Professional Indemnity Insurance: The Ultimate Guide
How can professional indemnity insurance help you in your profession?
Humans make mistakes, including the professionals.
These mistakes can be due to negligence, misrepresentation, or breach of copyright.
Your client might even sue you for damages that they have suffered due to your mistakes. They can be costly.
Professional indemnity insurance manages your risks when you make a mistake in your work.
What is Professional Indemnity Insurance?
Professional indemnity insurance or PI insurance covers your legal costs and damages when your service causes your clients or third parties to incur monetary damages. Professional service includes advice, designs and developments, and consultations.
PI insurance is also known as professional liability insurance. It is one of the key insurances for businesses providing professional services.
The usual claims of PI insurance are:
Negligence: Making a mistake in your professional advice which causes your client or 3rd party suffer monetary damages.
Misrepresentation: Misleading your client due to the omission or changing the facts, and your client suffers monetary damages relying on your misrepresented advice.
Infringement of copyrights: Breaching the copyright of the third party in your professional services
Breach of confidence: Leaking your client data without their consent
PI insurance usually does not cover criminal prosecution. They also do not cover all types of civil liabilities. The coverage depends on the contract.
Common Industries that Need Professional Indemnity Insurance
If you provide a service or professional advice, you will need professional indemnity insurance. Some of the common industries are:
Accountants and Tax Consultants
Accountants and tax consultants advise their clients on regulatory financial reporting and tax compliance. Given the complexities of the accounting or tax rules, accountants might make a mistake in the interpretation of the rules. As a result, the corporate client may suffer losses in tax penalties.
The recent Panama Paper release is an example. If you are a tax consultant that advise your client to set up a shell company in Panama to evade tax. Your client can sue you for your advice for their tax penalties and reputation loss.
Similar to tax consultants, lawyers give advice to their clients on complex legal affairs. When the advice is wrong and results in financial/reputation loss of their clients, their client can sue the lawyers.
In this case, the potential legal costs and damages can be covered by professional indemnity insurance.
Marketing and Creative Professionals
Marketing and creative professionals provide advice to corporate clients on launching and managing their marketing campaigns.
There are cases where marketing agencies are sued by their clients or third parties. If their marketing campaigns cause reputation losses or loss of income through advertising based on their advice, marketing firms can still be liable.
External Quality Assurer
In industries such as aircraft maintenance, it is a requirement for an external quality assurer to check the equipment and components used. If your business is providing quality assurance services, you will need PI insurance.
When the components used in the plane is not up to the standard, you may be held liable for the costs incurred by the airlines or the passengers.
Mistakes that doctors made can be disastrous. It may result in additional medical costs or even death. The mistakes can be due to issuing the wrong medicine, giving the wrong diagnosis, or not aware of the patient’s allergies.
In these situations, patients (or their families) may sue your practice for negligence.
More companies than ever are going digital. They started to automate their processes, storing sensitive client data, and perform their work using computers. These companies hire IT consultants to help them set up the infrastructure and software.
However, when any part of the processes failed, IT consultants can be liable for the damages suffered by their clients. These damages can be a result of lost opportunity due to server breakdowns, or insecure firewall, allowing their client’s data to be leaked out.
You may be engaged to help your clients improve their business. The engagement can be on business processes, internal controls, risk management or strategy. You most likely use your previous experiences with other clients to help your current client.
However, every business is different. What works for your previous clients might not work for the current one. There can be certain situations that you are not aware of. In this case, your client might not obtain its intended results, or even worse, suffer a loss. Then your client can sue you for damages.
The above are some of the common industries for professional indemnity insurance. In general, as long as you provide professional advice or service, you will have professional indemnity risk.
Things to Consider Before Purchasing Professional Indemnity Insurance
Do You Need Professional Indemnity Insurance?
As with other insurance, the first step is to determine whether do you need professional indemnity insurance. Ask yourself the following questions:
Do you provide any advice or services?
Is it possible for someone who relies on your advice or services suffer financial, reputation losses?
If the answer is no to the above, then you do not need a professional indemnity insurance.
You can do a quick check by searching whether anyone in your industry has been sued in the past in Google using the following keywords:
“Suing [your profession]”
“Suing [your profession] for bad advice”
“[your profession] + lawsuit”
For example, if you are an accountant, you may search for:
Suing accountant for bad advice
And you will see the following results:
Clearly, accountants are exposed to potential professional liabilities.
Please note that not seeing any examples of lawsuits in your profession does not mean that you do not have the risk. It is always better to check with an insurance agent.
Assessing your PI needs
You should assess your PI needs by evaluating the following:
What is the size of the contract? A bigger contract tends to have a bigger need for PI insurance.
What is the size of your client? A bigger client tends to have a bigger pocket to sue you.
How many contracts do you fulfill per month? The more contracts you are fulfilling, the higher PI coverage you will need
What is the maximum compensation for each contract? Do you have any limit on your liability laid out in the contract with your client?
What is the worst thing that can happen with your advice? Identify the stakeholders of your advice, and recognize the worst thing that can happen to them as a result of relying on your advice.
Once you have answered these questions, you would have an estimate of your exposure.
Limit Your Liability by Contract
In some cases, you may limit your liability in your professional contract with your client. The limit can be set based on a fixed amount, or as a multiple of the contract fee. This is known as the limitation of liability clause.
However, please note that while the contract seeks to protect you, there may still be a chance when your client can sue beyond the limit if the limit is unfair.
Review Your Coverage
Always review the coverage of the PI insurance. They might not cover for risks that you have, resulting in you being exposed greatly without the right coverage. If you are unsure about the risks of your professional business, you are welcomed to contact us for a free consultation.
Cost of Professional Indemnity Insurance
Depending on your requirements and coverage, the costs of the general liability insurance can vary. We will need more details of your company’s operations before advising you on the cost.
Business / Associations Requirements
If you intend to join a professional association, you might want to check whether is professional indemnity insurance a requirement.
Reputable Insurance Company and Agent
This applies to all kind of insurance. Having a reputable insurance company and an agent will give you the assurance that your risks are being well-managed.
A well-qualified agent will also be able to advise on your coverage, specific to your situation and industry.
It is not unusual for professionals to make mistakes in their works. Some of these mistakes can be damaging to your clients. And your clients can hold you responsible for their losses.
Fortunately, you can transfer the risk using professional indemnity insurance.
Do you want to manage your business risk and minimize your risk exposure? Please consider insuring your risk with Anthola’s general liability insurance package. Contact us for a free consultation on your business. We love to speak to you!
Or call us at +65 6298-6222.