professional liability insurance, professional indemnity

Your guide to professional liability insurance

As a professional, you strive to provide your clients with exceptional advice and quality service. But no matter how experienced, educated, or genuine your intentions are, there’s always a risk something could go wrong, and an allegation be made. That’s where liability insurance comes in.

If you’re an accountant providing tax advice, an architect providing a design, or a consultant delivering business guidance, professional indemnity insurance (PI) acts as your safety net in the event of a claim. Whether you’re liable or not, the costs to defend your business against an allegation can be devastating- not to mention the cost of compensation if you’re found liable.

What is professional liability insurance?

Expert mistakes are far easier to make than they are to bounce back from. Professional liability insurance (PI) (or professional liability insurance) is designed to protect you from the legal costs and claims for damages that may arise from an act, omission, or breach of duty during your business operations.

If a client alleges you’ve made an error, overlooked a critical piece of information, misstated a fact, or given poor advice and this results in a financial loss for them, they may take legal action against you to recover these losses.

It’s important to know that whether or not the allegation is true, PI can help cover the legal proceedings that arise from false claims.

How does it work?

Usually, professional indemnity cover is sold in the form of a contract between an insurer and the professional person, where the terms and conditions of the cover are detailed in the contract. Covers often include, but aren’t limited to:

  • Consequential losses – cover for indirect losses that accompany an insured loss, for instance, the loss of earning to a third party following a claim.
  • Defence costs cover – covers defence costs and lawyer fees sustained throughout a claim.
  • Fraud and dishonesty cover – liability of your business to a third party resulting from fraudulent or dishonest conduct of an employee.
  • Lost documents cover – costs of replacing or restoring documents lost in your custody
  • Court attendance cover – If attending court when defending a claim.

The amount of money that you pay to the insurer to maintain the agreed amount of cover for a given period (usually one year) is known as the premium.

The premium is often largely determined by the amount of risk that the insurer carries on behalf of a client. Generally, the higher the risk, the higher the premium.

Is professional indemnity necessary for me?

Many mistakenly believe that PI only applies to professionals such as lawyers, accountants, and architects. But, if you’re set up as a sole trader, contractor, consultant or freelance professional, you still need to consider professional indemnity insurance.

In some professions, it’s a condition of registration that some level of professional indemnity cover is always in place. This requirement varies greatly between professions and sometimes between states and territories- so be sure to check in with your local government.

What are the risks of not having cover?

The risk of operating without professional liability insurance is often underestimated. The one seemingly innocent and understandable error can sometimes have devastating ramifications for businesses. Even if it is ultimately determined that you aren’t responsible, payment of the legal costs associated with defending an allegation can put you out of pocket.

You may think “it will never happen to me”, but legal action often comes from an unforeseen event and can potentially bankrupt businesses, small or large.

Another risk is the damage to your reputation that could evolve from a claim made. If you’re a financial advisor being hit with a claim of poor advice, your customers are probably going to cut ties and switch providers. Professional indemnity insurance enables you to pursue legal avenues to clear your name and defend your reputation – with the backing of a legal and insurance team.

We can help

In today’s highly litigious society, professional liability insurance is becoming essential for a greater range of service providers. At Western General, we often see how the financial and reputational impacts of a claim can threaten small businesses across Australia. If you’re unsure about your insurance needs, contact us today and we’ll be happy to assist.

General advice warning

The information above may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information.

Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.