Traditionally, professional indemnity insurance has been viewed as the domain of core professionals like accountants, engineers, architects and lawyers. However, it’s available for a far broader umbrella of roles.
“The definition of ‘professional service’ can be broad, often extending well beyond popular perception,” says Declan Rye, director of London Australia Underwriting.
“Ensuring a duty of care, providing clients with the relevant instructions to use your product correctly – these are just some of the areas where businesses may find themselves encountering issues.”
Given that Australia is a highly litigious society, businesses need to be more aware than ever of PI insurance. While the financial protection offered is clearly the key benefit, it’s also important to remember that PI insurance can also protect a business’s reputation.
The changing face of PI
PI insurance has enjoyed a rapid growth in Australia in recent years, and there’s been an increase in the number of Lloyd’s coverholders in the local market. However, this has yielded other consequences: competition has been fierce, and, subsequently, rates have dropped to unsustainable levels. Additionally, PI is inherently a complex area of insurance, and inadequate policies can cause clients headaches.
“Simplified policies are great for some businesses that have relatively simple needs,” said Rye. “But they can also be dangerous for some of the more technical industries. Ultimately, most businesses can benefit from the services of a good broker who will discuss the full range of coverage they require, not just simply negotiate a price.”
Rye says many insurers have overlooked the fact that PI is long-tail business; it can take anywhere from one to five years for a claim to crystallise and be closed with a final settlement amount. Withdrawals from the Australian market are already starting to occur, likely due to a combination of falling rates and incoming claims.
“For an underwriter with little experience in long-tail business, this time delay can create confusion,” Rye says. “Eventually the claims catch up, and I believe this is what we are now witnessing in the Australian PI market.”
Rye anticipates more withdrawals from the Australian market in the next six- to 12 months. Looking further ahead, there will also likely be gradual rate increases as the market corrects to more sustainable levels. Some occupations will be hit harder than others due to more adverse claims events, such as real estate, construction and accountants.
Nonetheless, Rye remains optimistic about the future of professional indemnity in Australia.
“Broadly speaking, we are just entering another phase of the cycle,” he says. “No doubt it will correct itself in time.”
Avoiding common issues
There are numerous ways businesses can protect themselves from potential PI claims. First and foremost, it’s essential to have accurate retainer agreements in place with any new or existing clients. Any such retainer agreement should be recorded in writing and describe the services the insured has been retained to provide, including who will perform the work, applicable rates and timeframes (if relevant).
Additionally, the use of robust disclaimers, while not a watertight safeguard, can at least establish expectations for both parties. Rye also stresses the importance of keeping client files up to date – even details that might initially appear to be minor.
“Often a claim will refer to verbal advice, so evidence of such verbal advice is essential when proving negligence,” he says. “This can be in the form of a follow-up note to the client detailing the verbal advice that was provided.”
Internal systems must be secure and internal processes fully functional to ensure that the appropriate checks and balances are in place for quality of work. Additionally, Rye has a simple but crucial tip for business: don’t overstep the bounds of your expertise.
“Businesses really need to stick to what they are good at,” he says. “We often see claims arising from situations where a company has diverted away from their established path and taken on a role that involves unfamiliar territory.”
Written by Tom Goodwin for Insurance Business Magazine