Top ten things to consider when buying Professional Indemnity (PI) insurance
Outside the traditional professions, PI insurance has rarely been at the top of the list when business owners or directors consider their insurance requirements for the year ahead. Outside these traditional professions, it’s rarely made compulsory by legislation, in stark contrast to employers liability or motor third party liability insurance.
It is nevertheless an increasingly important part of the modern business insurance portfolio, attracting the attention of a greater number of stakeholders every year.
In the simplest of terms, PI insurance protects businesses and individuals against legal liability arising from advice or services provided
Below are ten things to think about when pondering whether to buy PI for your business, and to what level.
I stress – this is by no means exhaustive
(1) Do you have an exposure?
An obvious question maybe, but still the right place to start.
Under UK law a professional owes a greater duty of care to their customers than an ordinary person.
In the old world, professionals were easy to identify; people such as solicitors, accountants and surveyors. Today, the spread of professions has grown exponentially, with experts in ever increasing emerging fields.
Now highly qualified people operate in countless industries: technology, marketing, creative design, broadcasting and management consultancy to name but a few.
So how do you know if you have an exposure?
Simple. Ask yourself whether you provide either expert advice or a service. If the answer is yes then you should be considering PI insurance
(2) Your Budget
There is always friction between how much cover your business can afford to purchase versus how much risk it can afford to accept.
On the one hand it’s still tough economic times out there with finance scarce, cashflow critical and budgets squeezed. On the reverse though, litigation continues to rise in frequency, as does its cost.
The silver lining is that the insurance market remains soft in many areas, keeping premiums at a reasonable level. This is particularly true for business operating in emerging professions
So how big should your budget be?
Ask yourself what you can realistically afford then consider what you need taking into account potential frequency and severity of incidents, contractual obligations and legislative requirements.
(3) Contractual Requirements
An important consideration is what cover your customer base expects you to have.
Some may dictate that you hold specific level of insurance within the contract conditions you have to agree to. Others may ask for proof of insurance prior to approving you as an acceptable business to trade with, or when deciding which company will win their tender.
What is becoming increasingly rare, are those organizations who neglect to ask.
So what level of cover do you need when considering contractual needs?
Look at what you had before, and see if it resulted in lost opportunities. Check what limits people have asked for and whether they demand certain extensions.
Finally, keep an eye on what level your competitors buy, as you don’t want to be the one losing out on contract tenders
(4) Broker services
Should you buy your PI direct from the insurer, or use the services of an insurance broker?
Would you be comfortable representing yourself in court or letting a friend operate on your broken leg?
Same answer. All are possible, but are they really a good idea? Saving money in the short term could cost you and your business several times over if you get it wrong.
An insurance broker’s role is to act as intermediary between their clients, and insurance companies. Their core focus is to provide expert advice balancing differing client risk needs against the insurance products available in the market, considering aspects such as scope of cover, service, cost and solvency of insurer.
Consider the last point – how often you have heard of an insurer being in financial difficulty over the last 10 years?
In addition, as experts they have to purchase insurance protecting against their own errors and omissions, which provides their clients with a further avenue of recourse if things go wrong.
So should you use an insurance broker?
As the cost savings in dealing direct are generally minimal, I suggest it is worth working with an insurance broker. As well as that added level of protection, you get advice and assistance for your insurance program, particularly welcome when you have to make that claim.
One final note – try to find a broker with genuine experience advising business within your industry
(5) Insurer Expertise
In business, successful companies often focus on niche areas where they have an edge over the competition. Insurance is no different.
Both brokers, and insurers, have fields in which they are most proficient. Tailored products for specific industries by niche insurers illustrate this.
Frequently they will include additional covers, increasing the scope of what your business is protected against. Often they are worded in more suitable way to avoid ambiguity helping the efficient resolution of valid claims.
Some insurers go even further by ensuring claims under their niche PI products are administered by legally trained professionals, and not generic claims handlers.
In addition, some insurance companies provide ancillary services, such as contract and collateral warranty checking.
Sometimes it is even recognizable in the language they use.
So how important is the expertise of an insurer?
Having an insurer who understands your business, and its inherent risks is naturally very important. It becomes critical for those operating in emerging sectors, such as in the technology, creative and communication spheres. It is those domains that are evolving fastest; consequently it is their risks that alter most.
By employing a broker, you can be given information and advice on which insurers and products are suitable for your business, giving you comfort and saving valuable time.
(6) How valuable is your time?
As the owner or operator of a business, you want to spend most of your time concentrating on core business activities. Time spent dealing with insurance issues and legal disputes is not likely the best use of a busy management.
This is a powerful reason to purchase PI cover through a specialized broker.
Being able to pass on complicated queries to an expert is far easier than having to trawl through confusing policy wordings. Not having to keep constantly abreast of changes to insurers and product availability and suitability, saves yet more time
However it is when something goes wrong that the role of a specialized broker and insurer becomes crucial. Gathering information, analyzing wordings to see where and how incidents are covered, negotiating with solicitors and adhering to relevant protocols – these are not the best use of a business management resource. This is especially true when considering that timing of these incidents cannot be predicted.
So what would be the time impact for my business?
The time impact generally varies based on the size of the operation in question.
For smaller businesses, the time aspect is most crucial. The inability to work on new projects and complete existing ones, because the company is defending itself against a third party action, can seriously hurt the health of a business. Failure to fulfill existing contracts on time can damage reputations and hinder future business.
Larger business may be able to cope better, sometimes employing individuals within their organizations to deal with these aspects allowing them to bear higher excess levels
(7) Product Types
If you were to purchase a new laptop then there would be many things about the product which would affect your buying decision – processing speed, size, battery life and operating system, and so on
It is the same with PI insurance, and it needs to be considered as a product with value, and not an unwelcome intangible cost. Unless your business is subject to a prescribed wording* for you industry then there will likely be different levels of protection available at varying cost, and your choice of product could be critical to your business.
Let’s take the example of companies in the technology and creative industries:
You can buy the entry-level “negligence only” product, solely offering protection for actions arising from your errors and omissions.
Maybe you could upgrade to a full “civil liability” model, providing enhanced protection including defamation and infringement of intellectual property.
Or perhaps you can buy something more comprehensive. Over the last few years the products have developed even further, offering highly valuable breach of contract cover. Breaches of contract are common, and easier to prove than negligence, which is why some insurers see as many claims for this element of cover alone, as they see in the rest of their PI product**.
So which product should you buy?
In my opinion you should always look to purchase the best insurance product you can afford, as it should not be seen as an unwelcome cost on your balance sheet. Insurance should be appreciated as the product enabling you to run your business with peace of mind
* Many industries enforce specific PI products on those practicing within it. Examples include surveying, accountancy and legal professions, but there are many more than that.
** Source: Hiscox 22/08/11. 49% of their technology claims arose from breach of contract over the preceding 5 years
(8) Where will you be operating?
Firstly you need to understand the difference between geographical and jurisdictional limits on an insurance policy. Geographical limits concern the physical location where the advice was given, or the service provided. Jurisdictional limits concern under which law claims can be brought against your business.
Legal action in the USA and Canada has been notoriously expensive for decades, with higher costs, punitive damages and the prevalence of class actions. This means insurance policies with a worldwide jurisdiction are usually more difficult to obtain. When you do manage to find one they tend to be far more expensive, with more restrictive terms, lower limits of indemnity and higher levels of excess
So what jurisdiction or geographical limits will you require?
First consider where you operate and where your customers are based. Analyse what proportion of business relates to work for USA/Canada customers, and the type of work undertaken (as some activities are more hazardous than others).
Then weigh the cost of the wider scope of cover against actual exposure, then consider likely future exposure (for example, you may presently have no USA/Canada customers, but if you are planning to expand into that territory in the coming months then you should be considering the wider cover)
(9) How much cover to buy; how much risk to accept?
A fundamental issue concerns what level of exposure your business faces. There are many factors to consider, some of which are below.
What would be the worst-case scenario, what impact would that have on the business and how likely is it to occur? Larger organizations may be able to absorb higher losses, whereas one significant incident could put a smaller inadequately protected firm out of business.
You need to look at the size and type of contracts the business is involved in. Be aware that it is not just your element of the contract you have to consider, but that of the whole project.
The industry you operate in also has to be considered. The more specialized the area, the higher the likely litigation costs if something goes wrong.
How likely is the business to be subject to a legal action from a customer, or other third party? Do you have an exposure to repeat claims, or could you have if the environment you operate in changes? For example since the economic downturn with falling house prices, the surveying industry has experienced a glut of claims. These have been for inadequate property valuations from lenders against surveyors.
If you have a repeat exposure then you should look for a limit that is on an “any one” claim or occurrence basis, and not aggregated (meaning the limit effectively resets itself for every individual incident). The business should also seek to avoid high excess levels, maybe getting the excess aggregated if possible (once the amount paid under the excess for a series of incidents reaches a set figure the excess effectively drops to nil for the remainder of that policy period).
So what limit should I buy, and what excess level should I bear?
You should consider all of the aspects above to analyzing the potential severity and frequency of incidents, then look at what options are available to you, and what you can afford.
As a general rule, if you can afford a little extra cover, buy it.
(10) Ethical considerations
There are countless other factors which should be considered, however the last area I would recommend thinking about concerns ethics.
Being properly insured is good corporate social responsibility. It is the right thing to do.
If your business survival relies on being able to litigate when things go wrong, then you cannot afford to come up against a “man of straw”. It would feel an unfair situation, so why should your customers be any different? Why would it be acceptable for your business to cause another to go to the wall?
If you are properly insured, in the event of litigation, there is something that can respond and recompense the aggrieved party. There is something in place to prevent a fellow business from financial difficulty, or even bankruptcy.
If your business survival relies on being able to litigate when things go wrong, then you cannot afford to come up against a “man of straw”. So, why be the man of straw to your customers? Would it be acceptable for your business to cause another to go to the wall?
If you are properly insured, in the event of litigation, your policy will respond and recompense the aggrieved party, perhaps preventing a fellow business from financial difficulty, or even bankruptcy. Moreover, you have something in place to indemnify your business, creating peace of mind for you and your employees.
So what is the right thing to do?
If you have an exposure, it would be responsible to safeguard your business from risks faced through the purchase of adequate protection.