Why do professionals need professional indemnity (PI) insurance?
As a professional person providing advice, designs, specifications and supervision for a fee or gratuitously, you owe a duty of care to your client and potentially to third parties.
The duty of care owed to your client is to exercise “due skill and care” or, as it is more commonly described, to exercise “reasonable skill and care”. Although it may be possible to try to protect your position through your contract with your client, in reality it can be very difficult for a professional to escape liability by relying on a contractual provision.
It is commonly the case that professionals are sued even where they believe they have a strong position under their contract. If that happens, they face the cost of litigation and its associated risks.
Professional indemnity insurance generally provides an indemnity for damages awarded following a breach of professional duty through neglect, error or omission.
An indemnity is also provided for legal and other costs and expenses incurred in defending claims.
What can professionals be liable for?
If an allegation of negligence is upheld, a professional can be liable for losses incurred by the claimant.
The claimant’s legal costs will usually be awarded against the professional and they can be substantial.
Often large sums are spent trying to recover fairly minor losses. There may be liability for economic and consequential losses, in other words financial losses as opposed to the cost of rectifying a defect.
Providing an economic or consequential loss was reasonably foreseeable, or in the reasonable contemplation of the parties, and was caused by negligence, the claimant will be able to recover the loss.
That can extend to awards of damages for lost opportunities in some cases.
Is there a time limit of liability?
Generally actions can be brought in the tort of negligence for up to six years from the date on which the claimant first suffers loss or damage. Often that does not occur until a considerable time after the negligent act.
Under contract, a time limit of six years from the date the contract is breached usually applies (although the position can vary from state to state). If the parties’ agreement is a deed, the time limit for a claimant to bring a claim can be longer (20 years in some cases).
Due to the various periods of time applicable and grey areas in the law on limitation periods, professionals are advised to insert duration of liability clauses into contracts.
It is important that PI insurance is maintained so there is continuous cover, even for things that may have occurred many years before.
How does liability attach?
If you practice as a sole proprietor or partnership, liability attaches to you as an individual. In the case of a partnership, it is also joint and several. Personal liabilities do not end when you cease to practise, but continue to attach for some time (see above).
When you are a director of a limited company, legal opinion suggests that, while corporate liability ends if the company no longer exists as a legal entity, each director may be liable for his own work.
Therefore, the cessation of a limited company does not preclude legal proceedings from being brought against its individual directors.
For a limited liability partnership, a member’s liability will be restricted provided legislative criteria have been met (for example, the Partnership Act 1892 in NSW).
If the business ceases to trade, liability continues to exist for the assets of the limited liability partnership itself.
How does PI operate?
PI operates on a claims-made basis, meaning cover is provided by the policy in force when a professional first notifies a claim or the circumstances that may give rise to claim to the insurer, not by the policy in force when the alleged act of negligence occurred, or even when the contract was being performed.
If cover is cancelled, there is no protection from future claims arising from work undertaken the past.
What cover should professionals carry?
Indemnity limits should be assessed by considering past and current work to determine the potential level of damages that could flow from a negligent act. Professionals should consider property damage, potential costs of rectification, remediation and re-performance. Also consider personal injury claims and potential consequential losses. The limit should include awards made for claimants’ legal costs. Costs and expenses incurred in the defence of any claims against you are generally covered over and above the limit of indemnity.
Our covers are, in almost all cases, arranged on an “each and every claim” basis ie the level of cover under the policy applies separately to each claim that may arise during the period of insurance.
Importantly, cover is provided without an aggregate limitation on the number of claims. That gives clients peace of mind that cover will not be exhausted but can assist to help them negotiate with their own clients on what is an adequate level of cover.
Wherever possible, cover should be obtained on an each and every claim basis.
Claims can take many years to settle and you should bear that in mind when selecting the level of cover. Remember you have no control over when a client decides to pursue a claim against you.
What level of excess should professionals carry?
All PI insurers insist that professionals pay a certain amount of each claim themselves. That is called the excess.
The level of excess should be kept as low as possible because:
- Cover is not normally triggered until the maximum potential value of a claim exceeds the level of uninsured excess. Where a high level of excess is maintained, professionals could incur legal costs in defending spurious claims that would otherwise be met by insurers.
- The excess will apply to each claim – professionals could face several excess payments during the same year.
What insurance details should I disclose to clients?
In an ideal world no details should be revealed but, in commercial reality, that is unlikely to be possible and some details may have to be released to clients. An insurance declaration, disclosing details of your insurer, the renewal date and, if necessary, the limit of indemnity, will satisfy most clients – JMD Ross Professional Risks can supply these.
Some clients may require their own certificates to be completed confirming you comply with their requirements. JMD Ross Professional Risks can complete the certificates on your behalf.
We strongly advise against releasing copies of your insurance policy: your insurance is in place to protect you, not your client or any third party.
A note of caution: Remember it may be dangerous to provide details of cover to those with whom you are in dispute.
When should claims be notified?
All PI policies require insureds to give immediate notice of any claim or circumstance that might give rise to a claim. Failure to report claims can invalidate the cover.
Professionals should report problems, even if, in the first instance, they appear not to exceed the level of uninsured excess.
Informal conversations can often lead to a formal allegation of negligence and should be brought to JMD Ross Professional Risks’ attention immediately.
Using our experience in handling claims, we may be able to suggest a course of action that will prevent an informal complaint developing into a claim at all.
As a rule of thumb, if you have to ask yourself whether a situation should be reported, it should be. If in doubt, discuss the matter with us.
Are professionals covered for work done by sub-consultants?
If professionals employ sub-consultants, in the eyes of the law they are generally speaking fully responsible for their actions. Many PI policies automatically provide cover for acts of sub-consultants, although insurers retain the right to claim against a sub-consultant who gives rise to a claim.
If you employ sub-consultants:
- With some exceptions, you will incur a premium charge as fees payable to sub-consultants are included within the fee figure declared on your proposal form.
- Your claims record, which directly influences premium, is put at risk.
- Your excess is put at risk.
When appointing sub-consultants, check the adequacy of their PI arrangements; and not just when they are appointed, but for a reasonable period thereafter.
If you do not consider the level of cover carried by sub-consultants to be sufficient, insist on increased limits or refuse to appoint them. Agreements with sub-consultants should be made on a back-to-back basis so professionals do not end up paying a claim they cannot pass to a sub-consultant.