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Top ten reasons why you must have professional indemnity insurance

If your business consists of giving advice or providing a service, rather than selling a tangible product, then you face a specific set of risks around your responsibility to your clients. 

Professional indemnity insurance is a product that protects you against the risk of being sued by a client for financial or material loss as a result of professional ‘negligence’.

It usually covers the costs of defending your business against legal action, as well as any damages you are required to pay to your client.

Here are the top ten reasons why professional indemnity insurance is vital for your business.

  1. You have legal liability

Under Australian common law, if you claim to be a professional who is qualified to give advice or deliver a service then your clients have the right to rely on the quality and accuracy of that advice or service. This ‘duty of care’ is in addition to your general public liability, which relates to the physical safety of and their possessions.

Clients may claim that you have breached your professional duty of care if they lose money or business because something is wrong with the advice or service you have provided. This could fall under various categories, including:

  • Breach of contract – you fail to provide the agreed service
  • Negligence – you give inaccurate information, or fail to deliver the service to the expected standard 
  • Omission – you fail to notify clients of important factors or information, or to take key steps in the delivery of the service
  • Misrepresentation – you make false claims about your business or service

2. Your personal assets are at risk

If a client makes a professional negligence claim against you, your legal costs alone could run into the tens of thousands – even if the claim is found to be baseless. If the courts do find against you, you will have to make restitution to the client for any financial loss they have suffered as a result of your negligence – which, depending on the nature of the error and the size of their loss, could amount to millions. 

Even larger entities would be likely to struggle with a liability of this size. For smaller businesses and self-employed professionals, it would almost certainly mean bankruptcy. Even if you’re trading through a legal entity that has limited assets, you can still be sued personally for any losses caused by your errors. This means that you face losing your home and family assets as well as your business if you do not have PI insurance. 

3. It may be a legal requirement

For some professionals in Australia, such as medical and legal practitioners, professional indemnity insurance is a legal requirement of practicing or registration. 

This requirement is designed to protect not just the practitioner and their business, but also their patients or clients. The purpose is to guarantee that your clients will receive a sufficient level of compensation even if you or your practice do not have the financial resources to cover their losses and provide adequate restitution. 

There is specific legislation that governs both the medical and the legal professions, and the requirement for PI insurance is built into that legal framework, due to the extremely high risk of malpractice claims and the size of potential damages payments. Medical indemnity insurance, which is regulated by specific legislation, differs from standard professional indemnity insurance in that it also covers physical harm caused to patients as a result of professional negligence. 

4.It may be a requirement of your professional body 

Even in sectors where there is no government regulation requiring PI insurance many professional bodies, like the Institute of Chartered Accountants, require it as a condition of membership. 

Other professional associations choose to subscribe to a Professional Standards Scheme (PSS), administered by the Professional Standards Council. A PSS limits the liability of professionals who fulfil all its criteria – one of which is that they have adequate professional indemnity insurance in place. 

In certain sectors there are specific PI insurance providers that are approved by the professional body – such as Lawcover for legal professionals in NSW and the ACT. Some professional associations may offer an umbrella PI insurance policy for their members, which provides a limited level of automatic cover, while others negotiate a discount rate for members with a preferred insurance provider. 

5. It may be a requirement of your clients

If you do not have professional indemnity insurance, the fact is you are putting your clients’ businesses at risk as well as your own. If they suffer a substantial loss as a result of your negligence, and you do not have the resources to provide them with adequate compensation, their own business or personal financial security may be threatened. 

For this reason, many businesses, particularly non-profit and government sector entities, will not do business with you unless you can provide proof of both public liability and professional indemnity insurance cover. 

The failure to purchase PI insurance can damage your business – both by restricting your business opportunities and by positioning you unfavourably against competitors who are fully insured. 

6. Your professional reputation may depend on it

If a client makes an allegation of negligence and initiates legal proceedings against you, the reputation of your business is severely at risk. For service businesses in today’s networked world, your reputation is as vulnerable as it is valuable. Your business could be irreparably damaged by a negligence claim, however baseless, so it’s imperative that you take steps to protect yourself. 

This means that if a client does make a claim against you you will need to mount a legal defence to clear your name. Even if the matter is settled through negotiation this can be a very protracted and expensive exercise – and if it does go to court, your costs could reach $15,000 per day or more. 

PI insurance covers your legal costs whether or not the claim against you is found to be valid; without that insurance, those legal costs alone could bankrupt your business. 

7. You won’t be covered your existing insurance 

The chances are you already have standard business insurance to cover your premises and physical property against risks like theft and fire, and to protect you against the risk of business interruption. You probably also have public liability insurance in place, in case someone hurts themselves at your offices or you inadvertently cause an accident when you’re out visiting a client. 

Neither of these insurances offer you any protection against professional negligence claims, where clients are claiming for losses they have occurred as a result of a defect in your advice or service. Unless you have PI insurance in your portfolio you are leaving your business dangerously exposed.

8. You may be able to get retroactive protection 

PI insurance policies vary enormously, and many are tailored to suit the specific needs of certain sectors and professions. One of the major differences in policies lies in the basis on which you can claim protection.

‘Retroactive protection’ is a feature designed to offer extended cover for PI policy holders, and it provides absolutely vital protection for professionals in sectors where claims can be made years after advice has been given or service provided.

Retroactive cover may be offered when you buy a ‘claims made’ policy. A ‘claims made’ basis of insurance means that your cover will be valid as long as you hold the policy at the time a claim is made against you – regardless of when the incident that is giving rise to the claim occurred. Retroactive cover may be unlimited, or may start from a specific date (in which case, claims relating to advice given before that date will not be covered)

9. You can protect yourself into the future with runoff cover

At the other end of the policy lifecycle, ‘runoff cover’ can provide you with vital protection and peace of mind once you are no longer practicing, for whatever reason. Again, this extended cover is important for professionals in sectors like accounting, law and medicine where claims may be made a very long time after you have given advice or provided a service. 

Runoff cover provides ongoing protection – often for life – against claims that relate to advice you give while your policy is in force. This means that if a client files a claim against you later, even after you have retired, you’ll still be covered. You do not have to keep paying a premium in order to qualify for runoff cover – where offered, it will be provided automatically for the specified period after your policy lapses. 

If you begin practicing again you will of course need the protection of a new PI policy.

10. You’ll be covered for your employees’ mistakes

As the owner of a professional service business you can be held liable for the errors or omissions of everyone who works for you. 

Negligence claims can be made against you for a vast range of reasons other than erroneous or incomplete advice. These include issues like loss of documents, breach of privacy and libel or slander – either by you, or by someone in your employ. Even minor errors – such as accidentally emailing a sensitive document to the wrong person – could have major repercussions and cause significant financial loss to a client, for which you would be liable. 

The more people you employ, the greater the risk of a mistake becomes – so a comprehensive PI policy is even more essential once you start to build a team.

The cost of PI insurance will vary depending on the nature of your business. But when you consider the catastrophic implications of a negligence claim against your business, it’s an investment you simply can’t afford not to make.