22 September 2010

Professional Indemnity Insurance Requirements

Do you just ‘roll over’ your Professional Indemnity Insurance limit upon renewal each year?

Do you have an internal process for reviewing what is an adequate limit for your practice/profile?

Are you aware of the consequences of under-insurance?

In September 2010, a prominent PI insurer, CGU Professional Risks (one of Australia’s leading PI and D&O insurers) made the following statement:
‘A $1 million sum insured is no longer adequate for many Professional Indemnity or Directors & Officers Liability policies – these days you generally need at least $5 million.’ According to CGU Professional Risks a number of claims are now exceeding $1 million, even for Insured’s with annual fees/revenue much less than that amount.

Professional Indemnity Insurance Limitations

We recommend a practice considers the following factors when considering what is an adequate indemnity limit for their practice:

  • Are there any minimum legal or statutory requirements that exist?
  • Do have any contractual obligations for a stipulated minimum indemnity limit?
  • Review of the overall contract/project value of the practices current and past projects?
  • What is the nature, scale and complexity of work done in the past and during the policy period?ie. High risk verses low risk, potential for bodily injury claims (multiple injuries)
  • Potential for consequential economic loss to any third party
  • Potential legal and investigation costs which may be incurred by a successful claimant or claimants over the life of the claim
  • Is the policy limit inclusive or exclusive of defence costs?
  • How many parties are likely to be implicated in any claim or action?
  • What is the exposure from ‘incoming principals’ risks at prior corporate entities, or merged or acquired entities?
  • The potential for a claim to take many years to settle adding inflation, legal and interest costs to any potential compensation payments

Using fee income or simply settling for the minimum statutory requirements are not reliable indicators of an appropriate sum insured.
It is important for a practice to review and understand the terms and conditions of their PI policy before selecting an adequate indemnity limit.
A practice does not need to wait until the renewal of their current PI policy to increase or at least review the policy’s indemnity limit.

Please speak to your Account Manager for assistance should you have concerns with your current PI policy details or require advice on why the above considerations are so important.

Sherren Hepburn
National Operations Manager