Professional Indemnity Insurance Explained

If your business gives advice, prepares designs or provides a professional service, a client may claim that a mistake in your work caused them a financial loss. Professional indemnity insurance is designed to respond to claims of that kind.

It is relevant to a wide range of occupations, from architects and engineers to consultants, bookkeepers and IT providers. Some professions are also required to hold it by their industry body or regulator.

What professional indemnity covers

Professional indemnity (PI) cover generally responds to claims alleging a breach of professional duty in the course of your business. That might include negligent advice, an error or omission in a design, or a failure to deliver a service with reasonable care and skill.

Depending on the policy, cover may include compensation you are legally liable to pay and the legal costs of defending a claim. Defence costs can be significant even where a claim turns out to have no merit, so it is worth understanding how a policy treats them.

How it differs from public liability

Public liability is generally concerned with injury or property damage caused by your activities. Professional indemnity focuses on financial loss caused by your professional services. Many businesses hold both, as the two policies are designed to respond to different types of claims.

How PI policies work

Claims made basis

Most PI policies are written on a claims made basis. In general terms, the policy that responds is the one in force when the claim is first made against you and notified to the insurer, rather than the one in force when the work was done.

This has some practical consequences:

• Keeping cover continuous matters, because a gap could leave past work uninsured
• If you become aware of circumstances that might give rise to a claim, notifying them during the policy period can be important
• When you retire or close a business, you may want to consider run-off cover for claims about past work

Retroactive date

Many policies include a retroactive date. Work performed before that date may not be covered, even if the claim is made during the current policy. Check your schedule to see whether a retroactive date applies and what it is.

Limits and excesses

The limit of indemnity is the most the insurer may pay, either per claim or in total for the period, depending on the wording. Some policies include defence costs within the limit and others pay them in addition. Excesses also vary, so compare these details rather than looking at the premium alone.

Common exclusions

Every policy has its own exclusions. Some that appear in many PI wordings include:

• Known claims or circumstances you were aware of before the policy started
• Liability taken on under a contract beyond what you would have at law
• Fraudulent or dishonest acts, although some policies provide limited cover for innocent parties
• Work outside the professional activities declared to the insurer
• Bodily injury or property damage, which is usually a matter for other policies

The exact exclusions, and any extensions that soften them, depend on the policy wording.

It is also worth checking how the policy describes your profession and services. If you expand into new kinds of work, such as offering advice in an area you have not declared, tell your insurer or broker before you start so they can consider whether the policy needs to change.

Reducing the risk of a claim

Insurance is only one part of managing professional risk. Good habits in your day-to-day work can reduce the chance of a dispute and help you respond if one arises.

1. Agree the scope of work in writing before you start
2. Keep clear records of advice given, instructions received and changes requested
3. Review contracts for indemnities or limitation of liability clauses
4. Use checking and peer review for important work
5. Notify your insurer early if a client raises a complaint that could become a claim

Professional indemnity wordings vary widely between insurers and professions. A broker can help you compare how different policies treat defence costs, retroactive dates and run-off. If that would be useful, Tasman Insurance Group can walk you through the options for your profession.

This article is general information only and does not take into account your objectives, financial situation or needs. Before making a decision about insurance, read the relevant Product Disclosure Statement and policy wording, and speak with a licensed adviser about your circumstances.