Professional indemnity (PI) insurance protects self-employed professionals, businesses or organisations against legal liability to their clients and other third parties from the provision of professional services. It is also called ‘errors and omissions’ cover.
Types of professional
‘Professionals’ requiring the benefits of PI cover include:
- Traditional occupations such as doctors, solicitors, accountants and clerics
- New professions such as IT consultants, advertising agents, interior designers, management consultants, employment agencies, training consultants and travel agents
- Non-profit making organisations, as it is not necessary to charge a fee to be sued for poor advice.
Legal liability can arise from common law (tort). The professional owes a duty of care to their client to exercise:
‘Such prudence and skill as could be expected from an average member of the profession and if there is a commonly accepted method of doing things, they must conform to such a method’.
Professionals enter into contracts with clients, such as the insurance intermediary’s ‘terms of business’ letter (TOBA). Insurance intermediaries also owe a duty of care to insurers. The TOBA is evidence of the contract between the intermediary and the insurer.
It is an implied condition of a contract that the professional should act ‘with reasonable care and skill’ and some (for example, architects and engineers) also imply the final output must be ‘fit for its purpose’.
Liabilities under tort and contract co-exist and a claim can be pursued under both. There are a number of reasons why this may be the case including:
- The contract can require a greater standard of care than tort
- Damages awarded can be higher in contract than under tort
- The limitation period for tort claims starts from the time of the damage and not from the time of the breach of the contract.
Professionals also owe a duty of care to parties other than their clients who rely on their advice. To successfully sue, the third party must demonstrate breach of duty and:
- Foreseeability that the third party would be adversely affected
- A close relationship between the professional and the third party existed (known as ‘proximity’)
- A situation where it is fair, just and reasonable that the law should impose a duty upon the professional.
The financial implications for the professional following an error or omission can be significant.
Assets at risk
If a professional trades as a sole trader or in a partnership with unlimited liability, they can lose everything including their home.
The case of Merrett v Babb 2001 found that we are responsible for our own actions at work, not just the self-employed. Mrs Merrett successfully sued Mr Babb for financial losses as a result of an error made in a mortgage application. Mr Babb was employed by a firm that had ceased trading and he was held liable in their place.
Therefore assets of directors and employees could be at risk as well as those of principals and partners.
As well as damages, legal costs can cause financial ruin for businesses operating without the protection of professional indemnity (PI) insurance or those underinsured.
Defending even a frivolous or malicious claim can be very expensive.
A customer may require reassurance that their professional adviser is insured and may stipulate this in the contract terms. As professional indemnity insurance is on a ‘claims made’ basis, the request should also state how long the insurance should be held.
Professionals are liable for their errors and omissions for 6 years from when the damage is discovered (under tort) or the breach occurred (under contract), unless fraud or concealment is involved where there is no time limitation.
Contract terms should require cover for at least 6 years or sometimes up to 12 or 15 years for architects.
Membership of professional bodies
Professional bodies and institutes frequently make membership conditional upon holding insurance cover. They may also stipulate minimum indemnity limits, maximum excesses and indeed, the actual policy wording to apply.
The Royal Institution of Chartered Surveyors (RICS), for example requires cover to be issued by an approved insurer. Not all surveyors are members of RICS and therefore, not bound by this requirement.
The professional may be regulated by a body that requires cover to be held, for example, solicitors are required by the Solicitors (Amendments) Act (1974) to hold cover for a minimum limit of indemnity of £2 million (£3 million for limited liability partnerships).
In determining the client’s needs for insurance, intermediaries acknowledge adherence to any institute or regulatory requirements.
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