Professional Indemnity insurance protects professionals and organizations from financial losses resulting from claims made by third parties due to negligent acts, errors or omissions. It covers damages, settlements and defense costs. Key components of a PI policy include coverage for the firm arising from professional duties, claims made basis, limits of indemnity, and exclusions. Common professions that purchase PI include accountants, lawyers, consultants, engineers and medical professionals. Underwriting considers factors like revenues, claims history, staff experience and largest contracts to determine risk profile and premium.

1. Professional Indemnity
March 2015
Ram Garg CFA, MBA

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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.

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Professional Indemnity

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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.

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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

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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.

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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.

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PI – Source of Professional Liability
 Common Law
 Civil Code
 Statute - Laws, rules, regulations etc passed by Government
 Contract

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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

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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

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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

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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.

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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

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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.

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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.

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PI Policy – Claim Circumstances

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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

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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.

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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

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Thanks