What is professional indemnity insurance and who needs it?

As a professional, your clients rely on you to provide them with the most accurate, appropriate, and up to date advice. Even if you are diligently keeping up with the changes in your industry, mistakes can still happen potentially leading to legal action against you or your business. If you are found not liable the legal costs to defend your yourself or your business can be quite expensive, and if you are found liable the compensation costs can ruin your business.

Professional indemnity insurance covers professionals who provide advice, service, or design to their clients, such as engineers, doctors, lawyers, accountants, architects, real estate agents and consultants to name a few. The cover provides protection from financial losses resulting from claims of negligence, errors, or omissions in the performance of their professional services. Even if you or your business is not found liable, professional indemnity insurance covers the legal costs to defend yourself or your business. Additionally, many professionals are required by regulatory bodies or contract to have professional indemnity insurance.

Here is the breakdown of professional insurance:

1.      Limit of indemnity

The limit of indemnity under a professional indemnity insurance policy is the maximum amount the insurer will pay out for a claim. Therefore, it is important to consider your risks and exposure when taking out a policy. For many industries the limit of indemnity required for your policy will be specified by the regulatory body or by your contract. Limits of indemnity can also be specified for “any one claim” or in “aggregate” over the policy period.

2.      Legal and defence costs

Even if you are the best of the best in your industry, a client only has to believe that you or your business is responsible for their financial losses, to file a professional negligence claim against you. Even if the claim is unfounded, and is dismissed in court, your legal costs can run into the thousands of dollars. The legal costs to defend yourself or your business against a professional negligence claim can quickly add up, especially if the case continues over a lengthy period of time. Professional indemnity insurance policies cover these legal costs, which may need to be covered even if you or your business are found not liable.

3.      Claims made

Most professional indemnity insurance policies are “claims made” policies. This means that in order to be covered you need to have insurance in place when you become aware that a client intends to sue you even if the allegations are for an event that happens years ago. As a result, if you choose to change careers, closing your business, sell your business or retire you should consider run off cover to protect against allegations of professional negligence down the track.

Most professional indemnity insurance policies are “claims made” policies. This means that in order to be covered you need to have insurance in place when you become aware that a client intends to sue you even if the allegations are for an event that happens years ago. As a result, if you choose to change careers, closing your business, sell your business or retire you should consider run off cover to protect against allegations of professional negligence down the track.

4.      Run off cover

Run off cover is a professional indemnity insurance policy with a clause stating that the policy will not act on claims arising from any new services you provide but is provided for liabilities associated with previous services provided. It is normally recommended that run off cover is maintained for several years after ceasing the service but the length of time will depend on your potential exposure.