If you are a professional who provides advice or a service to your clients, your Professional Indemnity (PI) insurance is no doubt one of the most vital covers you have for your business. If things don’t quite go to plan it can provide much needed financial assistance for legal and compensation costs in the event of action taken against your business.
Like all insurance policies, there are several important conditions and obligations under your insurance contract that you need to understand to ensure your policy provides the cover you’re expecting, so that you won’t be left high and dry when you come face-to-face with the unexpected.
PI insurance is issued on a ‘claims made and notified’ basis, which means the policy responds to claims first made against the insured during the policy period, and notified to the insurer during the policy period. In short, for a claim to be covered your policy must have been in place at the time the allegation was made against you, and when the claim is lodged.
What is Notification and Why is it important?
In particular, one of the most important conditions of Professional Indemnity policies involves the requirement that circumstances which may give rise to a claim are notified to your insurer. As the policyholder you are obligated to inform them as soon as practical after you first become aware of a situation which could potentially result in a claim being made, even if your client hasn’t yet formally made an official complaint or engaged a lawyer. So, in other words, you must advise your insurance provider if any of the following occur:
- Any mistake, omission, oversight in your work, or work of your partner or employees, that you are aware of that could possibly lead to a claim being made, even if your client is not yet aware of it
- A client has complained or criticised about your work, even if you feel the criticism is unjustified
- A client is refusing to pay you for work completed that they are unhappy with
- Any remarks or comments a client makes that indicates that they may make a claim against you, either now or in the future, even if you feel they are empty threats
- Any instances where you are accused of failing to provide a service as promised or advertised
- If a complaint is made about you to your industry body or licensing board
Failure to notify your insurer as soon as reasonably possible could lead to your claim being rejected. So, even if you’re unsure whether it’s worthy of letting them know or not, it’s in your best interests to do so.
And as tempting as it may be, don’t try to resolve any disputes yourself, no matter how small the problem is, as you might inadvertently admit liability which can result in your insurer suffering prejudice, and again jeopardise the chance of your claim being paid.
Duty of Disclosure
Another very important condition of Professional Indemnity policies involves your Duty of Disclosure at the time of taking out a new policy. Under the ‘Prior Claims/Circumstances’ exclusion, you are obliged to disclose on your application, any past claims or circumstances that may lead to a claim being made against you. If you do not comply with your Duty of Disclosure your insurer may have the right to revoke your policy, meaning that the policy is void from the date of inception. Even if you attempt to make a claim for a fresh unrelated incident there will be no coverage. Your insurer does not have to prove that you intentionally mislead them – an omittance of information might be sufficient grounds for the insurer to cancel your policy and deny your claim.
A migration agent recently learned the hard way after his claim was rejected. He took out a new PI policy, and despite having a long history of complaints made against him for providing negligent advice, he failed to disclose any of these instances on his application for insurance. In particular, one complaint made a few years prior for failing to provide adequate advice was still being investigated at the time he took out the insurance. Recently he received letter from the department advising of another complaint made against him and subsequently lodged a claim with his insurer.
Upon investigation, the insurer became aware of the former and current outstanding complaints. They refused to pay his claim and voided his policy based on the premise that he had not complied with his duty of disclosure. The case was closed and he was left to defend the allegations on his own.
How can I ensure my claim goes as smooth as possible?
There are a few basic rules you can follow to help future claims run as smoothly as possible. However, it’s still important to remember that not all policies are the same, so it’s crucial to take note of the terms of your own policy.
- Ensure all of your trading entities (both past and present) are noted as an Insured on your policy
- Always disclose prior known claims or circumstances that may give rise to a claim at the time of taking out your PI insurance, no matter how big or small
- Do not ignore any inklings or threats a client may have made in regards to a possible claim – as much as you hope it may never eventuate, you can’t predict other peoples actions
- Notify your insurer as quickly as possible (before engaging your own legal assistance) if any of the circumstances listed earlier occur, even if in doubt it means that you have complied with the requirements
- Never admit liability or attempt to resolve a complaint on your own, even if you are at fault. Let your insurer take care of it – that’s why you pay an annual or monthly premium to them
- When dealing with your client following a claim, don’t try to make an offer or settlement without your insurers consent, or disclose how much PI insurance you have. It might result in them trying to claim more compensation than they intended
Most importantly keep in mind that, providing you abide by the terms of your policy, your insurance is there to protect you. Your insurer has a panel of experts ready to fight for you, including lawyers and investigators, and without your insurance, you could find yourself between a rock and a hard place – either being sued with the possibility of losing your business, or forking out thousands of dollars from your own pool of funds to cover the cost of your legal defence and compensation to your client.
This is general advice only.