Professional Indemnity

Often people ask for professional indemnity insurance without understanding exactly what it is or when it's required. PI however is a fairly onerous type of insurance, so unless you have a clear need for the cover, I'd suggest it's better to think about alternate solutions.

So what is PI?

Professional Indemnity insurance covers the legal defence (and settlement) for allegations of negligence (including negligence leading to pure economic loss) in the provision of professional services by a professional. A few of those terms need definitions:

• A professional is someone who has skill and knowledge outside the ken of the ordinary practitioner, and who owes a duty of care to her clientele to provide error-free service.
• Professional services are intangible offerings like advice and design, and tangible offerings that are products of the mind like design drawings, contracts, and models.
• Pure economic loss refers to financial suffering not caused by physical damage or injury; say poor advice leading to reduced sales income or a large drop in investment returns.

Claims made and notified

All professional risks insurances are offered on a claims made and notified basis. Essentially this means that you must notify the insurer as soon as you first become aware of the potential for a future claim to be made against you. Failure to notify the insurer at the appropriate time could mean that the later claim will not be covered. The major side effect of this notification requirement is that once the policy is lapsed or not renewed, you're no longer insured even though you may have held an insurance policy at the time of the alleged incident.

That's why I call this insurance "onerous" - because once you start buying the insurance, you need to keep it up forever.

Insurance rule of thumb

The old rule of thumb I often use is that:

• If you only make or sell physical products, you shouldn't need professional indemnity. For any advice or design services, it would make sense to look at an errors and omissions extensions to your public liability insurance.
• If you instead sell the products of your mind (e.g. advice or design services), then you should look at professional indemnity insurance.

But the contract says I need PI !

Usually works or services contracts are generic boilerplate, without regard to the actual services provided or requested. If the contract requires you to show professional indemnity insurance without you actually needing the policy, you'll struggle to obtain the insurance. It's illegal for insurers to offer products without merit - i.e. an insurer would be in hot water for arranging professional indemnity insurance unless the policyholder had professional services to insure.

The usual way out of the conundrum is to have the requirement deleted over pricing concerns. Explain to the principal that your offer is $xxx without professional indemnity insurance, and $YYY+++ with it. Since the contract will also require you to hold PI for 6 years beyond expiry, add in 7 x the (anticipated) annual cost of insurance - plus your markup - to the tender price.

In my experience, nonsense requirements like "professional indemnity for labour hire boilermakers" tends to be deleted quite quickly in that scenario.

Get advice before you tender

Errors and omissions insurance is not the same as professional indemnity, no matter what your current adviser might tell you. Make sure you understand the differences and risks before putting in your fixed price tender.