Professional Indemnity Insurance

Inclusions Under Professional Indemnity Insurance

Professional Indemnity Insurance offers protection against several types of professional risks, including:

• Legal and defence expenses: Covers the cost of hiring lawyers, handling investigations, and defending yourself against claims.
• Accidental breach of contract: Protection if you unintentionally fail to deliver services as agreed in a contract.
• Unintentional confidentiality leaks: Covers claims arising from accidentally sharing or exposing a client’s private information.
• Defamation claims: Protection against allegations of unintentional libel or slander made during professional communication.
• Employee-related fraud: Covers losses caused by deceitful or dishonest acts committed by employees while performing work duties.
• Unintentional IP or copyright issues: Covers claims arising from unknowingly using or reproducing someone else’s intellectual property.
• Loss or damage to documents/data: Protection if important client documents or data are lost, damaged, or misplaced in your care.

Exclusions Under Professional Indemnity Insurance

The policy does not provide coverage for the following events:

• War and Similar Events: Any loss arising from war, invasion, acts of foreign enemies, civil commotion, government action, or related disturbances.
• Known or Foreseeable Incidents: Claims linked to situations the insured was already aware of or could reasonably anticipate before the policy began.
• Previously Reported Matters: Incidents or circumstances that were notified under another insurance policy prior to the start of this coverage.
• Fines and Penalties: The policy excludes fines, penalties (civil, criminal, or contractual), punitive or exemplary damages, treble damages, and any other non-compensatory payments.
• Losses Related to Specific Substances or Diseases: Claims arising from exposure to substances such as asbestos, asbestiform talc, DES, dioxin, urea formaldehyde, or conditions like AIDS.
• Dishonest or Illegal Acts: Losses caused by fraudulent, criminal, malicious, or intentionally wrongful acts. Violations of law or services rendered under the influence of alcohol or drugs are also excluded.
• Insolvency or Bankruptcy: Claims stemming from the insured’s financial insolvency or bankruptcy are not covered.
• General Liabilities: The policy does not cover routine accidents or injuries that are not related to professional services. Such risks require a separate General Liability Insurance policy.

• Nuclear-Related Risks: Losses caused directly or indirectly by:

  • Ionising radiation or radioactive contamination from nuclear fuel or waste
  • The hazardous properties of any nuclear component or device
  • Nuclear facilities such as reactors, power plants, or storage units
  • Any premises insured under a local nuclear pool or association

*Disclaimer: To learn about the exclusions in detail, you can refer to the policy wording of the insurance product.

Tail Reporting Coverage

Tail Reporting Coverage is an add-on that policyholders can purchase with their PI Insurance. Also known as an Extended Reporting Endorsement, this feature allows the insured to report claims after the policy has expired, as long as the incident itself occurred during the active policy period.

Some insurers provide this extended reporting option when a policy is not renewed or is allowed to lapse for a specified duration. Since this extension increases the insurer's risk exposure, an additional premium is usually charged for activating Tail Reporting Coverage.

Professional Indemnity Insurance Policy - Limit of Indemnity

Here’s how the Limit of Indemnity works under a Professional Indemnity Insurance policy:

• The sum insured under the policy is referred to as the Limit of Indemnity.
• This limit applies per claim as well as per policy year.
• These are known as the Any One Accident (AOA) limit and the Any One Year (AOY) limit, respectively.
• Policyholders can select the AOA to AOY ratio based on their risk exposure and requirements.
• The AOA limit, i.e., the maximum amount payable for each claim, must be chosen at the time of policy issuance.

The table below explains the available AOA-to-AOY ratio options, along with their meaning and examples:

Note 1: The AOA limit should be determined based on factors such as the insured's nature of the activity, the potential number of people affected, and potential property damage in the worst-case accident.

Note 2: When considering coverage, it is essential to evaluate the adequacy of the sum insured and the selected extensions.

You may also read: Indemnity Insurance for Chartered Accountants

How Does Professional Indemnity Insurance Work?

Here's a simplified overview of how Professional Indemnity Insurance works:

• Claims arise from professional mistakes: If you or your employees make an error, omission, or act negligently while delivering professional services, and a client suffers a financial loss, you may face a claim.
• Coverage works on a claims-made basis: Most PI policies operate on a claims-made format, meaning the claim must be made and reported during the active policy period for it to be covered.

Important Condition

• Retroactive date matters: Any claim arising from an incident that happened before the policy’s retroactive date is generally not covered by the insurer, even if the claim is reported during the policy period.

Professional Indemnity Insurance: Triggering Event

A triggering event for a PI Insurance policy typically occurs when a claim is made against the insured for an alleged error, omission, or negligence in their professional services. Let's consider a case scenario to understand this:

Case Scenario:

Mr. Arora, a Chartered Accountant managing audit and tax filings for several clients, has a Professional Indemnity Insurance policy. While preparing the annual financial statements for his client, Sunrise Exports, he unintentionally overlooks a critical compliance requirement.

Because of this oversight, Sunrise Exports receives a notice from the tax authorities, resulting in penalties, interest charges, and the need for additional corrective filings.

Feeling financially impacted, Sunrise Exports files a claim against Mr. Arora, alleging professional negligence and seeking compensation for the losses incurred.

How the Policy Responds?

• The triggering event for Mr. Arora's PI policy occurs when the client officially files a claim alleging a professional error.
• Mr. Arora informs his insurer immediately, initiating the claims-handling process.
• The insurer reviews the complaint, evaluates the documentation, and investigates whether the mistake falls under the policy's coverage.
• If the claim is valid, the insurer may cover defence costs, legal fees, and compensation payable to the client, up to the policy's limit of indemnity.

Note:  The Professional Liability Insurance coverage is typically triggered when a claim is made during the policy period, regardless of when the alleged incident actually occurred.

Why is Professional Indemnity Insurance an Important Purchase?

PI Insurance Policy is important for the following reasons:

1. Protects your Financial Position if a Claim is Made

   In the event of a claim or legal action against your business, Professional Indemnity Insurance provides financial protection by covering legal expenses, settlement costs, or damages awarded.

2. Ensures Coverage for Businesses of All Sizes

   Whether you run a small startup or a large corporation, a Professional Indemnity Insurance policy offers cdoverage tailored to your specific business needs, mitigating the risks associated with professional services.

3. Offers Peace of Mind Knowing your Organization is Protected

   Having Professional Indemnity Insurance in place offers peace of mind. It ensures that your organisation is safeguarded against potential liabilities and unforeseen circumstances that could arise from professional mistakes or negligence. It allows you to focus on your work without constant worry about potential legal or financial repercussions.

   Regardless of the experience in your profession, the potential for mistakes always exists. In such cases, a Professional Indemnity Insurance policy is essential. Hence, you may need this insurance if you are:

   • Handling Clients or Business Data: Businesses handling sensitive client or business data are susceptible to the risk of data breaches or loss. PI Insurance can alleviate the financial consequences associated with mishandling data.
   • Providing Advice or Guidance to Clients: Professionals providing advice or guidance face the risk of errors or omissions that may cause financial harm to clients. The Professional Indemnity Insurance policy addresses claims arising from such situations.

4. Vulnerability to Claims Challenging Professional Work

   Professionals face the risk of claims challenging the quality or effectiveness of their services. To mitigate this risk, Professional Indemnity Insurance provides protection against financial losses resulting from legal actions initiated by dissatisfied clients.

Who can Purchase Professional Indemnity Insurance?

Professional indemnity or Errors and Omissions insurance can be availed by individuals or companies providing professional services. Here is a table of individuals and entities that can purchase a PI policy:

Factors to Consider When Purchasing Professional Indemnity Insurance

Here are certain factors that you should keep in mind while purchasing professional liability insurance:

1.Decide on the Right Sum Insured

Choose an appropriate sum insured based on the nature and magnitude of risks associated with your business, ensuring adequate coverage for potential claims.

2.Be Transparent with Information

Full disclosure is crucial when obtaining insurance. Provide all relevant details, no matter how insignificant they may seem, to avoid claim rejection and ensure the effectiveness of the insurance policy.

3.Align Insurance Features with Business Needs

Ensure that the professional liability insurance policy's features align with your business requirements. If your business deals with international clients, it is advised to opt for a policy that provides coverage beyond domestic borders to meet your specific needs.

What Is the Retroactive Date in Professional Indemnity Insurance?

The retroactive date is the date from which your Professional Liability Insurance starts covering past work, provided you renew the policy every year without any break in coverage. Any claim arising from work done after the retroactive date can be covered, even if it is reported years later.

Transferring Retroactive Date from Old Insurer to New One

Transferring the retroactive date from the old insurer to the new one refers to the point when the new insurer takes the responsibility to provide coverage for any claim that might come up from the policy tenure of the old one.

*Condition: There should be no gap between the old policy and the new one.

Example to Understand the Retroactive Date

Let’s take an example of a Chartered Accountant (CA):

• Mr. Mehta, a practising CA, purchased his first Professional Indemnity Insurance policy on 1 January 2020 from an insurance provider.
• The policy stayed active until 31 December 2020.
• At renewal, he chose to move to another insurer and bought a new PI policy effective 1 January 2021.

Even though the insurer changed, Mr. Mehta renewed the policy without any gap. Therefore:

• Retroactive Date: 1 January 2020 (from the first time he bought the policy)
• Current Policy Start Date: 1 January 2021

What is Professional Indemnity Insurance for Doctors?

Professional Indemnity Insurance for Doctors provides specialised coverage against claims for negligence, errors, or omissions in their services. It protects doctors from financial losses and enables them to focus on delivering quality care without constant concerns about litigation. The insurance includes legal defence, settlements, and damages, up to the policy limit.