Professional indemnity insurance insures professional advisors and consultants against allegations of and claims for breach of their professional duty or, more specifically, negligence, during the course of performing their professional services. To ‘indemnify’ means to ‘reimburse’.
This article explains what professional indemnity insurance is as well as some of the key concepts. These are important to understand. Commercial contract lawyers routinely refer to professional indemnity policies in negotiating contracts.
An overview of topics covered by this article
This article will take you through all the things you need to know about professional indemnity insurance and what it is.
- What is the policy of professional indemnity policy cover?
- What professions are required by law to have professional indemnity insurance
- Who is covered by professional indemnity insurance?
- A claims-made policy
- Where do I go to buy professional indemnity insurance?
- How much does professional indemnity insurance cost?
- What is an insurance deductible?
- What is a Certificate of Currency?
- What is included in a policy of professional indemnity insurance?
- Professional Indemnity Insurance and Extensions
- Defence Cost
- What is the difference between an insurance broker and an insurer?
- Renewal of professional indemnity insurance
- Making a claim under Professional indemnity insurance
What does a policy of professional indemnity policy cover?
Professional indemnity insurance (also known as errors and omissions insurance) covers an insured person or business for claims made against them for breach of their professional duty.
The kinds of professional advisors who should hold a policy of professional indemnity insurance include:
- Insurance agents
- Real estate agents
- Publishing agents
- Risk management professionals
- Travel agents
- Swimming pool inspectors
- Medical practitioners
Which professions are required by law to have professional indemnity insurance?
Some professions are required by law to hold professional indemnity insurance, such as:
- Medical practitioners
- Real estate agents
- Tax agents
These professionals are often required to provide a certificate of currency to prove that they have a valid policy of professional indemnity insurance to their governing industry body. Without proving they have professional indemnity insurance, they are unable to obtain a licence to practice.
Who is covered by professional indemnity insurance?
The person or entity described as the ‘insured’ under the policy will be covered by the insurance. This is typically the person who took out the policy, but the insurance coverage may also extend to categories of insured, not just one person or entity.
For example, an insured might be the person or business named on the policy, but it may also extend to:
- related companies, including subsidiary companies
- named, interested parties
- subcontractors or subconsultants
If a person or business is not named as an ‘insured’ under the policy, and does not fall into a class of insured, they cannot make a claim under the policy.
For example, if Party A provides professional advice to Party B, but Party C suffers loss, if Party C isn’t a class of insured under the policy, they cannot make a claim against the policy. Party C must instead pursue a claim against Party A, who may then make a claim under the policy of insurance.
A claims-made policy
Professional indemnity insurance is a ‘claims made’ policy. This means that the insurance will ‘respond’ to a claim in the year that a claim is made. For example, if you gave advice to a client in 2022, and in 2023 that advice turns out to have been negligent and your client suffers loss and makes a claim against you, you need to ensure that you have a policy in place for 2022 because that’s when the claim has been made.
A good business lawyer will advise sole traders to maintain their insurance until the end of their potential legal liability. This can be up to 13 years after ceasing trading.
Buying professional indemnity insurance
Where do I go to buy professional indemnity insurance?
How much does professional indemnity insurance cost?
There is no ‘one size fits all’ approach when it comes to the cost of professional indemnity insurance.
The cost of insurance premiums for professional indemnity insurance depends on a number of things. This may include:
- The type and extent of the business advice you give: If you provide advice that is considered to be high risk, your professional indemnity insurance premiums are likely to cost more.
- The size and turnover of your business: most of the time, the bigger your business is, the higher the insurance premium. However, this rule may not apply for high-risk advisors such as medical professionals that tend to operate alone.
- The type and size of the clients you give advice to: if your clients are large, complex and litigious, you can expect to pay more.
- The amount of insurance cover you need: naturally, the higher the amount of professional indemnity insurance you need, the higher the cost of the premiums.
- The amount of the deductible: by lowering a deductible, you may place more risk on an insurer and therefore pay more for your insurance premiums.
What is an insurance deductible?
An insurance deductible is the amount of money the insured person has to pay towards a claim. It’s a way of sharing risk between an insured and an insurer. Generally, the higher an insurance deductible is, the lower an insurance premium will be.
It’s important for businesses taking out professional indemnity insurance that they understand what they are able to pay at a moment’s notice in the event of a claim. If an insured can’t afford a deductible, the insurance policy becomes a less effective tool for managing risk for the business.
Insurance deductibles may be paid either by the insurer reducing the amount of a pay out by the deductible and then the insured makes up the difference (for example, the claim is $3, the deductible is $1, the insurer pays $2 and the insured pays $1).
Some professional indemnity policies of insurance will require an insured to run down the amount of a deductible before the insurer will contribute to a claim. For example, if a complex and large claim is made against insurance, an insured may run down the deductible through investigation and legal costs. Once the deductible has been used up, the insurer will start to pay until the claim is resolved or the insured amount is reached.
What is a certificate of currency?
A certificate of currency is a certificate issued by an insurer that describes the type of insurance in place, who the insured is, the amount insured, the period of insurance and other basic details.
Certificates of currency can be used to confirm that a policy of professional indemnity policy is current and covers the required amount. Many contract lawyers will tell you that contracts often ask for the full policy wording to be disclosed. However, this should be avoided. A certificate of currency provides sufficient information.
You can request a certificate of currency from your insurer or insurance broker.
What is included in a policy of professional indemnity insurance?
While professional indemnity insurance may insure against a breach of contract (if that breach would amount to a negligent error, act or omission), it does not extend to a breach of contract where that breach sits outside of a breach of professional duty and where the contract imposes a higher standard than the professional duty of care.
An example is when a structural engineer has a contractual duty to review and accurately advise on shortcomings in geotechnical drawings and breaches that duty.
Under the law of negligence, the structural engineer is measured against the standard of a ‘reasonable’ structural engineer in similar circumstances. If a hypothetical ‘reasonable’ structural engineer could not be expected to review and accurately advise on shortcomings in geotechnical drawings (because they are a structural engineer and not a geotechnical engineer).
In those circumstances where the contractual obligations of the structural engineer go beyond what the structural engineer would be expected to do as part of their professional duty, the policy of professional indemnity insurance might not respond to the claim. This means that an insurer might refuse to reimburse the insured, in which case the insured may have to defend and pay for the claim out of its own pocket.
Professional indemnity insurance and extensions
Professional indemnity policies generally provide coverage for legal expenses an insured incurs in defending a claim made against them. However, they don’t always cover the costs of investigations that might be required about the conduct which is said to be negligent.
To combat the risk that your insurance may not cover (potentially costly) investigation costs, it may be worthwhile to arrange for an extension of the policy.
An insurer may agree to extend your policy to obligations you agree to under a contract. For example, this kind of extension may apply if you agree to greater responsibility in your contract than you otherwise would have had at law.
What is the difference between an insurance broker and an insurer?
An insurance broker is different to an insurer. An insurance broker acts on behalf of their client, the insured (or potential insured). An insurance broker advises and helps their clients to get the best deal. They will do this by identifying the risks their clients want to be insured and then they will arrange to put the insurance coverage in place with an insurer.
Insurance brokers can specialise in different industries and different types of insurance.
Renewal of professional indemnity insurance
If you have a professional indemnity policy, it will at some stage come up for renewal. If you continue to provide professional advice beyond your policy’s expiry date, make sure your professional indemnity insurance is renewed.
If you let your policy lapse and a claim is made, your business may be personally liable for the claim and you will not be able to rely on your insurance. This is a key focus for contract lawyers when advising clients regarding insurance.
Making a claim
Policies of professional indemnity insurance will require insureds to notify an insurer in a certain way and within a certain time frame of circumstances giving rise to a potential claim or a claim itself. It’s important to comply with the notice requirements under an insurance policy. If you don’t, your insurer may refuse you to pay out under the insurance.
Don't admit liability
Your insurer has rights. If you admit liability, you are reducing your insurer’s ability to defend you and by extension, itself. This is because your insurer is the one that may ultimately be financially responsible for the claim and will want to take every opportunity to reduce the amount it may be required to pay out.
If you admit liability (regardless of whether you have or haven’t given negligent advice or breached your professional duty), you are potentially exposing your insurer to a higher pay out.
And higher pay outs may be likely to lead to higher insurance premiums. If your opponent has a savvy contract lawyer working with them, they will be on the look out for correspondence admitting fault.
Don't settle without your insurer's consent
Most policies of insurance will state that you must not settle a claim without notifying and/or getting the consent of your insurer. By entering into an agreement to settle a dispute, you are potentially binding your insurer to a particular dollar figure, payment timing and payment type. For this reason, it’s important that your insurer is involved in this process and agrees to the settlement terms.
For larger insurance claims, an insurer (and their legal representatives) will manage the process to settle a claim. In this instance, an insured is required to provide assistance to help the insurer investigate and settle a claim.