What is Professional Indemnity insurance?
Professional Indemnity insurance (also known as PI insurance) is designed for professionals who provide advice. It helps by covering your costs in the event a client or other third party alleges professional negligence and takes legal action against you. In other words, where a client claims your service or advice caused them financial loss and sues you for compensation. As rare as this type of situation might seem, it is something that can happen to even the most cautious of professionals.
What does PI insurance typically cover?
Claim investigation costs
Cover for the costs of investigating, defending and settling claims made against your business.
Professional Body Representation Costs
Cover for the costs of responding to and providing representation in relation to complaints about your business to your professional body.
Cover for contractors negligence
Cover for claims relating to the performance of professional services by your consultants, contractors, subcontractors or agents, for which you are legally liable.
Retroactive and run off cover
Cover for claims arising from acts, errors or omissions that are alleged to have happened before your insurance start date and can include cover which survives after you retire or leave the profession for acts, errors or omissions occurring before you retired or left the profession.
What does PI insurance typically not cover?
As with most insurances, there are some circumstances which are not intended to be covered by PI insurance such as:
Third party personal injury or property damage covered under Public or Product Liability Insurance.
Loss or damage which has not occurred as a result of your advice or service.
Any assumed liability under a contract with a client (contractual liability).
Who needs PI insurance?
PI insurance is a mandatory requirement for some professions in New Zealand but, even if PI insurance is not mandatory for your profession or is not a client contractual requirement, it is still a highly important policy to have in place.
Every piece of advice and recommendation you give is probably based on sound judgement on your part. However, sometimes it doesn’t take a lot for a client to decide they’re not happy with your service. If they take legal action against you it can be very difficult for your business to handle. Even if the allegation or claim has no basis, by the time you add up the legal costs of defending yourself, you could easily be looking at thousands of dollars out of pocket. As a small business owner, coming up with that kind of cash probably wouldn’t be easy.
Professional Indemnity Insurance is therefore a very important cover for businesses to consider holding, as it helps provide a safety net in the event your business does happen to experience an allegation of professional negligence.
Example of a PI insurance claim
Sam* was an accountant who regularly prepared tax returns. In preparing Bruce’s* tax return, he made an incorrect tax deduction. This led to Bruce underpaying his tax for that year. Bruce eventually received a large fine from the tax office and was also required to pay back the amount he’d underpaid. He successfully took legal action against Sam as it was his mistake that led to him receiving the fine and needing to backpay his tax. Sam’s PI insurance helped to cover the legal fees to defend his case, as well as the amount he was required to pay Bruce.
* This story is based on a real claim experienced by a client with insurance arranged by Aon. Names have been anonymised for privacy reasons.
Frequently Asked Questions
What is the difference between PI insurance and Public Liability insurance?
PI insurance provides cover for claims made against your business by clients/third parties claiming that your professional services or advice caused them loss. Public Liability insurance covers the costs associated with a third party’s claim for personal injury or property damage arising from the conduct of your business or due to products that are sold or supplied through your business.
Is PI insurance the same as Malpractice Insurance?
These policies can be similar but Malpractice Insurance is designed specifically for healthcare professionals, hospitals and surgeries.
Is PI insurance the same as Errors and Omissions?
Yes. PI insurance is also known as Errors and Omissions in some parts of the world, including the United States.
What are the limits on PI insurance?
Limits in the amount of cover will depend on the level of insurance you have taken out and the needs and circumstances of your business. Consideration has to be given to determine the appropriate amount to be insured for “damages” and “defence costs”. You can consult our team of specialist brokers to help understand the coverage options available for your business.
How much PI insurance do I need?
This will depend on a number of factors such as your profession, your business needs and the clients you work with. Some professions are required by law to hold a minimum level of cover, and some clients may require you to have a minimum level of cover to work for them. Most PI insurance policies start at a minimum cover of $1 million, but you should decide the appropriate limit for you and consult with your broker about this if you need to.
What is retroactive cover?
This is protection for claims that are based on services or advice you provided before the start date of your current PI insurance policy. When taking out PI cover, you may be asked to nominate a retroactive cover date or the insurer may impose one.
What is run-off insurance?
This provides cover for claims made against you after your business ceases operating, or after you retire, based on advice or services you provided whilst in business. Depending on the policy, you may be required to pay additional premium to activate run-off cover.
Are PI insurance policies issued on a claims-made or occurrence basis?
PI insurance is written on a claims-made basis. This means it will only cover claims made while the policy is in force. This means it is very important that any circumstances that may give rise to a claim, or any claim itself, be notified to the insurer as soon as possible after they are discovered. For example, if a client complains to you about your advice, your insurer should be notified at that time and within the policy period, rather than waiting until a formal claim is made. If that client does decide to take legal action against you at a later date, you may not be entitled to cover if the insurer wasn’t notified previously.
As a professional, what other types of insurance might I need?
Depending on your profession and the nature of the work you carry out, there are several different policies you may need to consider. For example, if you have an office, you can take out Business Insurance to help cover the cost to repair your premises if your office is damaged by fire, storm or other event, as well as Public and Products Liability to help cover you for damage to other’s property or if someone is injured on your property or by your products. Cyber Insurance also offers important protection, which can help protect your business against cyber threats and other internet-based risks.
Say hello to your local Aon broker today to find out how we can support you with all your business insurance needs.