Professional indemnity insurance
Professional indemnity insurance covers the cost of legal representation, investigations and compensating clients for loss or damage resulting from negligent services or advice provided by the business or an individual.
While most companies/individuals enjoy good relationships with their clients, a mistake in a project can change working dynamics overnight. The chances are that if a client suffers a significant financial loss as a result of your negligence, they are likely to seek legal recourse.
Do I need it?
If you offer your knowledge, skills or advice as part of your profession – either as a self-employed individual or for a company – you should consider taking out professional indemnity insurance.
Consumer awareness and on-line resources is resulting in our society gradually becoming more litigious. Even where there has been no proven error resulting in liability, a third party may initiate a suit against the professional purely as a result of the project not being successful. Defending actions in court could prove to be time-consuming, expensive and uncertain. In the event that the professional is found guilty, the costs related thereto, which may include reimbursement of the litigant’s expenses and damages, may be an unaffordable financial burden.
Some professions are required to have professional indemnity insurance by their professional bodies or regulators – these include:
- financial advisers
- consulting engineers
- some healthcare professionals
Many other businesses choose to take out professional indemnity insurance to protect themselves against claims – these include:
- chartered surveyors
- advertising agencies
- it professionals
- design agencies
- public relations agencies
Is professional indemnity insurance mandatory?
In respect of industry bodies' regulatory requirements, many business sectors require PI insurance - accountancy, engineering and surveying to name but a few. Professionals working on a contract basis - such as management consultants, business consultants and IT contractors - will almost certainly need PI insurance in order to be awarded a contract.
However, even if you are not legally obliged to have PI insurance, without it you could have to pay thousands of rands in compensation and legal fees to defend a claim. This would be in addition to the cost of your time spent defending the allegations.
No matter how large or small a business, without PI cover your financial position could be left vulnerable if a claim is brought against you. Although most professionals strive to provide the best service possible, people do make mistakes; knowing that adequate insurance is in place will give you peace of mind that you and/or your organisation is covered.
What it covers
Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered.
Compensation claims can be brought against you even if you provided a service or offered advice for free.
What limit of professional indemnity do I need?
Choosing a professional indemnity insurance limit depends on your firm's circumstances. If you need PI insurance for a specific contract, it's likely the client will have specified a minimum amount. This is often the case for industry bodies too, so check before arranging cover.
Otherwise, consider a worst case scenario if you were to make a mistake in a piece of work for a client, and estimate the cost of putting it right. Remember to take into consideration any legal fees and losses that could be incurred by your client as a result of the error.
Conditions of your cover
Professional indemnity cover is usually offered on a claims-made basis. This means that your insurer will only cover you for claims that are brought against you during the term of your policy. If a claim is made against you after your policy has expired – even if the incident occurred while your policy was in place – you will not be covered for that claim.
For example, if an incident occurred in 2011 when you had professional indemnity cover, but the client brings a claim against you in 2012 – after your policy has expired – your insurer will not cover you for that claim.