Cost pressures are mounting for countless businesses during this challenging economic period. And while many company owners are looking to cut expenditure, or even cancel insurances as a result of winding up their business, it’s essential to understand the importance of maintaining Professional Indemnity (PI) Insurance. Cancelling PI Insurance could end up costing far more in the long run…
Source: information in this article has been adapted from a piece published by LMI Group: click here.
What does Professional Indemnity Insurance cover?
Professional Indemnity Insurance is designed to provide you and your business with financial protection against claims alleging loss as a result of your professional advice or service.
Any company or individual that provides professional advice or services can be held liable for financial loss that occurs as a result of an error or oversight in carrying out their work.
Professional Indemnity Insurance acts to insulate against this financial exposure, even extending to cover legal expenses in the defence of a potential claim. Read more on PI cover here.
What is the risk if you cancel your Professional Indemnity cover, or let it lapse at expiry?
By cancelling a PI policy mid-term, or letting it lapse at expiry, you are exposing your business and personal assets to significant losses if you receive a potential claim for a breach of professional duty.
Additionally, many contracts require the contractor to hold PI insurance for 7 years after completion of the works, so in cancelling cover, you could also be breaching a legal contract.
PI insurance is a ‘claims made’ insurance policy – what does this mean for you?
A claims made insurance policy works on the basis that your current policy responds to any claim first made to the insurer during the current policy period, this is regardless of when the alleged wrongful act, error or omission actually took place.
A “claims-made” PI policy covers you retrospectively for all past work performed after the retroactive date set out in the policy, however to be protected, you must still have a current policy should a claim for past work arise.
Example:
An engineer provided advice on a building’s foundation design 5 years ago, but it was only on April 1st when a claim came through alleging this advice led to a collapsed pylon and significant structural damage. The PI policy in place at the time the engineer is notified of the potential claim (April 1st), is the one that responds to protect them.
However, if the engineer cancelled their PI Insurance, or let the policy lapse at expiry on March 25th, they would have no insurance protection in place when notified of this claim on April 1st. This is the case, EVEN though the claim relates to advice provided 5 years ago.
Without PI insurance protection at the time when you are notified of a claim (actual or alleged) you could be exposed to significant financial loss. Hence why it is essential to maintain coverage after completing works.
If you are closing your business and want to cancel your PI Insurance, what other protection is available for claims that come through after the cancellation date?
Speak to us about run-off cover. Run-off insurance is designed to protect you against potential claims that emerge from past business activities, alleging an error or omission in your advice/services.
Run-off cover normally comes in the form of the same PI policy but with an additional policy clause that excludes any new work after the cancellation date, lapse date or business closure date.
Depending on the insurer, “run-off” cover can be purchased in multiple years, or renewed with a gradually decreasing premium (until the minimum premium is reached), over a number of years. At the very least, the length of cover should be governed by the statute of limitations period, whatever that may be for your occupation.
What expenses could you face without PI Insurance in a claim?
Regardless if a claim is actual or alleged, there could be devastating financial ramifications without current PI Insurance.
Potential cost of no PI cover:
- No cover for legal defence costs – Regardless of whether you are at fault, you still need to defend yourself. Legal defence costs can fast amount to tens of thousands of dollars.
- Damages – if you are found to be at fault for the loss or damage incurred by a third party as a result of your error or omission, you could be required to pay significant damages to those affected. Depending on the claim, this can reach into hundreds of thousands of dollars, if not more.
Without PI Insurance, you would be left to incur these potential expenses on your own. Additionally, if your business is unable to afford these costs, or the original entity no longer exists, directors of the business can be sued personally, exposing personal assets and the possibility of bankruptcy.
What happens if you end your PI Insurance cover but continue providing professional services?
For many occupations providing professional advice and services, PI Insurance is a legal requirement, and often you are unable to provide these services or enter into contracts without a valid certificate of currency. Without PI cover, it is likely you / your business will need to cease providing professional services of this nature.
If for some reason you do continue working without PI cover, you would be financially and legally exposed to any claims alleging loss as a result of your professional service or advice.
From the date PI insurance is cancelled there is no cover protecting you for past, present or future work.
Whitbread are here to support you with important insurance advice throughout this challenging time and into the future. For guidance on achieving the most effective PI insurance cover outcomes for your situation, please get in touch with one of our specialists:
T: 1300 424 627
E: info@whitbread.com.au
This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.
