Determining the appropriate amount of professional indemnity insurance coverage requires careful consideration. Professional indemnity insurance protects you against claims for loss or damage alleged by the insured’s clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered.
In this article, we’ll explore what influences the amount of coverage required and offer insights on choosing the right coverage.
Overview of Professional Indemnity Insurance
Professional indemnity insurance is designed for businesses that offer advice or services that clients rely on. If the advice or service provided leads to a loss, the business could face a lawsuit for damages. This insurance helps cover the legal costs and any settlements or judgments.
Businesses providing professional advice or services are recommended to have professional indemnity insurance. This includes accountants, mortgage brokers, consultants, and allied health professionals. Some industries require professional indemnity insurance as a standard, often mandated by regulatory bodies or industry associations.
Basic Coverage Aspects
Professional indemnity insurance typically covers legal costs, settlements, and judgments. It protects against claims of professional negligence, errors, omissions, and breaches of duty. It’s crucial for businesses to understand the specific coverage details and exclusions of their policy.
Underwriting guidelines for Professional Indemnity insurance
- Nature of Your Business
- Government Regulations and Standards Surrounding the Business
- Business Size and Revenue
- Type of Services Provided
- Client and Contract Requirements
- Claims History
- Industry Standards
- Acquisitions/mergers
- Insured’s risk management and governance frameworks
- Level of cover (Limit of indemnity) and excess/retention clients are comfortable absorbing
Average Cost of Professional Indemnity Insurance
Small Businesses and Sole Traders
The cost of professional indemnity insurance for small businesses and sole traders can vary. Typically, it ranges based on the level of coverage and the nature of the services provided. Understanding the specific risks and coverage needs is crucial for determining the cost.
Medium to Large Businesses
Larger businesses with complex risk profiles can expect higher premiums. The cost considerations include;
- Number of employees
- Revenue
- Insured’s footprint (national or international) domicile
- Claims history
- Limit of indemnity
- Excess absorption capability (financial risk appetite)
- Risk and governance framework and the value of contracts handled.
Tailoring coverage to address these factors is essential for adequate protection.
High-Risk Professions
Professions with inherently higher risks, such as medical practitioners or financial advisors, often face higher premiums. The nature of their work requires extensive coverage to protect against significant potential losses.
How to Choose the Right Professional Indemnity Insurance
Evaluating Different Policies
When selecting a policy, consider key factors such as coverage limits, review exclusions against your risk profile, maximise protection, ensure insurable risks associated with your business are transferred to a professional indemnity policy and conduct due diligence on the insurer’s expertise in your industry. Seek advice from insurance brokers or industry experts to ensure comprehensive coverage.
Maintaining a Clean Claims History
Demonstrating measures that result in claims prevention enables a strong risk profile, resulting in insurers offering competitive premiums, coverage, and long-term partnerships. Best practices include thorough documentation, clear client communication, in-house client file audits, continuous professional development and risk governance/framework to minimise errors and omissions.
How to Calculate the Right Amount of Coverage
- Identify Specific Risks: Evaluate the specific risks associated with your profession and business activities. Consider potential scenarios that could lead to claims and assess their financial impact.
- Evaluate Financial Impact: Ensure your coverage adequately protects against the financial impact of potential claims. This includes legal costs, settlements, and any damages awarded.
- Seek Professional Advice: Consult with insurance professionals to tailor the right policy for your business needs. They can provide insights into industry standards and help determine appropriate coverage limits.
- Contractual Obligations: Examine your contracts to identify any minimum coverage requirements and ensure your policy meets these standards. Keep your insurance current, as claims are only covered if the policy is active when the claim is made.
- Future-proofing your cover: A Professional Indemnity policy is on a ‘Claims Made Basis’, meaning that consideration needs to be given to the costs now and your past activities. Inflation and other factors need to be considered, as a financial loss of $250,000 several years ago is likely to be significantly higher now.
- Include defence costs: Some policies include defence costs in the sum insured, and some policies have it as a separate limit. Consideration needs to be given to what the costs would be involved with defending an action against you. A long court case can incur significant costs that, if not taken into consideration when setting a limit, can be the difference between having enough cover or having to pay some costs yourself.
- The number of parties relying on your advice: Whilst advice may only be provided to one party, considerations need to be made into what that advice will be used for. An insured, for example, may provide a small amount of advice to their client. Their client provides this information to all the other parties involved in the remaining steps of a project. If this advice is incorrect, then a domino effect of affected parties can occur, causing significant losses.
- Include defence costs: Some policies include defence costs in the sum insured, and some policies have it as a separate limit. Consideration needs to be given to what the costs would be involved with defending an action against you. A long court case can incur significant costs that, if not taken into consideration when setting a limit, can be the difference between having enough cover or having to pay some costs yourself.
Benefits of Adequate Professional Indemnity Insurance
- Protection Against Financial Loss: Adequate coverage protects against financial losses due to professional negligence claims, ensuring your business remains financially stable.
- Reputation Management: Responsible handling of claims helps maintain your professional reputation. Clients are assured that their interests are protected, enhancing trust and confidence in your services.
- Compliance and Legal Requirements: Meeting industry standards and contractual obligations avoids penalties and legal repercussions, and compliance ensures your business operates within regulatory frameworks.
Protect Your Business Today
Assess your current professional indemnity insurance coverage to ensure it meets your business needs. Adequate coverage safeguards your professional reputation and financial stability. For further information or quotes, contact us at ACS Financial to explore your options.
