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Professional Indemnity Workshop


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Basic level presentation on PI

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Professional Indemnity Workshop

  1. 1. Professional Indemnity March 2015 Ram Garg CFA, MBA
  2. 2. 2 Disclaimer The information provided should not be relied on as legal advice or a definitive statement of the law in any jurisdiction. For such advice, an applicant, insured, listener or reader should consult their own legal counsel.
  3. 3. 3 Professional Indemnity
  4. 4. 4 Legal liabilities of Professional  The basis of liability is negligence which means a failure to exercise a fair, reasonable and competent degree of skill as judged with reference to the standard expected of the profession. – An expert will be judged by the standard of experts  Negligence arises when there is a duty of care, a breach of that duty and consequent loss or damage by the breach  The duty of care – Any professional owes a "Duty of Care" to anybody who might reasonably rely on his or her service or advice. The same Duty of Care is owed whether a fee is charged or not, even if it is for an obvious secondary function or service.
  5. 5. 5 Legal liabilities of Professional ….Continued  The professional is vicariously liable for the negligence of his employees arising out of and in the course of their employment  Liability may also arise under the Consumer Protection Act
  6. 6. 6 Example: What are the liability exposures for a BPO?  A BPO/KPO‘s duty of care extends not only to their original client, but  They are also vulnerable to claims from other aggrieved persons such as potential client of client due to an alleged negligence.  Even if the claim is successfully defended, there may still be a large proportion of unrecoverable legal fees.  And if the claim is successful, without insurance, the company may be exposed to bankruptcy or liquidation.
  7. 7. 7 What is PI Insurance? PI insurance protect Insured against financial loss resulting from liabilities for breach of professional duty by reason of a negligent act, error or omission. This insurance contract is comprised of an operative clause, terms, conditions, definitions of cover, and exclusions that outline the obligations between the insurance company and Insured.
  8. 8. 8 PI – Source of Professional Liability  Common Law  Civil Code  Statute - Laws, rules, regulations etc passed by Government  Contract
  9. 9. 9 PI Cover – Who purchase? A. Commercial Organisations like; – Information Technology Service companies – Property (real estate) managers – Accountants, auditors – Lawyers – Media companies – Management consultants – Architect and Engineers – Hospitals and Medical Professionals B. Financial Institutions like – Banks / Financial Institutions – Investment Managers / Fund Managers – Stock Exchanges – Financial Consultants – Insurance / stock brokers
  10. 10. 10 PI Policy – The Key Components  Cover for the firm or partnership for acts of negligence - or in some cases broader civil liability/wrongful act language  Must arise out of the professional business of the firm or partnership  Responds to a claim made by a third party for compensation  Covers damages/settlement and defence costs  It is claims made cover  Circumstances and claims can be notified  Will contain a limit of indemnity and be subject to policy deductible
  11. 11. 11 PI Policy – Various Professional Services  Some policy forms are drafted specifically for certain common types of professions; or  Miscellaneous PI form define services in the policy schedule – such as: – Accounting and audit services – Architect / engineering – Supervision – Management consultant  Review to ensure definition reflects services that are performed by Insured
  12. 12. 12 PI Cover – Civil Liability Wording  PI policies are broadened to provide cover for an insured’s ‘civil liability’ to a third party arising out of the insured’s conduct of their professional business or the provision of professional services.  Civil liability is liability of one party to another arising out of civil law, as opposed to criminal law.
  13. 13. 13 PI Cover – Civil Liability Wording  There are four branches of civil law: 1. Tort law ( the common law torts of negligence, nuisance, and defamation); 2. Contract law (breach of contract) 3. Statutory law (eg the Trade Practices Act) 4. Equity - (a system of law based on the principle of ‘fairness’ designed to furnish remedies for wrongs which were not legally recognised or for which no adequate remedy was provided by the common law). The policy only responds to civil liability for claims arising from the conduct by the insured of the nominated professional services stated in the policy schedule
  14. 14. 14 PI Policy - Limit  Limit of indemnity is set as “Each and every claim and in aggregate” for any period of insurance  On payment of a claim the aggregate limit is reduced by the appropriate amount until the next renewal date  The cost and expenses incurred in the action can either be included within the limit of indemnity or in addition to it.
  15. 15. 15 PI Policy - a Claim Made Basis Policy  The Policy only covers Claims made during the Policy Period arising from Wrongful Acts committed on or after the Retroactive Date.  Policy allows to notify any circumstances which may lead to Claims in future. Such notified circumstances are logged in during the Policy Period and insurer of that policy period will need to pay any claims related to it.  Known Claims or circumstances before policy incepted are excluded.
  16. 16. 16 PI Policy – Claim Circumstances
  17. 17. 17 Retroactive Date  If Retroactive Cover is full - the Policy will respond in respect of Wrongful Acts committed since commencement of business.  If Retroactive Date is Specified - Policy will respond in respect of Wrongful Acts committed on or after specified retroactive date.  Subject to No Known Claims, Circumstances and Prior & Pending Litigation exclusion.
  18. 18. 18 Optional Extensions Loss of documents Extension  The Policy may be extended to cover the Assured for any reasonable costs and expenses incurred in replacing or restoring any Document which is lost, damaged or destroyed during the Policy Period.  However, Insurer will not pay for any loss brought about or contributed to by the dishonesty of the Assured’s Partners, Directors or other Employees.  Sub-limit will be applicable
  19. 19. 19 Optional Extensions Dishonesty of Employee Extension  The Policy may be extended to indemnify the Assured for any claim brought about, or contributed to, by the fraudulent, criminal or malicious act or omission of any person at any time employed by the Assured  The policy doesn’t cover any person, company or other entity who has committed or condoned the fraudulent or dishonest conduct  Sub-limit will be applicable
  20. 20. 20 Optional Extensions Indemnity to Employee Extension  In the event of a claim being made against any employee of the Assured or former employee of the Assured whilst acting within the scope of his employment with the Assured which, if it had been made against the Assured, would have been the subject of indemnity under this Policy,  Insurer will indemnify such employee in a like manner to the Assured.  Sub-limit will be applicable
  21. 21. 21 Optional Extensions Libel & Slander Extension  The Policy may be extended to indemnify the Assured for all legally liable to pay in respect of claims made upon them in direct consequence of any Libel or Slander committed by the Assured in their professional capacity.  Sub-limit will be applicable
  22. 22. 22 Optional Extensions Breach of Confidentiality Extension  The Policy may be extended to indemnify the Assured for claims made during the Policy Period arising from the unintentional breach of confidentiality.  Sub-limit will be applicable
  23. 23. 23 Optional Extensions Infringement Of Copyright Extension  This Policy may be extended to indemnify the Assured in respect of actions or claims brought against them arising out of inadvertent breach of confidential information, copyrights or the unauthorised use of or infringement of the systems or designs of others whether negligence is proved or not  Sub-limit will be applicable
  24. 24. 24 Optional Extensions Vicarious Liability Extension  The policy may be extended to pay on behalf of the Assured the Loss which the Assured becomes legally liable to pay as a result of a Claim alleging an act, error or omission by an Agent (Sub-consultant etc) of the Insured in the provision of Professional Services.  Insurer will not be liable under this extension for the Agent’s own liability, nor will insurer be prevented from seeking recovery from any Agent  Sub-limit will be applicable
  25. 25. 25 Optional Extensions Inquiries Costs Extension  Insurer will pay on behalf of the Assured the Inquiry Costs which the Assured incurs on its own behalf and with the prior written consent of Insurer in preparing for and attending an Inquiry  Provided that the notice requiring the Assured to attend the Inquiry is first served upon the Assured during the Policy Period and reported to Insurer during the Policy Period  Sub-limit will be applicable
  26. 26. 26 Optional Extensions Extended Reporting Period (ERP)  If a Change in Control occurs during the Policy Period then the Insured may request an extended reporting period of up to certain months commencing from the end of the Policy Period during which time the Insured may notify any Claim to Insurer provided it results from an act, error or omission committed or allegedly committed prior to the effective date of the Change in Control.  The Insured must request this extended reporting period before the Policy Period expires.  If Insurer decides to offer an extended reporting period, it may do so on such terms and conditions and for such additional premium as it may reasonably decide.
  27. 27. 27 Common Exclusions  Contractual liability - this is liability assumed under any express warranty, agreement, guarantee or the like unless such liability would have attached anyway.  Personal Injury  Employer’s liability  Property damage  Insolvency/bankruptcy of insured  Circumstances known at inception  Fines and penalties  Claims by financially associated parties - some insurers will cover these claims if they emanate from a third party
  28. 28. 28 PI Underwriting Process Underwriting Information – To check  Proposal form, signed and dated  Revenue classifications  Past five years claim history  CVs of key staff  Press articles/ Internet search
  29. 29. 29 PI Underwriting Process – Proposal form  There are specialised proposal form / questionnaire for certain profession categories which would enable the underwriter to rate premium as well as underwrite the business  Proposers profession should be described accurately and comprehensively.  The date of business started is useful information – Well established firms are generally more attractive risks than new firms  The experience of key personnel is critical and CVs might be required  Proposals form is to be duly signed preferably by a senior partner or director
  30. 30. 30 Underwriting Considerations ? Each Insurer will assess risks differently and may look at following;  Total income;  Required limit of indemnity and level of excess;  Risk profile of the business; and  Nature of the business
  31. 31. 31 Underwriting Considerations ? 1. Continuity Risk (Past litigations or circumstances) 2. Claim experience 3. Staff experience 4. No. of staff 5. List of largest contracts undertaken in the past three years 6. Details of largest three contracts expected to be undertaken in the forthcoming year 7. Income from largest clients 8. Details where end product relates to overseas 9. Standard contracts used – copy brochures etc.
  32. 32. 32 Coverage Consideration  How much limit of liability for Policy?  Sub-limits for various extensions – Loss of documents – Fraud & Dishonesty – Continuous cover – Intellectual Property Rights – Libel & Slander  Add on covers – Auto reinstatement – Discover period
  33. 33. 33 Thanks