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Understanding Professional Indemnity Insurance - what it covers and how it works

Professional Indemnity (PI) Insurance is designed to help cover you and your business in the event a client alleges that you have been professionally negligent or that you have breached a duty owed to them while providing your professional services and they take legal action against you. Understanding the basics of PI Insurance may assist you with meeting your obligations under the policy.

PI Insurance is usually a claims-made policy.  A claims-made policy responds to claims that are made against you during the policy period that is in force, regardless of when the incident that gave rise to the claim took place, subject to the retroactive date. It is very important that you notify your insurer or broker of any circumstances or incidents which may give rise to a claim, or any claim itself as soon as possible after they occur. For example, if a client complains to you about the advice you provided, your insurer should be notified at that time, rather than wait until a formal claim is made. If your client does decide to take legal action against you at a later date, you may not be covered if the insurer wasn’t notified previously.

This is why you require a current policy when it comes to PI exposures. If you forget to renew and your policy lapses and then a claim is made against you, there may not be an insurance policy to cover the claim, even if you did have a PI policy in place when the services were provided.

Understanding your obligations under a PI Insurance policy is important because the responsibility of those obligations sits with you. If you don’t understand your obligations, you may miss something which could ultimately impact indemnity under your policy.

The following guide provides an overview and introduction to PI insurance:

Run-Off Cover:

Run-Off cover provides insurance cover for your past Professional Services after you have permanently ceased work, retired or left your profession. This is particularly important for policies that operate on a “claims made” basis, as claims or complaints can be received years after the Professional Services are provided. If you have a claims-made policy and retire or leave the profession without arranging run-off cover then it’s likely you will not be covered for claims made against you which relate to your previous work - even if you had a policy in place at the time the relevant service was provided.

Unlimited Retroactive Date:

Because your current claims made PI policy is the policy which can respond to an insured incident, the retroactive date is important.

If your policy has an unlimited retroactive date, it means your policy can provide cover for a claim, regardless of when the alleged wrongful act, error or omission was committed, including if the relevant professional services were conducted before the commencement of the current policy.

Notifying of Incidents that could result in a claim:

PI Insurance policies require you to notify your broker of incidents that may lead to a claim as soon as possible in case the incident results in legal action at a later date. An example of incidents that may lead to a claim could be someone threating to make a complaint or threatening legal action or realising there has been a breach of confidentiality.

In some instances, claims can be notified years later. If you don’t advise of a known incident before the policy expires, and if legal action is taken at a later time, it is possible that the claim could be denied by the Insurer because you may have failed to meet your obligations under the policy.

Limit of Indemnity (Sum Insured)

This may also be referred to as the Sum Insured. It shows the level of cover provided by a policy, subject to its terms and conditions, including any applicable exclusions. Your policy may have a limit of liability, sub-limits, and an aggregate limit. The limit of liability is typically the amount you are covered for any ONE claim, although sub-limits may apply to certain liabilities. The aggregate limit is the maximum amount the policy will cover if there are multiple (unrelated) claims, in any one period of insurance.

Certificate of Currency:

This is a document which confirms the details of an insurance policy. It may include details of the policy type, sums insured, professional services or business description, the policy period, and importantly, the entity or insured name.

Contractual Liability

Insurance policies often apply exclusions for liability that you agree to accept by signing a contact if that liability did not already apply at law. This is sometimes called an assumed liability, as you are assuming responsibility for the risk when this would not have been the case in the absence of the contractual agreement. Often, assumed liability arises by agreeing to an indemnity clause in a contract.
Therefore, it is always recommended that legal advice be obtained before signing a contract.

Taking the time to understand your obligations under your PI Insurance policy and being sure you have the level of protection you’re comfortable with should form part of your risk management strategy. Speaking to a broker who understands the risks of your industry in detail can also be a valuable exercise in making sure you’ve ticked all the boxes regarding your PI cover.

To learn more visit >>> Aon, small business insurance specialists


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