INSURANCE

PROFESSIONAL INDEMNITY INSURANCE

– AN ABSOLUTE ESSENTIAL FOR PROFESSIONAL SERVICES BUSINESSES

VERNON SUBBAN reminds us that even the most renowned practitioners have slipups that can be costly financially and reputationally, which is why it is crucial that businesses have PI Insurance

While South African professional services businesses continue navigating under ever increasing pressure, they are not spared the “quiet quitting” trend spawned from the Great Resignation narrative that follows hot on the heels of the Covid-19 pandemic. From the heightened threat associated with weakened supervision of employees working the hybrid schedule, to the challenge of increased privacy and cyber risks, mistakes are bound to happen. The client or third party who suffers a financial loss as a result of that error seeks recourse through litigation against these businesses and the trajectory from this sort of claim can slash through a balance sheet with devastating effect without adequate cover from a Professional Indemnity Insurance policy. The value of this insurance to provide cover to correct the error and cover the legal costs to defend

a claim against the business, cannot be overemphasised.

PROFESSIONAL INDEMNITY INSURANCE EXPLAINED

Professional Indemnity (PI) Insurance is also known as Professional Liability Insurance, Errors and Omissions Insurance or Malpractice Insurance (for Medical Professions). It is a type of liability insurance that covers businesses and individual professionals for the financial consequences of claims of neglect and errors or omissions from a client or third party who pays a fee for their services or advice.

Traditionally professionals were considered to be doctors, lawyers, accountants and architects. Fast track to the present and we have a reliance on the services provided by a myriad of occupations – IT consultants, estate agents, travel agents, beauty therapists, event planners, content marketers and the list travels on. There is also business’s increased use of external consultants, so the term professional has broadened indeed. This has created a climate of increased accountability and responsibility from an even wider spectrum of professionals.

WHY IS PROFESSIONAL INDEMNITY INSURANCE SO VITAL NOW?

◗ Businesses that offer advice or provide a service for a fee, are expected to have extensive knowledge and skills in their area of expertise. They are also expected to carry out their duties according to set standards. These businesses can therefore be held legally responsible for any harm or financial loss caused to a client or third party due to any act, omission or mistake. The cost

Without Professional Indemnity Insurance, the trajectory from a claim can slash through a balance sheet with devastating effect

of defending a claim of negligence is staggering. Even if a claim is unfounded – it still has to be defended. PI Insurance will offer that safety net to keep those front doors of a business opened. ◗ The economic downturn, coupled with significant skills shortages is the main driver of professional liability claims of recent. The construction industry which relies heavily on supervision of junior staff are struggling to survive the brain drain. There is also increased pressure on professional services businesses to take on work outside of their scope of practice due to increased labour costs and revenue shortages – eg. architects having to perform their design work and engage in project management duties. The frequency and severity of professional indemnity claims becomes inevitable under these circumstances. ◗ The changing regulatory environment has shown that consumer friendly legislations breeds a client who is most likely to seek redress if they feel that their providers of professional services were negligent or fell short in any way.

The last thing any business wants is for a disgruntled client to prevent them from attracting new clients or from trading altogether due to defending a ruinous claim without the backup of PI Insurance. ◗ The litigious culture from other parts of the world, has influenced the South

African consumer, which has led to a rise in professional indemnity claims.

◗ Some professions are bound by legislation to have PI Insurance in place in order to remain compliant – eg. doctors, architects, lawyers, insurance brokers etc. ◗ Professional bodies also strongly recommend PI Insurance cover and source the best options either as requirement or as a benefi t. ◗ When engaging in corporate contract work, PI Insurance is a prerequisite – eg. those in building or information technology fi elds.

PROFESSIONAL INDEMNITY INSURANCE POLICY IN BRIEF

PI Insurance is a specialty coverage and forms the cornerstone to a comprehensive Business Insurance Portfolio.

PI Insurance protects businesses against client/third party claims of:- PI Insurance protects businesses against client / third party claims of: ◗ Negligence/Faulty service (errors) eg. an estate agent who gives incorrect advice on a property evaluation. ◗ Failure to provide the service (omissions).

PI Insurance covers:◗ All forms of business – sole proprietors, partnerships and corporations. ◗ Directors and employees are included if business is a corporation. ◗ Will also cover sub-contractors/ consultants providing services or advice on the company’s behalf, unless they are expected to hold their own PI Insurance cover.

PI Insurance will cover:◗ Legal costs to defend the claim. ◗ Cost of any damages awarded to the plaintiff (client / third party).

The amount of PI Insurance coverage needed:◗ Will depend on the type of business and the risks they are exposed to, eg. Business

Rescue Practitioners (BRP’s) who are drawn from accounting, engineering and legal fi elds. These professionals have to increase their amount of PI Insurance coverage with each turnaround as the risks associated with rescuing an ailing business from liquidation is extremely high. NB:- It is important to note that although a PI Insurance policy predominantly offers protection in the event of negligence, most insurers also include cover for:◗ Infringement of Intellectual property – eg. unintentionally infringing on other’s copyrights/trademarks, or if in media infringing on broadcasting rights. ◗ Dishonesty ◗ Defamation ◗ Loss of documents.

RISK MANAGEMENT AND PROFESSIONAL INDEMNITY INSURANCE

PI Insurance is only one aspect of risk management. Risk mitigation strategies including risk reviews, formal systems for recording and reporting of incidents of liability and negligence should be an integral part of due diligence for professional services businesses. Insurers need to be kept informed all the way as these proactive strategies will hold the business in good stead to negotiate premiums, deductibles/excesses or any additional terms to be included upon renewal or inception of the policy. Insurers are also enthusiastic in assisting with mitigating professional indemnity risks by offering incentivised schemes to businesses adopting mentorship, peer review and supervision systems.

ABOUT PROFESSIONAL INDEMNITY CLAIMS

It might seem like the end of the world if a PI claim is brought against a business. Having a PI Insurance policy will manage the risks posed to a business and its hard-won professional standing. ◗ PI Insurance is triggered by the cause of liability, which is actual or alleged breach of professional duty – eg. If an IT Consultant designs a software package for a company and during its implementation, the software does not work correctly with a resultant loss of business – the policy will cover the liability of the IT Consultant for the damages to the company. ◗ PI Insurance policy is a ‘claims made’ policy – it responds to claims during the policy period or when the policy is ‘live’. ◗ A PI claim is a long and drawn out process and can take years to come to resolution. It can also take years to be brought on by a client (long after service delivery), so if a director or employee of a company retires, it is important for arrangements to be made for the company to keep them covered or renew the policy for several years after retirement.

CONCLUSION

Owning a professional services business is a grind and a hustle. It’s about pounding the pavement to chase that next lead and it’s all about making lasting relationships. The merits of a PI Insurance policy coupled with a comprehensive risk management programme would be invaluable to preserve all that toil. Even a completely baseless claim could lead to the demise of a business just through the cost of defending that claim. PI Insurance ensures that the professional services business will be protected against legal liability, threat of litigation and potential damage to its reputation. Even the most illustrious of practitioners do make mistakes.

Even a baseless claim could lead to the demise of a business through the cost of defending that claim

VERNON SUBBAN

INSURANCE BROKER SUBBAN AND SUBBAN RISK MANAGERS