Shielding Professionals From Claims Made Against Them By Their Clientele
Life Insurance Today|February 2018

There has been a rise in consumer awareness. Courts are more consumer friendly now and patients have sued hospitals and doctors malpractice or negligence and the courts have been asking doctors and hospitals to pay for their mistakes.

Jagendra Kumar

If a professional is alleged to have provided inadequate advice, services or designs to a client, professional indemnity insurance provides cover for the legal costs and expenses in defending the claim, as well as compensation payable to their client to rectify the mistake. Professional liability insurance (PLI), also called professional indemnity insurance (PII) but more commonly known in the US as errors & omissions (E&O), is a form of liability insurance which helps protect professional advice and service providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit.

The coverage focuses on alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the policyholder. These are causes for legal action that would not be covered by a more general liability insurance policy which addresses more direct forms of harm. Professional liability insurance may take on different forms and names depending on the profession, especially medical and legal, and is sometimes required under contract by other businesses that are the beneficiaries of the advice or service.

Professional liability insurance policies are generally set up based on a claims made basis, meaning that the policy only covers claims made during the policy period. More specifically a typical policy will provide indemnity to the insured against loss arising from any claim or claims made during the policy period by reason of any covered error, omission or negligent act committed in the conduct of the insured's professional business during the policy period. Claims which may relate to incidents occurring before the coverage may also be covered, means claims made during the policy period but which relate to an incident after the retroactive date.

Some professions entail a risk which can lead to a big liability if something goes wrong. This is where a professional indemnity cover can help. People act on recommendations of professionals. Hence, if a professional makes a mistake, the person he has advised will be impacted. The public is more aware of their rights and the duties of professionals and know that they will be heard in the court of law if they are wronged.

The judicial system is also more empathic to the consumer. This definitely improves the accountability of professionals. Professional indemnity cover takes care of the financial liability claim raised by the consumer. The professionals should take care that the sum assured is not very small. It should be renewed regularly and that one is covered both at the time of the event and when the claim is made and is to be paid.

If one plans to change the insurer, then events of the past should be taken into consideration. The cover is not limited to consultancy. It includes educational institutes, art valuers, auctioneers, tour operators and staffing companies as well. Even chartered accountants, company secretaries, public relations professionals, management consultants and insurance brokers can buy this policy. More and more professions are coming under this ambit because newer jobs are getting created which are consultancies based.

Also, due to increasing education, awareness levels, and huge sums spent by individuals in getting these services, they have started questioning these professionals if the services are found faulty, incorrect and not up to the mark. On the back of this, the policies sold under this segment have seen a good 40 to 45 per cent jump. Since clients act on the advice and recommendations of such professionals, the latter always face a risk of getting sued. The cover will pay legal cost to compensate the client, as decided by a court.

What is professional indemnity cover?

This policy is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service. The policy offers a benefit of Retroactive period on continuous renewal of policy whereby claims reported in subsequent renewal but pertaining to earlier period after first inception of the policy, also become payable.

Group policies can also be issued covering members of one profession. Group discount in premium is available depending upon the number of members covered. The policy covers all sums which the insured professional becomes legally liable to pay as damages to third party in respect of any error and/or omission on his/her part committed whilst rendering professional service.

Legal cost and expenses incurred in defence of the case, with the prior consent of the insurance company, are also payable, subject to the overall limit of indemnity selected. Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation of any law or ordinance is not covered. In professional liability covers, the sum insured is known as the 'limit of liability. A sum insured is quantifiable. If a building is worth Rs 100 crore, it needs a cover for a similar amount. But in professional indemnity, the claim amount is unknown.

So, insurers set a limit to liability, that is, the extent to which they will bear the loss, the balance will have to be borne by the professional. The basic rate for a professional indemnity policy ranges from 0.30% to 1% of the amount insured. Various professionals can avail of this policy. The premium depends on factors such as profession, experience, income, limits, jurisdiction and claim experience. It does not cover professionals from the financial services industry.

Who can take the policy?

The cover, in fact, is needed as the insured may not be able to bear the loss if a claim is brought against him/his company, as also to comply with contractual obligations and sometimes with statutory mandates. For individual professionals, having this policy can ensure their personal as well as professional survival should they have to pay a claim. The policy is meant for following group of professionals:-

1. Doctors and medical practitioners - It covers registered medical practitioners like physicians, surgeons, cardiologists, pathologists etc.

2. Medical establishments - It covers legal liability falling on the medical establishment such as hospitals and nursing homes, as a result of error or omission committed by any named professional or qualified assistants engaged by the medical establishment.

3. Engineers, architects and interior decorators.

4. Lawyers, advocates, solicitors and counsels.

5. Chartered accountants, financial accountants, management consultants.

Professional Indemnity insurance is also available for other professionals - Designers, planners, small businesses, event liability etc. In case policyholders do not find standard policy suitable for his requirement - he can always approach an insurance company as a group for customising a cover for him. An indemnity cover is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional services.

However, these are mostly availed by doctors, engineers, lawyers and chartered accountants. For the persons who provide advice, designs or a service to their clients, they should give serious consideration to professional indemnity insurance. While most firms enjoy good relationships with their clients, a mistake in a project can change working dynamics overnight. The chances are that if a client suffers a significant financial loss as a result of their negligence, they are likely to seek recompense.

Professions that may need PI cover include consultants, IT professionals, teachers and private tutors, recruitment professionals, designers, fitness professionals and dance teachers. Liabilities may arise in the discharge of professional duties due to negligence. This indemnifies the policyholder against loss/circumstances incurred only as a result of their negligent act, error or omission in carrying out the policyholders business. This is the narrowest form of cover.

What is covered under the Pi policy?

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