If you are a professional, providing your knowledge, expertise or advice, professional indemnity insurance is designed to protect you if you make a mistake, error or omission. Commonplace amongst lawyers, accountants and engineers the scope of coverage has grown to cover just about anything from Arborist to Zumba instructors. With large growth more policies are being sold off the shelf and the industry has grown aggressively.
Traditionally, taking cover out has been reasonably easy and off the shelf products have been easy to get. However, in a modern environment, with increased scrutiny on policy wording, additional claims being made and large growth it isn’t as easy as it once was to get covered.
Before you decide whether to take out a policy, the best thing to do is to understand a few key components of professional indemnity insurance to make sure you get the best policy for your business at the best price.
What Is Professional Indemnity Insurance?
Put simply, Professional Indemnity Insurance is a type of business insurance that is designed to protect you from the costs incurred when a financial claim is made against you from a client or customer.
A claim can be made in any scenario in which a customer believes an error or omission that you have made during your professional work has impacted them negatively. Irrelevant if the claim is one of merit or not, you as a professional will need to defend yourself against it.
Do I Need It?
There are two key elements to understanding if you need professional indemnity insurance. The first one, is it a mandatory requirement for me to operate? The second is, can I afford to cover the risk myself?
Often, it is mandatory for professionals to hold an active policy to operate within their field. This is usually set by the industry’s governing body and without it, you just can not do your work. The best thing to do is find out from your governing body what the case is for your line of work and go from there. A doctor for example, working in the public health system will be covered by their insurance however, a private practice would need to arrange their own.
Another example of mandatory cover are Bookkeepers. As of 1st of July 2011 The Tax Practitioners Board made professional indemnity insurance mandatory for Bookkeepers and BAS Agents. It is on a tiered scale that is based on the professional’s turnover.
One last example is a business finance broker. To operate as a financial broker, it is mandatory that you hold an appropriate level of cover before giving advice to your customers. Usually, the claim limits are very high to ensure adequate coverage but due to lower claim ratios, policies are not very expensive.
Once you have established if you need it, the next thing to ask yourself is, can I afford the risk myself?
The costs of litigation can be incredibly high. It doesn’t matter if you believe you are right or wrong, you will still need to defend yourself in court and with that comes legal fees from the courts and lawyers.
Then, if it turns out you did make a mistake that impacted your client, you will also be up for the settlement costs. It is important to have a deep understanding of the possible impacts and implications of a claim so you can decide if you need cover or not.
What does Professional Indemnity Insurance cost?
The cost of a policy will vary depending on many different factors. Insurance is a financial product and PI cover is considered a financial line insurance. So, most of the cost will come down to data.
When assessing the cost of a policy insurance companies will look at things like.
● Previous claim rates for your profession
● Your businesses turnover
● The size of your organisation
● Your individual claims history
● The excess associated with the policy
● The type of advice you give
Lower risk roles = lower premiums. Higher risk roles = Higher premiums. Claims data is made public by APRA under their National Claims and Policies Database if you are interested in understanding more.
In recent times, Australian financial insurance policies have been rocketing due to a few key factors. Increasing claims, class actions and a period of cheap products has seen increasing policy costs however things are beginning to turn. Losses are beginning to even out meaning policies are beginning to come back down.
How Does Professional Indemnity Insurance Work?
PI cover works on what is known as a ‘claims made basis’. What this means is, you need to have active cover when the claim is made. For example, if you have cover from 2015 – 2020. Then in 2021, a claim is made against you for work you did in 2018, unless you have an active policy, you are not covered. Due to this, an insurer might want to know a bit of your history if you are getting a new policy as they are taking on some historical risk.
When the day comes and you decide to retire, change roles or move on you can get what is known as ‘run off cover’. Run off cover is basically a professional indemnity policy that is designed to protect you for the years after you finish trading in case a claim is made against you for old work.
Who Can Get Professional Indemnity Insurance?
Nearly, anyone. In the early days of cover it was very strictly for traditional professional professions like engineers, accountants and doctors. However, with the increase in litigation, the growth and change of our workforce cover can be obtained for nearly anyone that is seen as a professional in their field.
Consider the setting of a personal trainer in a gym. When you go to the gym you rely on their professional advice to have a safe, productive workout. If they accidentally give some bad advice that leads to an injury, they could be liable for a claim being made against them.
In Australia, there are hundreds of professions covered and the growth in the sector has been vast. A lot of ‘off the shelf’ policies have been made available due to this growth however it is important to read policy wording to ensure you have adequate cover before taking one out.
What Are The Risks?
In modern business, there are a range of risks that your business is exposed to at all times. When delivering your professional advice, the risks are often directly associated with what you do. Some common risks across professionals that take out professional indemnity insurance are:
– Incorrect advice
– Failure to provide the services your promised
– Failure to deliver advice within agreed time frames
– Negligence when providing your professional services
– Breaches of acts of law
Given the broad nature of who a professional is, the range of risks is vast. That is why it is so important to get the right policy that covers you for your scope of work.
How Do I Get The Best Deal On Professional Indemnity Insurance?
Like any financial product, it pays to shop around. Insurers will rarely reward loyalty and shopping around can save you significantly. It is also a good idea to speak to an insurance broker. Insurance brokers don’t work for the insurance company, they work for you. Their job is to understand your business, understand the risks and find you the best policy for you.
While getting a good value policy is important, it is just if not more important to get the right policy. With professional indemnity, the policy wording is vital. If your policy is worded in a way that is advantageous for your business, if the time comes to make a claim in some instances you may not be covered. Insurance brokers spend all day reading policies and speaking to insurers so their expertise can be vital in getting the best policy.
When Should I Get Professional Indemnity Insurance?
Having a claim made against you for an error or omission during your work can be an incredibly stressful time. When you run your own business or provide your professional advice, there is always a risk that a mistake or omission can be made.
Professional Indemnity Insurance will help protect you against the financial burden of a claim and help protect you and your assets.
If you are about to start providing advice or are already, it is important to have a policy in place to protect you. Due to the nature of a claims made insurance product, if you don’t have an active policy you simply just aren’t covered. If you take out a policy and know of any possible or existing claims, you must tell your new insurer and those events most likely won’t be covered.
So, if you need cover, the best time to get it is now.