The importance of professional indemnity insurance for resources professionals
Ensuring you are covered by appropriate insurance as a consultant is a key aspect to best professional practice. This article explores why professional indemnity insurance is so important and how to ensure you are getting the best cover possible.
What is professional indemnity insurance and why is it important?
It is important for professionals to have the correct insurance and to engage in good risk-management strategies, especially when involved in mining consulting work.
Professional indemnity (PI) insurance is a vital risk transfer mechanism for resources professionals, particularly consultants. For example, engineers, geologists, metallurgists and mine managers can be exposed to a high degree of risk due to the services provided and nature and size of projects undertaken. In today’s highly litigious society, claims can be relatively common. Without a PI policy in place, consultants risk their business assets – and possibly their personal assets – in the event of a claim. Even if it is ultimately determined that the consultant was not responsible, payment of the legal costs associated with defending an allegation of negligence or similar is often the part of the insurance cover most appreciated by an insured business.
A PI policy not only provides cover for third party claims for compensation and defence costs, but also provides indemnity for disciplinary inquiries and civil fines and penalties. These can include occupational health and safety (OH&S) investigations and civil fines, which are considerable risks carried by many resources professionals. PI policies can also provide protection for contractual liability and breaches of the consumer protection legislation.
Why are premiums increasing?
The insurance market is cyclical and the last 12-24 months have seen a significant hardening in the cycle, particularly for PI insurance across all mining, natural resources and engineering disciplines. A soft market is characterised by plenty of insurer competition, low premiums and excess levels, broad policy coverage and access to higher limits of indemnity. The rates charged by insurers during the soft market ultimately proved unsustainable and insurers began to suffer underwriting losses. Loss ratios (claims payouts as a percentage of total premium) reached levels that were intolerable for insurers, and in 2018 Lloyd’s identified international PI as the second least profitable line.
In 2019, a number of Lloyd’s syndicates withdrew from the Australian PI market, resulting in reduced capacity, particularly for mining, engineering and construction risks which were significant contributors to underwriting losses. The remaining insurers then raised premiums and excesses, restricted coverage, imposed new exclusions and reduced the limits of indemnity that they were prepared to provide.
The result is the current hard market where annual premiums for resource professionals have increased by at least 20-30 per cent and by as much as 100 per cent or more for those deemed higher risk by insurers. Following diminished insurer capacity, higher limits of indemnity are often no longer available.
How to get the best results from your PI renewal
Despite the above, the cycle will turn when insurers start making profits due to higher premiums. Capital will flow back into the market and competition among insurers will increase, resulting in a softening of the market. However, the hard market appears set to continue for at least another 12-18 months so during these difficult times, it is important for consultants to ensure they are preparing properly for their renewal and adhering to industry best practice. Practical suggestions that may help include:
- Give the renewal process the attention it deserves.
- Engage a broker with expertise and resources in your field to provide you with the best advice.
- Complete the proposal form early and diligently. If the questions do not adequately portray your business activities, provide an explanatory addendum. A sub-standard submission may prejudice your practice, resulting in premium loadings, restrictive terms or even a declinature.
- Pay particular attention to the risk management questions. If you are able to differentiate your practice from your peers and provide comfort to underwriters regarding your processes and procedures, you are more likely to achieve a favourable result. Include accreditations, CVs and procedure manuals if appropriate.
- If any PI claims have been made against your practice, provide details regarding the steps taken to ensure there will not be a repetition of the circumstances which led to the claims.
- In the hard market, underwriters are more particular about the risks they are prepared to write and negotiations are often lengthy and time consuming. Ensure you provide your broker with renewal documents well before your renewal date, as they may need to approach a number of insurers to achieve the required coverage and premium.
Exclusive professional indemnity scheme for AusIMM members
For the last decade, Austbrokers Countrywide (Countrywide) has operated an exclusive PI scheme for AusIMM members (the Scheme), helping achieve outcomes for AusIMM members that may not have been possible elsewhere. Over the years, we have been able to negotiate coverage for a broad range of professions and activities including mining geotechnicians, mining engineers, mine managers, underground and open cut mining, feasibility studies, plant design and process automation and corporate advisory firms in the mining area. Our Scheme also provides broad cover which many other insurers do not, such as USA/Canada exposure, pollution cover and cover for valuation work in accordance with the JORC and VALMIN Codes.
Countrywide case studies
Countrywide has over 500 insured clients in the Scheme generating a significant premium pool for the insurer. This ensures that we have negotiating power regarding the risk appetite as well as premiums charged. The surging premiums over the last two years have threatened the financial viability of some firms and in the last few months, we have received many enquiries from clients insured elsewhere whose premiums had increased dramatically or whose broker was unable to secure a renewal quote. Examples include:
- A number of mining geotechnical sole traders have contacted us advising that their renewal premium was between $12,000-$15,000. Countrywide arranged PI Insurance in the Scheme for around $4,000.
- A multi-disciplinary mining engineer paid $33,000 last year. Annual fees had declined, and renewal terms were $28,000. Countrywide benchmarked the practice against similar practices in the Scheme and successfully negotiated a reduction to $21,000.
- A large geotechnical engineer, fees of $6 million, was insured elsewhere last year for $135,000. They experienced great difficulty in obtaining renewal terms from their holding insurer and were eventually quoted around $200,000. We were able to place the risk in our Scheme for $123,000 while still maintaining the required cover.
- A general mining engineer with annual fees of $246,000 was paying $6,000 with another provider; Countrywide placed it for $2,800.
Get in touch with Austbrokers Countrywide
This article provides general information, does not constitute advice and should not be relied on as such. Users should carefully evaluate accuracy, currency, completeness and relevance of information and seek professional advice relevant to their particular circumstances.