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What is Professional Indemnity Insurance?
Professional Indemnity Insurance is insurance that is specifically designed to protect anyone who provides advice to a third party and in return are paid for that advice. Some insurance policies have been specifically designed for certain occupations in order to ensure that they cover the specific risks and exposures relative to that occupation, including any breaches of specific Acts or Laws governing that occupation. For example:
- Professional Indemnity Insurance for Accountants
- Professional Indemnity Insurance for Tax Agents
- Professional Indemnity Insurance for IT Consultants
- Professional Indemnity Insurance for Management Consultants
- Professional Indemnity Insurance for Recruitment Consultants
The cover provided by a Professional Indemnity Insurance policy will be encompassed within the Insuring Clause contained in the relevant Insurers policy wording. An example of a typical Insuring clause is as follows:
The Insurer agrees to indemnify the Insured against civil liability for compensation arising from any claim first made against the Insured during the period of cover and notified to the Insurer during the period of cover as a result of a breach of professional duty in the conduct of the Insured\'s profession.
Insurance policies either operate on an "Occurrence" or "Claims Made" basis. If a policy is on an Occurrence basis it means that irrespective of when the claim was discovered or notified, a policy will only respond if the incident occurred within the policy period. A "Claims Made" policy however will only respond to claims that were made in the policy period, irrespective of when the incident leading to the claim occurred.
As the Insuring clause above implies, Professional Indemnity Insurance policies are typically "Claims Made" policies, so provided the Insured was not aware of the claim at the time they took out the policy, if a claim is made during the policy period the policy will respond.
Professional Indemnity Insurance Policy Limit
The policy limit is the maximum amount that the insurer will pay in relation to any one Professional Indemnity Insurance claim during the policy period.
In many cases this will also be the maximum amount the Insurer will pay in total during the policy period.
For example, the limit may be expressed as "$1,000,000 any one claim and $1,000,000 in the Aggregate during the policy period"
Some policies provide a higher aggregate limit so that if the Limit is totally used up during the period it will be reinstated once or a number of times. In the above example if the policy provided say 1 Reinstatement, the Limit would be expressed as "$1,000,000 any one claim and $2,000,000 in the Aggregate during the policy period"
"Costs Exclusive" or "Costs in Addition" v "Costs Inclusive" Policy Limits
All Professional Indemnity policies cover both costs associated with defending a claim (e.g. Legal Costs) and any civil damages that are paid as a result of a claim.
If a Professional Indemnity policy limit is defined as "Costs Exclusive" or "Costs in Addition" then any costs incurred in defending a Professional Indemnity claim will be paid in addition to the policy limit, whereas if "Cost Inclusive" then costs form part of the policy limit.
For example, say an insured had a $1,000,000 Policy Limit any one claim and a successful claim was made against them and accepted by the Insurer totalling $1,500,000, comprising $1,000,000 damages and $500,000 costs incurred in defending the claim.
If the Limit was Costs Exclusive the amount paid by the insurer would be the full $1.5M, whereas if the Limit was Cost Inclusive then the Insurer would only pay up to the Limit or $1M.
Therefore a policy with a Limit which is "Costs Exclusive" or "Costs in Addition" provides greater cover.
Professional Indemnity Insurance Policy Excesses
The excess or deductible under a Professional Indemnity policy is no different to that under any other policy, being the amount the insured will contribute to each and every claim.
Using the example above if the excess was $10,000 then the amount the insurer will pay will be reduced by this amount. Generally the higher the excess the lower the premium as the Insured is carrying more of the risk.
Like Limits excesses can also be either Costs Exclusive or Inclusive. If Costs Exclusive then the excess does not apply to costs, only damages, and vice-versa if Costs Inclusive.
Other Professional Indemnity Policy Extensions
These will differ from policy to policy however some examples include cover for:
- Breaches of Trade Practices Act & Other Legislation
- Loss of or Damage to Documents
- Dishonesty of Employees
- Present or Former Principals, Employees & Others
- Defamation, Libel & Slander
- Infringement of Copyright or Patents
- Enquiry Costs
- Joint Venture / Consortium - Own Liability
- Continuous Coverage
- Appointed Sub-Consultants
- Newly Created or Acquired Subsidiaries
- Run-Off Cover to end of Policy Period
- Estates and Legal Representatives
Professional Indemnity Insurance is recommended for anyone who provides advice as part of their business or profession, as anyone can make a mistake no matter how experienced they are or how much expertise they have.
In many cases it is compulsory under law to have a minimum level of Professional Indemnity insurance and in these cases professionals cannot maintain their accreditation/s without it. For example Accountants and Lawyers are required to have PI Insurance, and from 1 July 2011 Tax & Bas Agents were also required to have a policy in place in order to renew their Tax Registration.
It is increasingly common for consultants and contractors to maintain Professional Indemnity cover in order to respond to tenders, and this is particularly the case in order to participate in any government run project tenders.
In the case of IT professionals, they often require both Professional Indemnity Insurance and Public Liability insurance particularly if they are developing software or applications that are ultimately going to be used by members of the public.
Professional Indemnity Insurance Premium Pricing
Insurers generally set Professional Indemnity rates based on type of occupation. The rate is then applied to the Insured\'s turnover in order to work out a Base Premium. To this GST is added and then Stamp Duty is applied depending on the State/s the Insured operates in. Insurance brokers like express generally earn a commission from the Insurer which is part of the Base Premium. This generally ranges from 15% to 22.5%. Brokers may also charge a policy administration fee covering their general office overhead costs associated with the calculation, preparation and production of tax invoices and supporting documentation, insurer premium and statutory charges collection, and settlement to underwriters and relevant authorities. In the event your insurance is cancelled this fee is generally non-refundable.
Professional Indemnity Insurance Insurers
There are a number of APRA approved insurers that offer Professional Indemnity Insurance cover, and each tends to have preferred occupations that they like to write. This is however variable and depends on the number of claims that they have across their portfolio relative to each occupation. In addition to the Australian based insurers there are a number of Underwriting Agencies many of whom are agents of one of more Lloyds of London syndicates. As Lloyds is APRA approved so are the agencies that are acting on their behalf.