What is Professional Indemnity insurance & who is it designed for?
No matter who we are and what we do, we all seek advice and guidance from time to time. Whether getting our finances or our bodies in shape, we use others to help us make the best decisions for our lives and rely on the advice they give as recognised professionals in their respective industries.
In business, organisations rely heavily on fellow experts to offer support, guidance and products/material so it’s critical that they know they are dealing with others who care about their business as much as they do. Think about a construction company building a hospital: they would rely on a team of architects, engineers and consultants to supply plans and products that take into account the purpose of the building and the people that will use it.
Broadly speaking, if you’re in the “advice-giving” business you should have professional indemnity insurance as a “must” on your insurance shopping list. In some regulated professions, the law may even force you to purchase. Examples of key professions for whom this insurance is vital include:
- Financial advisors
- Healthcare professionals
- IT professionals such as software and solutions developers
- Management and business consultants
Further professions that would benefit from professional indemnity insurance include (but are not limited to):
- Technical contractors& engineers
- Recruitment agencies recruitment consultants
- Designers such as web designers, graphic designers, and interior designers
- Fitness professionals such as personal trainers& yoga instructors
- Teachers and tutors
- Copywriters and Content Writers
Even if you are not in the “advice-giving” business, others might insist you have the cover before they decide to trade with you. It sends a message that you are serious about giving a quality service to your customers and partners and that even if you have “a bad day at the office” you are protecting those you deal with at all times. It’s also worth remembering that having this insurance means you are protected whether a claim is successfully brought against you or not.
What’s covered under a Professional Indemnity Policy?
Professional Indemnity policies are usually arranged on an annual basis to cover all business activities but can also be offered for a specific project. An example of this might be an architect buying PI cover for the design of buildings in a construction project.
The covers generally offered by the policy are:
- Professional negligence
- Defamation (slander &/or libel)
- Breach of confidence
- Breach of copyright
- Lost or damaged documents
- Loss of data being held
- Loss of money or goods
Let’s consider the meaning of each of these:
this is where it is proven that you have made errors in the advice or service you have provided. Examples are where you have misinformed a client (provided them with incorrect or incomplete information), failed to provide them with key facts or information (referred to as omissions), or where you have made an error of judgement in the type of advice you gave, such as decision making or provision of recommendation.
A good example of this is an engineer who is asked to design a drainage system for a hotel but didn’t check the plans drawn up by the architect meaning that adequate pipework could not be installed to all of the rooms. This resulted in blockages and flooding in the rooms causing damage. The hotel could sue the engineer for physical damage caused to property as well as related financial loss as a consequence such as loss of rental income of the damaged rooms.
this is where the reputation or character of another is damaged through negative and/or false spoken word (slander) or written word (libel). A professional indemnity policy would protect you against law suits brought by anyone who felt you had said or written anything defamatory (false) against them.
Breach of confidentiality:
we all have a right to privacy and when we entrust our information to others, we want them to respect that right. It is critical that sensitive data and information is kept securely to stop it falling into the hands of unintended recipients. This is important not only for the civil aspect (ie. the rights of others personally & professionally) but also from a regulatory perspective, with most countries across the world having laws that govern the storage of data, information and intellectual property.
Breach of copyright:
accidental use of someone else’s intellectual property could result in a claim. For example, if a website designer uses a photographer’s images on their client’s website without permission of the owner of the image (usually the photographer) then they are breaching copyright law and could be sued. These are often innocent mistakes but can be very costly.
Loss of or damage to documents and/or data being held:
when business documents and data are lost, the owner company can face a number of difficulties. Trade secrets could fall into the hands of their competitors, their customers’ data could be compromised by no longer being private and protected but publicly available and their historical records could be lost with either an expensive exercise to re-obtain or be permanently lost with no chance to replicate. Claims in this area can be very expensive. Consider an IT Cloud Data Management company who loses its customers’ data due to poor systems maintenance or who didn’t have suitable Cyber protections in place and their systems were hacked causing a security breach. The Company would be open to PI claims from the customers entrusting them with their data and this could prove very expensive. Another example could be an accountancy firm who keep their clients’ invoices and documentation to prepare their tax returns yet loses critical papers by not storing them in waterproof storage. The customer may then be in breach of tax return deadlines or unable to supply required documentation to the authorities and as are fined. This customer may sue the accountant for negligence in not safekeeping the documents.
Loss of money and/or goods:
if you are entrusted with money or goods for either safekeeping or services and you subsequently lose them, you could be sued. An example of this would be a dry cleaner who accepts a tuxedo from a customer to clean for an important event but the dry cleaner mixes up the tickets/receipts and returns the suit to the wrong customer. In this example the owner of the tuxedo would look to sue the dry cleaner for the cost of the suit but may also claim damages in the event that they had to purchase another one at the last minute or if they could not attend the event due to not having the tuxedo in time and as such suffered a financial loss due to non-attendance.
How much insurance do I need and how much will it cost me?
So, you’ve made a wise decision to purchase Professional Indemnity insurance but you still have some decisions ahead: namely how much insurance do I need and how much am I prepared to pay for my premium?
Professional Indemnity is generally sold in varying limits or bands of cover. For example, AED500,000/AED1m/AED2m policy limits. Cover can even be as high as AED10m depending on the Insurer.
In deciding which limit is right for you and your business you should consider the following factors:
- The size of your business (turnover, number of clients, depth of advice)
- The profile of your clients and their size (“Blue Chip”, global, SME, local)
- How much you think it would cost to defend yourself against claims (do you have a company solicitor/in-house legal team or do you have an independent solicitor? Would you defend yourself instead?
- Do you operate in a regulated industry? If so, do you know the limits your regulator stipulates as mandatory for insurance or recommends based on experience?
When considering your clients, you should consider the size of the contract with them or the exposure they face. This is because in the event of a claim, their loss could become your loss.
So, you’ve considered how much insurance to purchase but what do insurers consider when deciding how much your premium should be?Insurers will decide the “risk” they face in covering your Professional Indemnity exposure through considering the following factors:
- How long you have been operating your business
- How much industry experience do you have overall (ie. how long have you worked in your chosen profession/sector of industry?)
- What relevant professional qualifications do you hold?
- Are you a member of any Trade Bodies?
- Are you in a regulated industry sector?
- Have you had any claims made against you previously?
- What control measures or processes do you have to minimise your exposure to claims, for example, are your employees vetted and qualified (if applicable), do your clients sign any disclaimers, do you limit your liability by contract that is accepted by both parties?
- What limit of liability are you seeking?
All of these factors are “insurance influencers” and depending on the answers, the premium will be calculated. Policies have standard limits and coverages generally so there is little opportunity to “tailor” or customise your policy to suit your budget. As a guideline, the more industry experience you have, the expertise and knowledge you demonstrate and the diligence you display in running your business will have a positive impact on how Insurers view your risk although premiums generally are banded as standard according to the insurance limit you select.
Claims: what’s paid under a Professional Indemnity Policy?
Professional Indemnity Insurance would pay out the financial damages awarded by a court of law and will also pay for related legal defence costs up to the limit specified in the policy. So, what does this mean? Put simply:
if a customer/client takes you to court and wins, they are likely to be awarded a set sum of money in recognition of their actual financial loss arising out of your advice/service:for example, the actualcost to replace a suit that you as their dry cleaner lost or damaged. They might also be awarded compensation in recognition of additional consequential losses, such as missed business opportunity by not being able to attend a prestigious sales event because you lost the tuxedo they were going to wear!
Legal Defence Costs:
if a customer does sue you and as such takes you to court, you will need to prepare a defence against the claim whether it is justified or not. It is for the court to hear evidence and decide the outcome of the claim so even if you disagree, you’ll need to defend yourself and that costs time and money. Professional Indemnity will cover the legal expenses associated with your case.
Before we move on to look at a real claim story, it’s also worth considering that Professional Indemnity policies often include what’s known as “Run Off” insurance. Even if you cease operating your business, you are still exposed to future claims and run off insurance is there to ensure that these claims would still be considered under the policy and therefore not leaving you personally liable. Professional Indemnity policies generally operate on what’s known as an “occurrence basis”: meaning that provided there was valid cover in place at the time the alleged incident took place, Insurers will consider the claim.
So, what about a real claim story? Here’s one from a leading Insurer specialising in Professional Indemnity for small businesses.
John was a professional IT freelancer and had worked in software development for a number of years. He had experience of delivering projects to a range of clients in different sectors of industry and set himself high delivery standards.He was hired to develop a website for a company but although he worked hard, the project suffered a series of delays throughout the production stages and after it went live, the claimant reported a high number of defects. The customer claimed that the delays and defects were all John’s fault and as such made him liable for the money they lost. Luckily, John had taken out PI insurance so he was covered for any compensation payments. The insurance company worked with him to analyse the claim further and concluded that while although there had been delays in finalising the project, these were not his fault alone: nor were the performance issues as bad as the claimant suggested.John accepted that whilst he had tried his best, the project was not delivered to expectation, and accepted that he had some liability.His insurers therefore decided to try settling the case quickly by offering the claimant a reduced amount reflective of the situation, which was accepted and the case was closed. So, as you can see, the value of a Professional Indemnity insurance policy is far greater than the premium you pay!