Professional indemnity insurance: Can you afford not to be insured?

When your main asset is people, it goes without saying that your main risk will most likely come from people as well.

Professional indemnity (PI) or errors and omission (E&O) insurance protects your company from claims associated with:

- Failure to apply due diligence;

- Giving poor business advice;

- Inadvertently divulging sensitive information about a client;

- Making a mistake that costs the client money;

- General failure to perform as promised in your contract.

Murphy’s Law seems to have singled out certain professions and businesses as particularly prone to this type of risk. Lurking beneath the surface of what appears to be small ‘slip-ups’ in delivering services are missteps that could easily explode into huge claims. This is particularly the case if you provide expert services (e.g. medical professionals, engineers, construction workers), provide advice and consultancy (e.g. business consultants, financial advisors, PR & advertising agencies) or handle sensitive information.

Professional indemnity (PI) insurance, or professional liability insurance, as it is also called, provides cover for legal fees and other expenses incurred in your defence, as well as any judgments or settlements that may be awarded. PI insurance not only protects you financially, it protects your reputation as well.

Consider the following scope of coverage from a typical PI insurance policy:

1. Professional negligence – e.g. providing incorrect information or advice to a client that causes them to lose money, or physically injuring a client due to negligence, or even loss /damage to buildings or contents due to negligent work.

2. Breach of privacy or confidentiality – e.g. sharing information without permission.

3. Intellectual property infringement – e.g. infringing on any copyrighted material, trademarks or intellectual property rights.

4. Defamation – e.g. slanderous statements made about a client.

5. Lost or damaged documents – e.g. misplacing documents or mobile devices containing data about your client, which divulge sensitive information.

6. Legal expenses – This includes costs associated with investigating, defending and settling claims made against you.

7. Repairing your reputation – e.g. hiring a PR agency to repair your reputation after a claim has been made against you.

Can you afford not to be insured?

Rates for PI insurance generally range from 0.25 per cent to five per cent of total service fee income or annual turnover, depending on the risk factors of the business, profession or person and existing market competition. This roughly translates to an average premium of US$7,500 per annum. Naturally, the skill of your broker will affect the final cost of the premiums to you. While admittedly PI premiums may appear costly, the harsh reality is that without this coverage, the payout for a single loss can put your business in a financial crunch from which it may not recover – in fact, it is not uncommon for unprotected firms to file for bankruptcy as protection of last resort.

Can you afford not to be insured ... ?