Professional Indemnity Insurance can be confusing to understand. At it’s most basic level it is designed for professionals who provide advice or a service to their customers and protects against allegations of mistakes and omissions made by you.
At Logical, we believe it is paramount to ensure you have the right Professional Indemnity insurance program in place
For example, your client may allege that you (or a business you work for or have an interest in) has made an unintentional mistake, overlooked a critical piece of information, misstated a fact, made an error of judgement or simply provided the wrong advice, and this results in a financial loss to your client. Your client may then take legal action against you in an attempt to recover these losses.
The risk of claims against you isn’t always determined by your skills, experience or level of professionalism. There is always the risk of an unhappy client making a claim against you.
Whether or not any allegation is true, Professional Indemnity Insurance seeks to protect both your assets and your reputation. This means you can continue in your business without the stress of financial or reputational ruin should a successful claim be made against you.
Regardless of the merits of any potential claims, Professional Indemnity Insurance will pay for your legal defence as well as any judgements or settlements that you or your business may have to pay to compensate your client, up to stated policy limits.
We are often asked about Professional Indemnity Insurance and Consultants & Subcontractors and we offer the following commentary
Many Professional Indemnity insurance policies do not include consultants/subcontractors themselves within the scope of cover. You are typically covered for any work in connection with the professional activities and duties as noted on the policy. Where you are liable for claims resulting from these activities, including activities of consultants/subcontractors, the policy would usually respond. However, no cover would be provided to the consultants/subcontractors where they were responsible. In that instance, the insurer would then typically seek to make a recovery against the consultants/subcontractors if they were ultimately responsible for the claim.
In some limited circumstances, consultants/subcontractors may be seen as being similar to an employee. In this scenario, a few policies may provide an extension of cover. In these circumstances, the policy usually has certain criteria which must be met in order for the cover to automatically extend to consultants/subcontractors, such as 90% of their income being derived from work being performed for you for the last 6 or 12 months. Where such an extension applies, it will usually only extend to work that the contractor/subcontractor performs on behalf of you.
Although some insurers will allow consultants/contractors to be specifically endorsed onto their PI policies as an insured party and be treated as an insured party for the work they are performing on behalf of you, it is not a practice we would encourage because it permits consultants/subcontractors to exercise control of the polices as an insured. However, if this option is required by you, then relevant underwriting information will be required, including the consultants/subcontractors understanding and complying with the Duty of Disclosure and details of any previous claims &/or incidents. Depending on the policy, this will often attract additional premium, higher deductibles and other specific terms.
The Importance of Obtaining Appropriate Legal Advice
Prudent business practice dictates that when you are considering entering into a relationship with consultants or subcontractors, it is important to obtain appropriate legal advice and arrange written agreements which set out the terms of engagement, including insurance arrangements. Rather than insureds trying to arrange for consultants and subcontractors to be included within their PI policies, we believe that subcontractors and consultants should hold their own appropriate insurance policies, and this aspect should be included within the relevant consultancy/subcontractor agreements. This will help protect you against claims arising from the actions/inactions of consultants/subcontractors. This will also help protect your PI policy from unwanted claims and any subsequent losses against it, which will likely carry increased future premiums and other impositions resulting from a claim that is partly or wholly attributable to your consultant/subcontractor. Further, as part of your standard business practices, you should periodically obtain certificates of currency from your consultants/subcontractors to keep on file and refer to in the event of a claim.
You should consider obtaining appropriate legal advice to ensure you are not attempting to disguise employment relationships as independent contracting arrangements. Fair Work inspectors, operating under The Fair Work Act 2009 can seek the imposition of significant penalties for potential contraventions of sham contracting arrangements.
Consultants/Subcontractors who do not have a “professional” aspect to their engagement, however, Professional Indemnity insurance is required for contractual reasons.
This issue commonly arises in connection with State and Federal Governments and/or their Agencies/Instrumentalities where their agreements stipulate that consultants/subcontractors are required to hold PI insurance. However, some consultants/subcontractors do not provide a professional advice service, for example, tradespeople such as plumbers and electricians. It can be challenging for an insurer to identify a suitable professional business description in these scenarios. If PI insurance can be arranged in these circumstances, care needs to be taken to ensure the policy has been arranged adequately, as it has been our experience that confusion and arguments can often arise in the event of a claim because of the inability to identify where a professional service or advice is included within policy schedule description(s).
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