What is Professional Indemnity insurance?
Professional Indemnity insurance – also known as PI insurance or PII – is intended to protect professionals and their businesses in the event of claims made by a client (or third party) suggesting that they have suffered loss as a result of non-performance, breach of contract and/or professional negligence in the services provided.
In addition, the policy will cover legal and other costs and expenses incurred in the defence of any claim. Professional Indemnity insurance provides the ultimate safety net when all else fails. However, like any other safety net, its use should be avoided as much as possible.
Who needs Professional Indemnity insurance?
If your business sells knowledge or skill, such as providing advice, design, specifications, supervision etc., you have a responsibility and duty of care to your client, and third parties, through the services and expertise you provide.
Many professions are required to have Professional Indemnity insurance cover as a regulatory requirement or as part of their professional authorisation. This includes solicitors, accountants, architects, surveyors, mortgage intermediaries, insurance brokers, and financial advisers. Many consultants including consulting engineers; advertising and PR agencies; and designers also choose to have this type of insurance to meet client requirements and to benefit from financial protection in the event of a claim arising.
The duty of care owed is generally the exercise of ‘reasonable skill and care’, in the discharge of the services provided. If a professional fails to exercise this duty (i.e. is negligent) they may be liable for losses incurred by their client, and/or third parties. Taking into account the operation of the current legal system, even defending claims can be very costly.
PI cover is for the benefit of the professional and not the client, although, far too often, it is not viewed that way. Clients cannot generally claim directly against the Professional Indemnity insurance carried by professionals – they must prove liability first, a legal process which can be time-consuming, expensive and uncertain.
How does liability attach?
Personal liability attaches where a practice operates as either a sole proprietor or a partnership. In the case of a partnership, liability is joint and several. Even when a practice ceases to operate, these personal liabilities do not come to an end, but continue for the limitation periods in contract and tort. Corporate bodies assume liability in their own right although individuals within such organisations can attract personal liabilities in certain instances.
Unique operation of Professional Indemnity policies
Professional Indemnity insurance operates on what is known as a ‘claims made’ basis. This means that it is the policy in force at the time the claim is notified which will operate, irrespective of when the work was actually undertaken or when the alleged act of professional negligence took place.
The ability of clients or third parties to bring claims many years after services are complete (subject to the relevant limitation periods) emphasises the importance of maintaining appropriate and effective cover not only when the project is being undertaken but also for a number of years into the future.
What can professionals be liable for?
First, any potential claimant must prove professional negligence on the professional’s behalf (i.e. a failure to exercise reasonable skill and care in the discharge of its services). A claim can be brought in contract or tort/idelict (i.e. common law). It is often more difficult to succeed in a claim in tort as the following tests must be satisfied:
- the plaintiff must prove that the professional owed him a duty of care.
- the plaintiff must prove that the professional has breached that duty.
- the plaintiff has suffered financial loss as a direct result of that breach.
If an allegation of professional negligence is upheld, the professional is likely to be liable for the losses incurred by the plaintiff which arise as a reasonably foreseeable consequence of their actions. The professional will often be responsible for the plaintiff’s legal costs and these can be substantial. Large sums of money are often spent simply trying to recover fairly minor losses.
Direct financial losses (economic and consequential loss) as opposed to the cost of rectifying a defect are implicit under contract unless specifically excluded. There is more of a grey area arising out of the question of liability for economic and consequential loss at common law although recent judgements have allowed such losses to be recovered.
What is the extent of cover?
Professional Indemnity insurance provides only limited cover against the consequences of claims for professional negligence. Unless contractual limitations have been agreed between the professional and his client, the professional’s liability:
- is unlimited in amount, and
- extends over a considerable period of time.
Professional Indemnity insurance, by contrast:
- will have a set limit on the amount that insurers will pay – the limit of indemnity.
- operates for a set period of time – the period of insurance.
- is subject to the policy terms, conditions, limitations and exclusions.
- operates on a ‘claims made’ basis.
Limits of indemnity
The limit of indemnity is the maximum amount that can be claimed from insurers for the professional’s liability to pay claimant damages. Generally cover for defence costs payable in addition to the limit of indemnity can be secured. It is important to note that disclosing the limit of indemnity to a client does not lead to a limitation of liability, which can only be achieved by negotiating a specific financial cap as part of the professional’s appointment.
The limit of indemnity generally operates in one of two ways:
- Each and every claim cover – this means that the indemnity limit applies separately to each claim that is made under the policy. However, all claims arising from the same occurrence would be regarded by insurers as one claim.
- Aggregate cover – the limit of indemnity would apply as one single amount for all claims made in each period of insurance.
Policies operating on an ‘each and every’ basis, would still normally apply in respect of:
- pollution/contamination claims
- claims brought in American or Canadian courts