Professional Indemnity Cover: Who's at Risk and How It Works

Professional indemnity insurance is designed to protect a professional person (or firm) such as doctor, lawyer, architect, accountant or insurance broker against legal liability to pay damages and costs to persons sustaining loss through a breach of professional duty i.e. breach of contract or liability in tort.

Liability in tort arises from professional negligence, which is the neglect of a professional duty of care that renders the professional person committing the act, error or omission of neglect liable in law to a client or some other third party who suffers loss as a result of the neglect.
Claims for financial loss may be against a professional person or firm by reason of their failure to exercise that degree of care and skill that is expected of them in the conduct of their profession or business.

The indemnity, therefore, usually applies to liability arising out of any negligent act, error, or omission on the part of the insured or his or her employees. A professional person can do or say things that cause others to suffer in some sense. For example, a lawyer may give advice carelessly with the result that the person who was relying on the advice loses money.

That person would be able to sue the lawyer for an amount equal to what he had lost. The lawyer can arrange professional indemnity insurance that is in effect professional liability cover to meet the cost of any award against him or her.

Who's At Risk

Take another example of a surgeon whose theatre nurse is poor in arithmetic, and the surgeon sews up a patient leaving a scalpel inside. Sooner or later, the patient will discover this error, and the surgeon may be called into court.

Professional indemnity insurance relieves the surgeon of both the cost of defence of his or her case and the burden of damages (to the limits of the policy), should any be awarded against him/her. Please don't think this example of a surgeon negligence is far-fetched: there are, indeed many cases arising from such carelessness.

The insured own costs incurred with the insurer's consent are also covered and are in addition to the limit of indemnity, which is the aggregate limit for any one period of insurance.

Also note that the insurer will pay for the defence of the professional person against all suits for the damages, even if the suit does not rest on a firm foundation.

By buying professional indemnity insurance, professionals could be defended by the most competent legal staff available, even against charges of undue familiarity.

The insurance is 'claim-made' and cover is given in respect of the fault of the predecessors in title because when a practice is taken over, the incoming owner assumes responsibility for the fault of the predecessors if the claim is made against the firm or practice.

How It Works

A 'discovery period' of three or six months brings within the policy claims made after the policy has lapsed provided the negligence occurred during the period of insurance.

There are variations in the policy wordings, as well as exclusions and extensions according to the special features of each profession and market experience. the principal exclusions refer to the dishonesty by the insured and libel and slander.

However, extensions are available in connection with dishonesty of employees, libel and slander, loss or damage or documents, and breach of warranty of authority. Let it be noted that the outcome in professional indemnity cases is often pure financial loss but i some professions (for example, medical profession), can cause injury or damage.

In all cases, professional indemnity is not dependent on the happening of bodily injury or damage to property as under an ordinary public liability policy.

Premium are primarily dependent on the profession, limit of indemnity and the extensions taken. An excess will often apply, either voluntarily to reduce the premiums, or imposed as part of the terms of cover