What Is Professional Indemnity Insurance?

What Is Professional Indemnity Insurance?

If you run a small business in Australia, having professional indemnity insurance could be one of the smartest ways to protect yourself and your organisation against claims of negligence, errors, or omissions in your services.

It’s a special type of insurance for professionals who, during their day-to-day responsibilities, provide advice, consult, or deliver other advisory services to clients. It covers legal fees and compensation in the event of a professional indemnity insurance claim.

Before taking out professional indemnity cover, you’ll want to learn how it works, what it actually covers, and the job types that need it most. So here’s what you need to know about protecting your business from potential legal and financial risks.

How does professional indemnity insurance work?

Professional indemnity insurance provides businesses and professionals with a set level of cover if they are sued for negligence or mistakes in their professional services.

When a client believes they have suffered financial loss explicitly due to your professional advice or services, they might file a claim against you. In such cases, professional indemnity insurance covers the legal costs of defending and settling claims and any compensation that may be awarded to the client if the claim is successful.

Most policies operate on a ‘claims-made’ basis, which means that it covers you for claims made during the policy period, regardless of when the incident occurred. Because of this, it’s essential to maintain continuous coverage – even after a project has finished or if you switch insurance providers.

This insurance policy also covers the legal costs of representation, which can sometimes be quite substantial, especially if the matter is complex or drawn out over several months or years. Think of professional indemnity insurance as a safeguard against significant financial strain.

What does professional indemnity insurance cover?

Many different types of business insurance are available, and professional indemnity insurance revolves around specific situations where your business – or just you in your professional capacity – may be liable for mistakes, omissions, or negligence in your services.

Professional indemnity insurance protects against things like:

● Legal costs: The associated expenses of defending a claim, including solicitor fees, court costs, and other related expenses.
● Compensation payments: Funding to compensate the client if they win the claim, covering the financial losses incurred due to your professional advice or services.
● Breach of duty: Safeguards against claims related to a breach of professional duty, such as failing to meet the expected standards of service.
● Defamation: Covers claims related to unintentional defamation that could arise from your professional advice or communications.
● Loss of documents: Protects against the accidental loss of or damage to important documents necessary to the services provided.

How does professional indemnity insurance differ from public liability insurance?

The main difference between professional indemnity insurance and public liability insurance is that the former protects you against claims related to the professional services and advice you provide, whereas public liability insurance covers claims related to physical injury or property damage caused by your business operations.

Think of it this way:

● Professional indemnity = customer sues you because you gave bad advice.
● Public liability = customer sues you because they tripped in your lobby.

Public liability insurance is essential if your business directly interacts with the public or has customers come onto your premises. In contrast, professional indemnity insurance is more appropriate for businesses that provide expert advice or specialised services.

What could result in a professional indemnity claim?

Because it’s hard to know everything you might be legally responsible for, below are a few common situations that could lead to a professional indemnity claim against you and your business:

● Errors or omissions: Mistakes in your work, such as giving bad/incorrect advice or failing to deliver a service as promised.
● Negligence: Not exercising the adequate level of care that’s expected in your profession, which may lead to a financial loss for your client.
● Misrepresentation: Giving false or misleading information to a client, whether intentionally or unintentionally.
● Breach of Contract: Not fulfilling the terms of a contract and causing the client to suffer a financial loss.
● Defamation: Unintentionally making statements that harm a client’s reputation.

As you can see, having a professional indemnity insurance policy to protect your business against claims of this nature could be the difference between staying afloat and closing your doors.

Who needs professional indemnity insurance in Australia?

While many individuals and businesses can find great value in having professional indemnity cover in place, there are a few careers where it’s a must, including but not limited to:

● Consultants: Those who provide strategic advice or specialised knowledge to other businesses or individuals.
● Accountants: Anyone who gives financial advice, handles tax services or manages accounts.
● Architects and engineers: Designing buildings and other structures where mistakes could result in significant financial loss.
● Medical practitioners: Anyone who provides healthcare services that could result in claims of negligence or malpractice.
● IT professionals: Creating, integrating or upgrading technology solutions or services that could lead to financial losses if not delivered correctly.

The bottom line is that any professional who sells knowledge or advice to clients should consider taking out professional indemnity insurance to protect against future claims.

How much does professional indemnity insurance cost in Australia?

Like most small business insurance costs, the amount you pay for professional indemnity insurance will depend on things like the nature of your business, the level of coverage required, your industry’s risk profile, the type of professional service you provide, and your claims history.

Generally, premiums can range from a few hundred to several thousand dollars annually. High-risk professions, such as those in legal or financial services, will likely have to pay higher premiums due to the increased likelihood of claims.

Thankfully, online comparison tools make finding the right professional indemnity cover easy. So make sure you shop around and compare quotes before settling on a policy.

Which professional indemnity insurance cover is right for you?

First, you’ll want to consider the size of your business, the type of clients you work with, and the value of the contracts you currently handle. This will indicate the amount of business insurance you should take out to cover claims and legal fees.

It’s equally important to look into your industry’s legal and regulatory requirements. If you’re unsure about the specifics, consult with an insurance broker who understands your type of work, as they can help you identify the right level of cover to protect your operations.

Ultimately, professional indemnity insurance is a way to save your business from the financial minefield of having a claim made against you because of professional advice or services you provide. Think of it as an investment in the future of your business – without it, you could be on the hook for severe legal costs and reputational damage.