What Is Professional Indemnity Insurance And How Does It Work ?
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Enterprises constantly need to think a step ahead and thwart an unforeseen consequence even before it takes place. Despite exercising extreme caution, businesses could still quite possibly leave room for error at times. The price for even a slight overlook could be a bottomless pit of legal and other associated expenses. This is where professional indemnity insurance comes in.
Professional indemnity insurance is designed to take care of risks associated with professional liability. A professional indemnity insurance policy primarily caters to professionals or organizations to help manage their risks, especially the ones pertaining to their clients.
In today’s high-risk climate, this policy finds a rapidly growing relevance for organizations to navigate through civil liability and prevent any large expenses that may follow with such risks. Here’s all that you need to know about professional indemnity insurance and why it is a prudent business investment in today’s times.
What is Professional Indemnity Insurance?
Professional indemnity insurance is a type of insurance policy that is developed especially for a business providing professional services or consultations to its clients. Given the growing focus on responsibility and answerability in today’s corporate atmosphere, including extensive professional liability insurance is a crucial element of any risk management programme.
Essentially it entails that if there’s an alleged failure or negligence in the delivery of any of these services, organizations shall be liable to pay their clients for the losses incurred. Additionally, they may also be held legally liable for these risks and losses. The compensation for these risks can run significantly high, thereby bleeding a business dry even with one single case. The organizations, therefore, need to cover themselves way ahead of any such occurrence.
Professional indemnity insurance comes to their rescue in this case, compensating them for costs that may occur as a result of lawsuits from their clients.
Who Should Opt for Professional Indemnity Insurance?
Ideally, the professional indemnity cover is meant for any business dealing with clients. But practically, it is a protective shield for both businesses as well as professionals. Traditionally, the term “professionals” would translate to roles like accountants, engineers or lawyers. However, that has largely changed with the times and now, the term has taken a much broader meaning and extends to any person who provides any kind of consultancy or services in a professional capacity.
Therefore, any business that deals directly with clients for providing any kind of consultation or service should definitely opt for this policy in order to protect themselves from any possible legal claims raised by the client in the future.
While professional indemnity insurance is essentially a legal liability cover, it also covers other related expenses that the insured may incur in the course of their defense. These could also include damages or losses awarded to the third party.
The policy could be bought by a range of professionals, including but not limited to accountants, construction engineers, architects, interior designers, marketing and media professionals, and travel agents among many others. Opting for the right insurance policy not only shields one against civil liability but also financial and reputational loss.
Why is Professional Indemnity Insurance Needed?
We live in an era of growing financial literacy and awareness where clients are much more cognizant of risks before they enter into a contract with the company. While it is arguable that one may have an agreeable working relationship with their clients, this still is no guarantee of preventing future litigations from their end.
Depending on the nature of the lawsuit, the legal battle could sometimes persist for years. Even one such incident is enough to liquidate the financial foundation of an enterprise, irrespective of how small or large it may be. This is especially all the more relevant for businesses that serve high-value clients, as the stakes are higher in this case.
Apart from this, the dealing by several organizations is not just limited to domestic clients, but also extends to serving customers overseas. In this case, the business dealing with litigious countries should certainly go for a higher cover amount.
In fact, having a standardized professional indemnity cover is often imposed as a mandatory requirement for signing a contract overseas. As clients become more aware of their legal rights to hold professionals or businesses liable for their financial loss, the need for professional indemnity cover is transforming into an indispensable part of business operations and risk management strategy.
What are the Risks Covered Under Professional Indemnity Insurance?
The concept of professional indemnity insurance is fundamentally based on compensating the insured party against the risk of being exposed to civil liability. Here are the primary risks that are covered by a professional indemnity policy –
- Breach of confidentiality
The policy offers coverage to the insured against intentional or unintentional disclosure of information resulting in financial loss to a company.
- Infringement of intellectual property
It also covers the legal costs or legal defense costs associated with pursuing infringement or theft of intellectual property or copyright.
- Impaired or unauthorized access
The damages that occur due to unauthorized access and losses arising due to the same are covered under this policy.
- Civil fines and penalties
Due to any negligence, the civil fines and penalties imposed on the insured party shall be covered by the insurance company.
- Libel, slander and defamation
It includes coverage for defamatory statements or materials which can have a negative impact on the reputation of a person in the eyes of others.
- Breach and delay in duty
The policy covers damages caused due to delays in the execution of services that the client may face. In addition, it provides coverage against the bad faith of employees in case of any breach of duty.
- Disputed Fees
It includes claims made against professionals arising from a disagreement about the fees charged by such professionals.
General Exclusions under Professional Indemnity Insurance
- Wilful negligence or misconduct
No insurance policy can safeguard an individual or business from intentional damage. Like all the other policies, PI policy also works on utmost good faith and therefore, no wilful negligence or misconduct shall be compensated for by the insurer.
- Liability arising from illegal violations
The insurance ecosystem is bound to follow the law of the land and can only cover a party within the legal boundaries. So, if the insured is held liable for an illegal violation committed by them in a professional capacity, the professional indemnity policy or its features will not get triggered.
- Claims before buying the policy
Any existing claims before the policy is bought shall not be entertained by the insurer under any circumstances. The insurance is only meant to cater to the future possibility of claims, and so the coverage starts only from the day the policy is bought.
- Alcohol or drug influence
While professional indemnity cover is supposed to take care of professional negligence, it does not factor in the effect of alcohol or drugs while discharging the duties. Therefore, if negligence occurs due to or under drug or alcohol influence, the insurer will reject your claim.
- Nuclear or war-related perils
Like most policies,perils pertaining to nuclear or war situations are not covered by the professional indemnity cover as well. The policy will only cover losses incurred in a professional capacity by the insured.
Factors to Consider Before Choosing Professional Indemnity Insurance
- Deciding the right sum insured
Sum insured is the most crucial part of any policy, so one should decide an adequate amount that will cover them sufficiently in case a claim arises. Unlike the popular notion, the sum insured is not dependent on the service or consultation fee charged, rather, it is decided by the nature and magnitude of risks that a particular business carries.
- Full disclosure of information
Never hide any piece of information from your insurer at the time of issuance of the policy. This could defeat the entire purpose of buying the insurance in the first place as the insurer is entitled to reject your claim on the grounds of incomplete disclosure. No matter how small or insignificant, every bit of information should be detailed out.
- Note the deductibles and sub-limits
The nature of risk differs with every business and so does the premium. Some popular ways to bring down your premium are – opting for plans that have deductibles or sub-limits. While this will lower your premium, opting for a deductible will require you to shell out some part of the payment out of your own pocket at the time of claim settlement. Similarly, plans with sub-limits come with a lower premium but can restrict your coverage at the time of claim. So, choose accordingly.
- Aligning policy features with business needs
It is of utmost importance to align your business needs with the features you opt for in your policy. For instance, if your business primarily deals with clients overseas, you should steer clear of policies offering only domestic coverage and instead, buy a policy that covers you outside the country’s boundaries.
Also, you should assess the nature of the risks that your business carries. Considering that the risks of a marketing enterprise will substantially differ from the risks of a construction business, the policyholders should be mindful of the kind of coverage they are opting for.
Lastly, do not forget to compare the features online and choose what suits the needs of your business the best. Always remember to thoroughly comb through the fine print and check with your insurer regarding any doubts that you might have.