Professional Indemnity Insurance Explained
– by Marsh
This informative article from Marsh helps to explain the ins and outs of Professional Indemnity insurance, a must for all management consultants.
What is Professional Indemnity Insurance?
Professional Indemnity is generally defined as an actual or alleged act, error or omission, misstatement, misleading statement, or breach of fiduciary duty or other duty committed when providing or failing to provide professional services.
Tip – If you provide professional advice or service for a fee, you may need Professional Indemnity Insurance.
Claims made – what does it mean?
Claims made means that you (the insured) are covered for claims made against you during the CURRENT period of insurance, regardless of the date when the incident happened (subject to retroactive date being unlimited).
When you (the insured) are first notified of a potential claim or incident, it is the current policy that the claim/incident will fall under.
Example – You performed a service for a fee in June 2019. In August 2021 you have been notified of a potential loss for the work you performed in 2019. The claim will fall under the 2021 policy not the 2019 policy, as that is when the claim was made.
The current insurer will respond to a claim made against the insured, and not the insurer at the time of the original incident.
Tip – inform the current insurer of any potential claims during the policy period.
What is a retroactive date? Why is this important?
A retroactive date defines how far back in time a loss can occur for your policy to cover your claim. If a claim happens prior to your retroactive date, your policy won’t provide benefits. It is a feature of the “claims-made” Professional Indemnity insurance.
Example – You performed a service in June 2019. In August 2021, you have been notified of a potential loss for the work you performed in 2019.
You purchased a new Professional Indemnity policy, and your retroactive date is the inception date of the policy on 1 February 2021. The incident that you have been notified of in August 2021 that occurred in 2019, will not be covered by your current policy, as your retroactive date only covers claims dating back to 1 February 2021, and not any further back.
Tip – pay attention to the retroactive date, and whether the retroactive date is Unlimited.
So you have a contract that requires a higher Professional Indemnity limit than you currently have, what do you do?
Professional Indemnity policies are “claims made”, meaning if you increase the limit than decrease the limit due to a contract ending be aware that the claim/incident will fall into the policy period and term in which the claim/incident is notified. If you have a contract stating limits that are required and you have accepted this, you could be in breach of contract, if you lower the limit without informing the other party.
Tip – Negotiate, negotiate, and negotiate! See if the third party that you are negotiating with will accept your current limit!
Exclusive vs inclusive limit. Does it matter?
The Legal Defence Costs that are associated with a claim or incident can be very high. You have two quotes; one is with an Inclusive limit, one is with an Exclusive limit. Which one should you take and what does it mean?
“Inclusive” limit, means the Defence Costs are included in the limit.
“Exclusive” limit, means the Defence Costs are excluded from the limit.
- Professional Indemnity Limit: $1,000,000 inclusive of costs.
You have a limit of $1,000,000 which includes the Defence costs. The defence costs will erode your limit. “Inclusive” = included.
- Professional Indemnity Limit: $1,000,000 exclusive of costs.
You have a limit of $1,000,000, the Defence costs are in addition to the limit. The defence costs payable will not erode the limit. “Exclusive” = excluded.
Tip – An Exclusive limit will not be eroded by Defence Costs.
Exclusive vs inclusive excess
Inclusive excess means the insured must pay the amount of the excess towards the legal and defence costs upfront.
Costs exclusive excess means the insured does not pay any excess towards the legal and defence costs, but only pays the amount of the excess towards the settlement of any claim.
Tip – Exclusive excess will reduce any excess paying towards legal and defence costs.
Run-off cover what is it? Do I need it?
Professional indemnity policies are written on a ‘claims made’ basis. This means that the policy will only respond to claims, which are made against an insured and notified to the insurer during a current policy period, irrespective of when the work was performed by the insured. If the policy has expired, lapsed or cancelled, no additional claims can be made under the policy, as it is not current.
There is a potential for claims to be made against an insured after a business is wound up, has ceased trading or you are retiring. If a claim is made at a time in the future and there is no insurance policy in place, there would be no protection for the insured.
A run-off insurance policy can be purchased prior to cessation of the business. It will provide coverage to an insured for future claims made against them which arise from acts, errors or omissions which occurred prior to the inception of the run-off policy. Run-off policies can be purchased on an annual basis, or a multi-year basis with one upfront premium payment.
Tip – A run-off policy can protect you for your past work, when you or your company have ceased trading.
To learn more about Professional Indemnity insurance, click here: Small and Medium Business Professional Indemnity Insurance | Marsh (marshadvantage.com.au)
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Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange insurance and is not an insurer. This brochure contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire the product, refer to the specific policy wordings and/or Product Disclosure Statements available from Marsh on request. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.