If you’re in the business of providing advice, you probably have some expertise that your clients highly value. Whether you’re a real estate agent, accountant, or an allied health professional, providing your clients with best in class service is your top priority.
However, when your business involves providing advice, there is always a likelihood of this advice being misinterpreted or wrong. If a client does misunderstand your advice or you provide the wrong advice, and the client consequently suffers a financial loss (or, in the case of health professionals, suffers an injury), they may take legal action against you, potentially leading to costly legal fees for you, as well as potential compensation to pay. This is why Professional Indemnity Insurance exists – it is designed to help protect businesses that provide advice against the financial hardships of having professional negligence claims brought against them. Let’s take a look at Professional Indemnity Insurance in more detail, what it covers and how it can help your small business.
What is Professional Indemnity Insurance?
Professional Indemnity Insurance is designed to help cover you and your business in the event a client alleges professional negligence and takes legal action against you. In other words, where clients claim your service or advice caused them financial loss, and sue you for compensation and/or damage. As rare as this type of situation might seem, it is something that can happen to even the most cautious of professionals. To demonstrate how these allegations of negligence might come about, here are some examples of claims against Aon clients, from 3 different professions:
Real Estate Agent
A tenant suffered an injury at their rental property, and took action against the real estate agent, alleging the agent’s negligence in maintaining the property caused the injury.
A massage therapist performed a massage on a client, and the client experienced an increase in pain immediately after. The client sued the massage therapist for compensation and rehab costs as they believed the massage therapist’s treatment caused their pain.
An accountant prepared a tax return for a business client, and made an incorrect tax deduction, leading to fines and backpay for the client. The client sued the accountant for the financial loss they suffered as a result of this mistake.
What does Professional Indemnity Insurance cover?
Professional Indemnity Insurance (PI) will often cover several costs that arise as a result of an allegation of professional negligence.
Firstly, Professional Indemnity Insurance helps cover the legal costs you or your business incur as a result of a claim. These costs can be both to defend your case in court, as well as for investigation. It’s important to keep in mind that once your business has been named in a claim or allegation of negligence, sometimes the only way forward in rectifying the situation is with appropriate legal representation. This can, however, be expensive, with costs easily running into the thousands of dollars. That’s why this is an important coverage under most PI policies, as it helps minimise having to pay for legal costs out of your own pocket.
Another important feature of Professional Indemnity Insurance is cover for the costs to resolve a claim. In other words, if the allegation of professional negligence is proven to be legitimate, and you’re ordered to pay compensation for financial loss, then Professional Indemnity Insurance can help cover these costs. This may also include penalties imposed by regulators if your policy covers penalties (not all policies do, so ensure you read your documents to understand what is covered).
As you can imagine, when claims like these occur, the harm that can occur to your business’s reputation can have long-lasting effects, and rebuilding trust with your clientele and the general community is not an easy task. Therefore, in addition to legal costs and compensation, some PI policies also include cover for the cost to hire a public relations consultant to help reduce your reputational damage. The PR consultant can devise an action plan that will help lessen the reputational damage your business suffers. This might include communications with customers, helping adjust your marketing messages, and also liaising with local media.
What doesn’t Professional Indemnity Insurance cover?
Most insurance policies will have some exclusions in place, and PI is no different. Some instances which will not be covered by PI include deliberate acts of wrong doing by you and acts which are considered criminal. Also, allegations of negligence made by employees against you are not covered (these may instead be covered under Worker’s Compensation Insurance).
Many PI policies do not cover personal injury or property damage. Such liability is intended to be covered under a Public and Products Liability policy. However, some PI policies will not apply this exclusion, and actually include cover for personal injury or property damage if it was a direct result of professional advice or services provided by you.
Why do you need Professional Indemnity Insurance?
Professional Indemnity Insurance is not only a compulsory cover for some professions, it is also a highly important policy to have in place. Every piece of advice you give as a professional, and every recommendation you make is probably based on ample research and sound judgement on your part.
However, sometimes it doesn’t take a lot for clients to decide they’re not happy with your service. If a client was to take legal action against you as they believed your service or advice caused them loss, the resulting financial hardship could be very difficult for your business to handle. Even if the allegation or claim has no basis, by the time you add up legal costs of defending yourself, you could easily be looking at thousands of dollars out of pocket. As a small business owner, coming up with that kind of cash probably wouldn’t be easy.
Professional Indemnity Insurance is therefore a very important cover for businesses to consider holding, as it helps provide a safety net in the event your business does happen to experience an allegation of professional negligence.
Who needs Professional Indemnity Insurance?
Professional Indemnity Insurance is designed for businesses that are involved in providing advice or a service. For some professions, in some states, it is a mandatory cover to hold. However, any business that provides advice as part of their service should consider having this cover in place regardless of whether it is mandatory for that profession or not.
How is Professional Indemnity Insurance calculated?
Just like any other insurance, the cost of Professional Indemnity Insurance is calculated based on a number of factors. Some of the factors taken into consideration may include the industry you operate in, the services you provide, the state you’re in, the size of your business, your claims history, the level of cover and the number of employees and their qualifications. A combination of these will be considered when determining your premium. Two similar businesses in different states may find their PI premiums vary. Even businesses operating in the same field will find their premiums vary depending on the services they provide.
How long do you need Professional Indemnity Insurance?
If your business is required to hold Professional Indemnity Insurance, your coverage should not only be in place for the entire duration of your business operating, but also after you retire or cease practising. This is because claims of professional negligence can arise long after a service is provided. Furthermore, Professional Indemnity Insurance is a ‘claims-made’ policy. In other words, for a claim to be covered, your Professional Indemnity Insurance needs to be in place at the time the claim is made, even if the service or advice you’re being sued for was given in the past.
This is where another aspect of Professional Indemnity Insurance comes into play, known as ‘run-off’ cover. Run-off cover is a feature of PI which continues to provide coverage for allegations of professional negligence after you retire, close your business, or stop practising. It is usually not automatically included under PI – it must be applied for, and an additional premium be paid for it to be effective. Run-off cover also needs to be arranged before you cease or leave the profession and before your policy lapses. In some cases, you may also need to arrange run-off cover within a certain timeframe after you cease practising, so it is important you speak with your broker.
Is Professional Indemnity Insurance compulsory?
There are some professions for which Professional Indemnity Insurance is compulsory. Whether or not it is compulsory, and the limits of cover needed are set by the relevant regulating body(ies). For example, for Allied Health Professions, the Australian Health Practitioner Regulation Agency stipulates that all practising health professionals must have Professional Indemnity Insurance in place, however, the respective board of each of the individual professions (for example, physiotherapists) may set the limits of cover needed.
Regardless of whether it is compulsory for your profession though, in our opinion, it is a highly important cover to consider having in place. Claims of professional negligence can cause substantial detriment to you and your business, and without the appropriate PI cover in place, you could even be forced to shut your doors permanently due to being unable to keep up with the associated costs.
How do you know if you qualify for Professional Indemnity Insurance?
To find out whether or not you or your business requires Professional Indemnity Insurance, you need to firstly check with your relevant governing body. Depending on your industry, PI may be mandatory for you to hold. If it is not mandatory, consider whether your service involves providing advice to your clients – for example, if you’re a consultant or a PR agent. If your clients are paying you for your expertise in an area, and you provide advice to them based on this expertise, then Professional Indemnity Insurance is most likely a cover worth considering for you.