are also many different levels of insurance coverage provided, most varying from one insurer to the next.
It’s part of a broker’s commitment to a client to provide comprehensive and customised assessments that evaluate policies and to give you suggestions on what is best for your business, based on both your current level and future plans for expansion and growth.
This kind of risk management and assessment allows businesses to feel confident that brokers are designing and helping them choose the policies that are right for their situation, preventing risk, minimising loss, and negotiating terms and covers with insurance companies.
How an insurance broker can be vital at claims time
Business doesn’t end at the end of a business day. Similarly, a relationship built with an insurance broker doesn’t end because you’ve signed the proverbial dotted line.
In fact, a true test of the efficacy of a broker comes at claims time.
Insurance brokers in Australia act as the liaison between the business and the insurer. In such a pivotal role, the broker assists the business to fill out paperwork, file claims, follow up with the insurer and handle the provisions of your claim.
For example, if part of the business’s policy is to be eligible for a rental car coverage in case of an accident, brokers can expedite and handle this, alongside the insurance provider.
Think of your broker as someone who speaks multiple languages: They speak your language, understanding the needs of your business. At the same time, they speak the language of insurance as well as that of the insurance companies.
During stressful moments of filing claims, it’s an insurance broker’s intricate knowledge of the fine print on your insurance policy that can make all the difference.