Professional Indemnity Insurance – When would I need it?
Sometimes called professional liability insurance and previously called an errors and omissions policy, professional indemnity insurance is essential for anyone providing a professional service, whether they are a contractor, consultant, sole trader, or company.
Often people who contact us at GSI Direct haven’t purchased this type of insurance themselves before, whether it be that they are starting in a contracting position for the first time, or setting up a new company.
Let’s have a look further at what this type of insurance is.
Why needs professional indemnity insurance?
Starting with the basics, in general there are two main different types of businesses, one that sells something physical and one that sells something which is intangible – a physical product or a ‘paper based’ service.
If you aren’t providing a physical product to your clients then it’s likely that you will need professional indemnity insurance, or at the very least you will need to make an informed decision as to whether you require it.
If you provide advice, give an opinion, provide IT services, make calculations, do research, make recommendations, provide a medical or associated health service, manage someone’s asset, create or design something then you will be providing a professional service. Your client will be relying on whatever it is that you are providing, that it will be correct or accurate. If it’s not and that person suffers a financial cost as a result, they can sue you for the loss they have suffered.
If you sell a product it may be less clear if you need professional indemnity insurance, but if you do any of the above in conjunction with your products, particularly if you charge a separate amount for that service, then it is likely you will have a professional indemnity risk exposure that you may want to insure.
What does professional indemnity insurance cover?
At GSI Direct, we cover the risk that someone sues you for providing your professional services negligently.
We will provide cover for:
- The legal costs to defend you; and
- We will also pay any compensation you are required to pay, if you have indeed been negligent and not provided the level of advice or service that the person should have been able to expect from you.
Do I need to buy insurance?
Insurance is about transferring a risk you have to an insurance company. If you chose to take this risk on yourself and you have a claim, you will have to pay the cost of legal fees and compensation, which can be very expensive.
If you do not have the money to pay to defend yourself or to pay the amount you are liable for, your company could be put into liquidation, or your personal assets could potentially be at risk.
Whilst you could keep money aside to pay for mistakes that may occur, it isn’t always possible to have a large amount of money in the bank in case someone makes a claim. Most people will not know when they might make a mistake and therefore it’s more effective to insure for this risk.
Let’s look at some more examples for different professions:
IT Professionals: An IT service provider maintains the network servers of a company. The server’s firewalls were not set up correctly by the provider and the network is brought down for 3 days. During the 3 days of not having access to their networks the company was not able to deliver their services to a client and lost a $100,000 contract. The IT provider was negligent and liable to their client for the loss they suffered..
Recruitment Consultant: A recruiter has an urgent request to fill a position for a client. They don’t have time to do some of the necessary due diligence they would normally do and the employee does not perform well. They find out subsequently that the CV was fictitious and the individual did not have appropriate experience for the position. The client asks for compensation due to the poor quality of the candidate.
Marketing consultant: A client is not happy with the content of a marketing campaign, which has had some negative comments from existing customers. The client considers taking action against the consultant for the advice in respect of the advertising content.
Accounting consultant: An accountant prepares the GST returns for a company but misses out a revenue line from the trial balance meaning that not enough GST is filed over an 8 month period. When the error is realised the returns have to be re-filed and the IRD applies interest and penalties. The client seeks to recover the interest and penalties from the accountant as it would not have had to pay them without the error.
Immigration consultant: An immigration consultant gives incorrect advice to clients about the documentation they need to provide to make a visa application. The application is declined and the client must pay the visa applications costs again to reapply. The client expects the immigration consultant to refund them for these costs due to their mistake in advice in respect of the application.
Chiropractor: A chiropractor has a complaint made against them to the chiropractic board. They do not believe they have been negligent but incur legal costs in defending the complaint at a hearing.
Disclaimer: There are other factors and policy exclusions that may influence whether a claim is covered by a policy or not. Policy coverage will solely be determined by the policy documents and policy wording, and no reliance can be placed on the content of this blog post whatsoever. The content and examples of this blog post are only given to provide a general understanding or to help explain a specific concept.