Anyone who provides specialized services or advice may be held legally responsible for adhering to the general standards of their trade or business.
As a result, several lines of business are legally required to carry this coverage, and AIG can provide insurance solutions for a wide range of current professional activities.
What is professional indemnity insurance and do I need it?
Professional indemnity insurance is designed to protect professionals who provide advice or services as part of their job. Professionals who typically require PI include:
What does Professional Indemnity Insurance cover?
If you’re accused of providing poor advice, services, or designs that cause your customer to lose money, Professional Indemnity Insurance covers your legal costs and expenses, as well as any damages or costs that may be awarded.
What kind of claims can Professional Indemnity Insurance provide cover for?
Professional Indemnity Insurance is designed to cover the costs of dealing with a disappointed customer’s claim. It’s critical to ensure you’re covered in the event of an error, whether it’s due to a measurement error or strategic counsel that costs a client money.
For instance, you may be required to compensate a client if they file a claim for:
- Sharing confidential or commercially sensitive information without authorisation is a breach of confidence.
What is covered by professional indemnity insurance?
Professional indemnity insurance reimburses the insured for legal fees incurred as a result of financial damage caused by your company’s negligence, error, or omission in providing professional advice or services.
Is professional indemnity insurance compulsory in South Africa?
FSPs must “keep in force adequate guarantees or professional indemnity or fidelity insurance cover,” according to the statute. The minimum amount that an FSP must have in place is defined by BN123 of 2009, and it varies depending on the types of FSPs and their activities, such as keeping client funds.
FSPs can address some of the issues they encounter by passing the risk to the PI provider through PI Cover. As a result, PI Cover should be considered more than a ‘compliance requirement,’ but rather an integral part of an FSP’s risk management strategy.
FSPs should become familiar with how their insurance works, such as when it pays out and what is excluded, and consider if they have enough coverage in place.
The advisor had failed to guarantee that his client was insured for the exact value of the property, had failed to operate in good faith towards the client, and had broken his contractual liability, according to the Western Cape High Court of South Africa.
The advisor in this case arranged for the property to be insured using average structure replacement costs. The structure, on the other hand, featured beautiful historic characteristics that would cost a lot of money to replace. The client filed a claim with the insurer after the building was extensively destroyed by fire. The insurer determined that the property was underinsured and used the law of averages to determine that the client was compensated significantly less than the actual cost of reconstructing the structure. The customer subsequently filed a claim for damages against the advisor for failing to provide adequate guidance on the building’s replacement costs. The court ordered the advisor to compensate the client for a loss of R17 152 981 plus interest and litigation costs.
The minimum amount of professional indemnity insurance required by many FSPs is R1 million. As shown in the example above, a client may be entitled to significantly more. Despite the fact that PI Cover has exclusions and excesses, FSPs that just have enough coverage to meet their regulatory duties may not have thoroughly evaluated whether their coverage is adequate or structured in the right way to keep them in operation in the event of a claim. It’s critical to comprehend the business’s risks as well as the PI Policy’s terms and circumstances.
PI Cover should not be used to substitute an advisor’s responsibility to manage and conduct business in accordance with the general duty of due care, skill, and diligence, as well as to ensure that customers are treated fairly. It can, however, protect a company in the event of an unforeseen incident.
What is meant by professional indemnity?
Professional indemnity (PI) insurance is a type of commercial insurance that protects business owners, freelancers, and the self-employed from claims that their services are substandard. If the recipient is displeased with their work, any organization that provides a professional service or gives advise could be sued.
What happens if you don’t have Professional Indemnity insurance?
A detailed definition of professional indemnity insurance (PI) is required to explain it. It is, in essence, an insurance product for professional firms and individuals that protects them in the event of specific errors made during the course of their company. Professional negligence, mistakes or omissions, breach of professional duty, and civil liability are all covered by the plans provided.
Professionals can work without fear of being sued by a customer or a third party for problems that arise as a result of their professional actions if they have this sort of insurance. In a nutshell, it enables professionals to operate with more confidence and peace of mind.
Professional indemnity insurance was designed to provide much-needed financial protection against the risks and personal losses to which professionals were particularly vulnerable. The origins of this insurance can be traced back to the 1700s in London. Accountants, solicitors, and architects, for example, traded with ‘unlimited liability’ as a guarantee of the quality of their work at the time.
They would pay any remedial recompense to their customer from their own wallets if they made a mistake, limited only by the value of their assets. As a result, if they make a serious mistake, they could actually “lose their shirt off their back.” As a result, insurance was created to safeguard against these losses, which was a much-needed answer.
The growing reliance of businesses on the contracted services given by various occupations has greatly expanded the definition of the term ‘professional,’ and a professional is now defined as any individual or corporation providing specialized advice or services. The risks are still very real, and mistakes can cost a professional their career and reputation if they don’t have enough professional indemnity insurance.
The cost of insurance will be determined by the type of profession, annual turnover, claims history, and other factors. A high-risk Financial Adviser, for example, will be compensated more than a lower-risk Recruitment Consultant.
Depending on the customary risk variables and market competitiveness, rates for this insurance range from 0.25 percent to 5% of fee income or annual turnover. However, rates may be greater or lower than this.
Minimum premiums will also be required, which would vary according on the insurer. The’minimum premium’ is the beginning point for an insurance company when insuring a risk, and it can vary dramatically between companies. Depending on the insurance company, the minimum premium could be £100 or £1,000, for example.
Insurance premiums are also subject to a 12% insurance premium tax, but they are not subject to VAT.
Professional indemnity insurance is primarily purchased through expert insurance brokers such as us. Because of the intricacy of the risks and the large range of products available, consulting a broker with the necessary skills is essential to ensuring that you purchase the right cover at the right price. A broker will learn about your firm and assist you in identifying potential risk areas that you may not have seen on your own.
Because certain professions are substantially more risky than others, the premium calculation for a professional indemnity policy differs by profession. There are many factors that go into the cost of a policy, not only the quantity of coverage or the maximum of indemnity necessary, just as there are many factors that go into the cost of a car insurance policy.
Any calculation, as well as any claims that have already been made, must take into account the size of a business, its turnover, and its professional activity. The higher the risk of a possible claim, the more expensive insurance will be.
Simply put, it pays for the costs of errors made when providing professional services. Anyone, no matter how competent or diligent, is at risk of making a mistake in today’s fast-paced corporate world. Some errors are trivial and have little or no financial ramifications. Others, on the other hand, can be significantly more serious, and failing to get appropriate PI insurance might financially ruin a firm, its directors, or its partners.
It will cover negligence, errors and omissions, breach of duty, and civil responsibility, depending on the coverage purchased. Professional indemnity insurance should also cover liabilities arising from negligence, such as business interruption and hefty legal fees paid as a result of a lawsuit.
Some plans will also cover company or financial losses resulting from defamation, loss of papers, employee dishonesty, and unintended breach of confidence.
Having an insurance coverage that covers a professional’s work is vital since it allows them to provide services without having to factor in the potential extra expense of any future mistakes. In addition, a professional indemnity coverage can cover legal costs and expenditures incurred as a result of a court case brought against a professional for their mistake.
Professionals are exposed to a lot more business risk without this insurance, and they may have to raise their prices to compensate. However, with this insurance, they are covered against a variety of negative business outcomes, allowing them to compete more effectively.
Although professional indemnity insurance is not required by law, most professional institutes and organisations require their members to have it and control it through their rules and regulations. Failure to have insurance is usually a major disciplinary offense that can lead to a fine or closure by the regulator.
Professional indemnity insurance is not required in many deregulated industries, such as IT and technology. Even if this form of insurance is not required for professionals, it is still a good idea to get it. Professional indemnity insurance is not necessary for management, business, or marketing consultants, but it is routinely purchased to protect oneself from the potential liability of legal fees or compensation payments.
Many large organizations and government agencies may also demand proof of PI insurance from any service providers they work with.
IT experts, recruitment consultants, graphic and interior designers, personal trainers, instructors, teachers, and private tutors are among the other professions that frequently take out professional liability insurance. However, the list is much broader and more diverse than these occupations.
A professional indemnity insurance policy can be a customized product that is assessed on an individual basis, or it can be a pre-packaged product that can be acquired easily and fast online. The policy wording should be crafted in such a way that it fulfills all of the policyholder’s individual demands.
An IT specialist, for example, could be concerned about an unintended breach of a written contract involving the delivery of equipment or software, whereas a quantity surveyor might be less concerned. Damage limitation coverage, on the other hand, is likely to be of far higher relevance to marketing professionals than, say, private tutors.
After the necessary business has been adequately covered, the only thing left to examine is the excess that will be applied. This is the initial amount of a claim that is not covered, just like other types of insurance. In general, the higher the excess level, the lower the insurance prices.
When purchasing any type of insurance, whether for a business or personal use, it is critical to determine how much coverage is required. This varies from company to company, and when it comes to professional indemnity insurance, determining how much coverage is necessary for a company’s needs can be difficult.
Often, it boils down to calculating the amount of financial harm that could be incurred by considering the ‘worst-case scenario,’ i.e. what could go wrong in the worst-case situation?
There is no one-size-fits-all solution or policy that will work in every situation. Consider the potential financial strength of your clients and how much resources they might have if they were to file a claim against you when deciding what amount of professional indemnity insurance to purchase.
Another factor to consider is the possible cost of legal fees if you don’t have insurance and need to defend yourself. This varies per industry, but keep in mind that prices tend to rise across the board when dealing with issues that are difficult to handle.
Who should get Professional Indemnity?
Professional Indemnity Insurance is a vital sort of coverage for any business, but it is especially important for individuals who work in professions that need them to give advise on a regular basis. Anyone who “provides expert advice or services according to a recognized discipline” qualifies as a professional. Whether your company is large or small, a claim for compensation as a result of poor professional advice or services can be devastating.
Defining Professional Indemnity Insurance
Professional Indemnity Insurance protects against claims for liabilities owing to a third party (usually a client of the insured) for losses incurred by the third party as a result of the insured’s provision of ‘professional services.’ To ‘indemnify,’ it means to compensate the insured for any liability payable to a third party as a result of the loss. As a result, Professional Indemnity Insurance is a type of insurance that can protect your company from claims for financial loss, bodily/personal harm, and/or property damage arising from an act, error, or omission in the performance of the professional services covered by the policy.
For example, an architect’s incorrect designs, a migration agent’s incorrect advice on visa requirements, and a work, health, and safety consultant’s failure to detect unsafe work conditions can all result in a financial loss or bodily injury to a client, and thus a potential claim for compensation against the insured.
Why is Professional Indemnity Insurance Important?
In your line of work, it’s possible to inadvertently break privacy or confidentiality, omit information, make a judgment error, or give incorrect advice. A simple act, error, or omission might result in a claim against your company, making it critical to safeguard yourself, your company, and your reputation.
Professional Indemnity Insurance is essential since the legal costs of defending any claims might be substantial. Small firms, in particular, might struggle to find the money to pay for court and other legal bills to defend their business, regardless of whether they are found guilty or not for damages. Court proceedings can go on for years, with recurring fees that can have a substantial financial impact on your company.
Professional Indemnity Insurance is crucial because it protects you from having to shoulder the full cost of these claims. This will allow you to keep your business up and running as usual, with little inconveniences.
Who Needs Professional Indemnity Insurance?
Lawyers, accountants, bookkeepers, architects, engineers, and marketing specialists are just a handful of the professions that can benefit from Indemnity Insurance. Professional Indemnity Insurance is less common in professions with more hands-on work, although it is nevertheless necessary in some instances. Agricultural consultants, event managers, life counselors, and marriage celebrants are just a few examples.
As a Professional in whichever field you work in, you are responsible for ensuring that your advise or services are of high quality. As a result, if you give your client inaccurate advice or services, you could be held accountable for any damages that occur as a result of this.
The Cost of Litigation
Many companies undervalue the true expense of legal action. The cost of defending yourself may be in the $100,000 range – or much more. Many businesses, particularly small businesses, would find it difficult to cover these expenses.
For example, in one case handled by CGU, a professional was involved in a litigation that lasted several years and cost $1 million in legal fees alone.
His insurance payment covered all of the charges, and the firm took care of the issue. More crucially, he was found not guilty of negligence.
Protecting Your Professional Reputation
This exemplifies a crucial aspect of professional indemnity: reputation defense, which is often overlooked.
In such legal cases, the professionals involved may have a predisposition to strive to resolve the issue as swiftly as feasible. While it may appear to be the simplest approach, it’s crucial to evaluate the long-term consequences of this decision. It could be interpreted as a confession of guilt and have a negative impact on your reputation.
Professional indemnity insurance allows you to explore legal channels to clear your name and defend your reputation while having the support of a legal and insurance team behind you.
When your livelihood depends on giving advise, the correct professional indemnity insurance can provide you with peace of mind, stability, and, most importantly, protection for your prized reputation.
Final Word
Professional Indemnity Insurance gives businesses the peace of mind they need to keep functioning confidently, regardless of their profession or size. More information about Indemnity Insurance can be found on our website here.
With the correct insurance, you can safeguard your professional reputation, your business, and your livelihood. Contact CGU today for more information on Professional Indemnity Insurance.
How does a professional indemnity claim work?
Professional indemnity insurance is frequently sold in a range of coverage limitations. Consider the following factors when determining how much professional indemnity insurance you require:
The quantity of coverage needed will be determined by your client’s level of exposure.
If you work in an industry where professional liability insurance is required by law, you should know that your profession has a recommended level of coverage. You can double-check with your regulator to make sure you’re covering the required quantity.
Do I need both professional indemnity and public liability insurance if I am starting my own practice?
Starting your own practice can be a thrilling experience, but it can also be intimidating, especially given the high startup expenditures. When it comes to insurance, you should think about whether you can afford to go without it. Towergate Insurance’s Faith Chapman discusses why professional indemnity and public liability insurance are so important:
Professional indemnity insurance can protect you against any claims brought against you if you are accused of Professional Negligence, which can include things like giving inaccurate advice or making a suggestion, breaking a professional code of conduct, losing documents, or violating confidentially. A client may claim that they were damaged as a result of an undesirable effect they had as a result of a recommendation you made during a session. This type of policy will cover the costs of defending you against this allegation, as well as the damages paid if the customer is successful in suing you.
Public liability insurance will cover you in the event of a claim for accidental injury or property damage to a client or a member of the public, as well as loss or damage to public property. If you spilled coffee on a client’s laptop, for example, or if a client trips over while visiting you, this coverage would cover the legal costs of defending you, as well as pay out if the customer was successful in suing you.
Is professional indemnity the same as professional liability?
Professionals must make decisions every day, and some of these decisions may be questioned for years. Professional Liability (also called as Professional Indemnity) allows the entire practice team to focus on their work without having to constantly glance over their shoulders.
Even if the error that caused the claim occurred years ago, Professional Liability insurance covers claims that are submitted while the policy is in effect. As a result, it should be kept up to date; otherwise, there will be no protection against the unintended results of previous efforts.
Is professional indemnity insurance the same as public liability?
Absolutely. If your company provides a service based on your skills, knowledge, and expertise and also has a location where the public can visit, both types of insurance can give you complete peace of mind.
Assume you’re an accountant who works from home and receives clients for meetings and appointments. Professional indemnity can shield your company from allegations of professional negligence, while public liability can protect you if a client is injured in an accident on your property.
Do architects need professional indemnity insurance?
What kind of insurance do architects require? Architects must have professional indemnity insurance. If you are out and about, public liability insurance (for third-party bodily damage or injury claims against you) is a good idea.