The importance of professional indemnity insurance

Understanding your professional indemnity insurance coverage

What is professional indemnity insurance?

Professional indemnity insurance originated from a professional person’s duty of care in regards to common law. The principal consideration in determining if you have a professional exposure encompasses ‘Is the advice based on a skilful answer?’

Where you are offering skilful advice and services (for example as a professional consultant), and a party suffers a loss arising from your advice, you can be held liable for their loss. These causes of action would not be covered by public liability insurance.

Often, the most value provided in a professional indemnity policy is the legal defence costs. If someone alleges your advice was negligent and they suffered a financial loss, Professional Indemnity insurance can pay for your legal costs to defend that action, regardless of whether the action is baseless. In addition, the policy can pay for damages awarded against you, which, is in effect an amount awarded to rectify or compensate for the error caused.

Without professional indemnity insurance, you’re at risk of losing your personal assets. A common misconception made is that a professional can set up a legal entity as a form of protection against the risk of being personally exposed. By simply closing down that entity or ensuring it has no assets, this does not prevent you from being sued personally for errors caused.

Professional indemnity insurance is essential for asset protection. On numerous occasions a professional indemnity policy has saved the professional person from personal bankruptcy and the closure of their business. While you may only charge a nominal fee, your advice may result in an error that causes a substantial financial loss. A client seeking large compensation would have a substantial impact on your business’s future, without a suitable professional indemnity insurance in place.

Specialist legal representation is also a welcome relief to policy holders in the event of a claim. Finding suitable legal advice independently and within your field of expertise can be both difficult and costly at short notice, which the insurer would have already pre-arranged, so you can get the best opportunity to defend yourself, as well as allowing you the time to get on with your own business.

Professional Indemnity is not only protection for yourself; it is also protection and a form of risk management for your clients. If you make a professional error, there is an insurance policy to put your client back into a pre-loss position, in effect restitution.

Who is covered?

It is common for professional indemnity policies to cover the principals and the employees of the company. This usually means the policies specifically exclude any cover for consultants. If you are the employer using consultants, ensure the consultants have their own professional indemnity cover. If you are acting as the consultant, check and find out if you are in fact excluded by the employer’s professional indemnity policy.

Your concern is not whether the employer engaging you will sue; the exposure is that their insurance company is almost certain to sue you if they feel that you contributed to the alleged loss.

Check before you sign

A word of caution, signing contracts can have the potential to impact your insurance cover. A common issue is that in order to gain work you are often expected to sign a contract before you are engaged, and the contract can be a minefield of onerous terms and conditions placed on you. Most professional indemnity insurance policies have an ‘assumed liability exclusion’. This means that if you enter into a contract and hold a third party harmless (ie carry their loss or agree to not be able to pursue them for contributory negligence) then you may have prejudiced your insurer, as they will not be able to take action against this party. This exclusion allows the insurer to reduce the cover by the amount they have been prejudiced, thus reducing your level of protection. 

Benefits for AusIMM members

Austbrokers Countrywide is the endorsed insurance broker to AusIMM and has established an exclusive professional indemnity insurance facility for members. A panel of insurers have been appointed to meet the wide variety of member needs.

Austbrokers Countrywide can also assist AusIMM consultant members in reviewing their contracts to determine if there are any insurance and indemnity clauses which may impinge upon or threaten the level of cover under their professional insurance. Seek professional advice when reviewing contractual exposures. Always aim for contracts to be proportionate in nature, that is, each party will be liable for their own losses and their own negligence.

Professional indemnity is essential for a business providing advice and professional services. The points outlined above make it clear that it a necessary annual purchase to protect both yourself and clients.

Disclaimer

This advice and comments are provided in the capacity as your insurance broker and should not be construed as legal advice. Separate legal advice relating to the interpretation and implication of this article for your individual circumstances should be obtained.

Find out more

If you would like an insurance quotation or a review of the adequacy of your current Professional Indemnity cover, please contact us on 03 9835 1300 or complete the form on the Austbrokers website www.abcountrywide.com/associations/ausimm