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Professional Indemnity Insurance

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Professional Indemnity Insurance

Professional Indemnity Insurance, often referred to as PI or indemnity, is a type of liability insurance designed to protect professionals and businesses from financial losses due to claims made by clients. These claims can arise from alleged mistakes, negligence, omissions, or incorrect advice provided during their professional service or advice.

Why is professional indemnity insurance important?

No matter how skilled or careful a professional or business may be, mistakes can and do happen. These errors could cause harm to clients, leading to claims against you. Legal proceedings can be expensive, and the financial implications can be substantial, potentially leading to bankruptcy. Therefore, having professional indemnity insurance offers a protective layer that can safeguard the financial stability and reputation of your business. Professional indemnity insurance seeks to protect both your assets and reputation, covering the costs of compensation for which the business is liable, as well as the costs of defending a claim.

Professional indemnity cover is a necessary component of your business risk management, its affordability makes it a wise investment. In New Zealand, the average cost of professional indemnity insurance typically ranges between NZ$50 – $100 per month.

It’s crucial to have this cover if your business:

  • Offers advice.

  • Handles client data.

  • Works with intellectual property.

  • Belong to a professional association or regulatory body.

What does professional indemnity insurance cover?

Professional indemnity insurance covers errors or omissions resulting in financial loss to a third party. This includes defence costs, emphasizing that most policies include legal defence costs outside the indemnity limit, covering the costs of defending a claim even if the claim is found to be without merit. Additionally, it’s crucial to have coverage against the risk of incurring significant legal fees due to professional mistakes or misinterpretations, especially in cases of unsatisfactory advice, design, or specification.

Legal costs

This includes the cost of defending your business against a claim, whether the claim is valid or not. If a client alleges that your advice or service led to their financial loss and takes legal action, these costs can quickly escalate. Indemnity insurance can cover the expenses related to legal proceedings, such as lawyer fees, court costs, and potential settlement fees.

Breach of Professional Duty

If you fail to meet the standards of your industry and a client suffers a loss as a result, this type of insurance can cover you. For instance, if you're a financial advisor and you fail to follow due diligence when advising a client on an investment, leading to a significant financial loss for the client, your professional indemnity insurance can step in to cover the costs associated with the claim. This can help maintain your professional reputation.

Negligence

This covers errors or oversights in your work. If you accidentally provide incorrect advice to a client that leads to a financial loss, your policy can cover the legal costs and potential compensation you might have to pay.

How much does professional indemnity insurance cost?

Professional indemnity premiums are calculated on several different factors including:

  • Limit of cover
  • Type of industry
  • Number of employees 
  • Turnover 

Professional indemnity insurance in NZ typically costs between $50 to $100 per month, covering both the cost of a claim for compensation that a business is legally liable to pay, as well as the costs of defending a claim.

Who needs professional indemnity insurance?

While it’s virtually mandatory for some professionals like lawyers, accountants, and financial advisors, any individual or company providing professional services, advice, or handling client data can benefit from Professional Indemnity Insurance. It’s not only about meeting regulatory requirements; it’s also about safeguarding your business from potential financial and reputational harm that could result from legal claims. A professional indemnity insurance policy is crucial for various professionals, encompassing considerations such as legal defense costs, policy inclusions, exclusions, and the right coverage limits tailored to specific professional needs.

Yes, regardless of your business size, if you offer professional advice or services, you should consider PI insurance. Even small mistakes can lead to significant claims, and the associated costs can have severe consequences for small businesses, sole traders and individual contractors. There are of course certain professions give larger amounts of expert advice e.g. Law, Building Inspections, Real Estate Agents, Engineers. The potential liability from these industries are much higher and the financial consequences of a mistake can be put an end to the business so having comprehensive cover is a necessity.

Unfortunately, once a claim has been made against you, it’s too late to purchase professional indemnity insurance to cover that specific claim. Professional Indemnity Insurance operates on a “claims-made” basis, meaning it covers claims made during the policy period, even if the incident causing the claim occurred before the policy was in effect. It’s always recommended to have coverage in place before you need it.

Top professions that need professional indemnity insurance

In New Zealand, indemnity insurance is a critical safeguard for many professions, protecting them against claims.

How do I get proof of professional indemnity insurance?

You can usually get proof of insurance same day when you purchase insurance through Gerrards.

Acquiring a professional indemnity insurance certificate from traditional insurance brokers may require a few weeks, a delay that could create problems for people or businesses who need instant insurance proof.

To obtain insurance coverage and policy documents promptly, contact us. We may require you to provide some fundamental details about your business, such as:

  • The name of your business
  • The nature of your business activities
  • The total number of employees
  • Predicted annual income
  • Financial situation
  • Maximum amount of cover needed
  • Years of experience in the industry
  • Qualifications

What does professional indemnity insurance not cover?

Professional Indemnity Insurance generally does not cover costs for which a business is legally liable due to the following.

Known Claims and Circumstances

If you were aware of a claim or a circumstance that could lead to a claim before the inception of your policy, and you did not disclose it to your insurer, your policy might not cover it.

Fraudulent, Dishonest, and Criminal Acts

PI insurance does not cover any claims arising from deliberate, dishonest, or criminal actions.

Bodily Injury or Property Damage

Professional Indemnity Insurance is not designed to cover physical injury to a person or damage to property. These would typically be covered under Public Liability Insurance.

Claims from Insolvency or Bankruptcy

If your business becomes insolvent or bankrupt, indemnity insurance generally won’t cover claims related to these financial issues.

Other common questions about professional indemnity insurance

‘Claims-made’ policies cover claims that are made during the policy period, regardless of when the incident causing the claim occurred. In contrast, ‘occurrence’ policies cover incidents that occur during the policy period, even if the claim is made after the policy has expired.

The amount of coverage you need depends on the nature and size of your business, the potential risks you face, and the requirements of your professional body or clients. Most small business opt for $1 million or $2 million worth of cover. This amount is highly specific on your specific risks so it’s best to discuss this with an experienced broker to ensure you have the right amount of coverage.

When considering a professional indemnity policy, it’s crucial to understand the cost and conditions associated with obtaining this insurance. The importance of notification cannot be overstated; failing to notify your insurer of potential claims in a timely manner can have serious consequences, potentially invalidating your coverage. This underscores the need for businesses to carefully manage their professional indemnity policy, ensuring they fully comprehend the terms and conditions, especially regarding notifications and claims.

Run-off cover is a feature of professional indemnity insurance that continues to provide coverage for claims made against you after your business has ceased trading or you have retired. This is particularly important in professions where claims can arise long after the actual service or advice was provided.

For instance, imagine you’re an architect who designs a building, then retires a year later. Five years after your retirement, a flaw in the building’s design becomes apparent and causes substantial damages. Even though you’re retired, if you had taken out run-off cover as part of your professional indemnity insurance, you would still be protected against this claim.

Run-off cover is crucial because many professional indemnity insurance policies operate on a ‘claims made’ basis, meaning the policy that responds is the one in effect when the claim is made, not when the incident occurred. Therefore, maintaining some form of coverage even after ceasing to practice can protect against late-arriving claims.

In New Zealand, the premiums for professional indemnity policies are typically tax-deductible as a business expense. However, it’s best to consult with a tax professional to understand the specifics based on your circumstances.

Yes, PI insurance can cover past work as long as the claim is made during the active policy period, there was no knowledge of the potential claim or specific circumstances that could arise in a claim when you purchased the policy and the retroactive date was before the incident the claim arose from. Also note that if your services provided are different now than in the past, you will need to note them all on the current policy to have the right cover if claims arise.

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