A Professional Indemnity Insurance Primer
What is Professional Indemnity Insurance?
Professional Indemnity Insurance Explained..your Checklist
In New Zealand, Professional Indemnity means the risk a business, or owner or principal of a business, is exposed to if they, through the advice they provide through their business, cause losses to their customers and clients due to errors and omissions.
No one is perfect and genuine mistakes do get made…
There is no legal requirement to have Professional Indemnity Insurance, but if you don’t protect yourself, then you and your business may have to pay the costs of defending yourself in court.
Traditionally people would think of professionals as university educated specialists such as:
Architects – Lawyers – Accountants – IT Consultants – Surveyors, or similar, but really, anyone giving professional advice, even trades related operators such as builders, electricians and others can be exposed if they give wrongful advice in the course of their work that later causes damage or losses. People who have contracts with large companies and government are often asked to provide evidence of cover to meet the clients own compliance requirements.
What exactly needs to be covered?
Wrongful Advice, errors or omissions. This can include verbal or written client advice, where the only service provided is advice, or can extend to designs and such as building plans. The risk is that clients who have suffered loss will sue the advice provider. Policies should provide for the costs of defending these claims in court, as well as any necessary investigations or negotiations.
Who is Protected? Who is Required To have Professional Indemnity Insurance?
Can be a business entity, the owners or director or employees. Clearly the company owners or directors should be aiming to cover at least themselves and their businesses, but they may also want to also think about issues outlined in the FAQs list below:
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What is covered by Professional Indemnity Insurance?
(The answers below are broad answers to the type of questions we are often asked – the answers aren’t financial advice by any legal definition – every Client situation is a little different, contact Saffron directly for genuine qualified registered financial advice..)
Q. Does professional indemnity insurance cover negligence?
A. Yes, within reason, depending on your business activities and the terms of your policy.
Q. Does professional indemnity cover personal injury to others?
A. No, you’d need Public liability Cover for that.
Q. Does professional indemnity cover employees?
A. It can do. You may need to think abut the kind of work that you are asking your employees to do – are they also offering advice as part of their client work?
Q. Does professional indemnity insurance incur gst?
A. Yes, at 15%.
Q. Does professional indemnity cover damage to property?
A. No, this would fall under your Public Liability policy.
Q. Does professional indemnity insurance cover contractors?
A. It can do, but check that your policy wording covers the kind of contracts you undertake.
Q. Is professional indemnity insurance tax deductible?
A. Insurance is treated like most other business expenses and will be deducted from your operating expenses before calculating your net profit, which is the part you are usually taxed on. Refer to your accountant to understand your tax position and obligations.
Q. Is professional indemnity insurance required by law?
A. No, not generally, but in some cases government bodies or other government regulated organisations are required by law to ensure suppliers have professional indemnity insurance in place.
Q. Is professional indemnity insurance compulsory?
A. No, not as such, but keep a few million dollars spare to cover expenses in case of professional indemnity litigation against you if you choose not to get insurance cover!
Q. Is professional indemnity insurance the same as public liability insurance?
A. No, Public Liability is to cover you for damage to third party property or their personal injury, Professional Indemnity provides cover for wrongful advice, errors and omissions. It is highly recommended that you place these two policies together as there are grey areas between them. Both policies should be placed with the same underwriter.
Q. Does my professional indemnity insurance need to be with the same insurer as my public liability insurance?
A. Yes, quite often a professional Indemnity policy claim will fall into a grey area between a Professional Indemnity policy and a PL policy – the two policies need to be matched to ensure they provide full coverage and make sure there are no gaps. Having two insurers arguing about who the liability sits with can delay claims.
Q. What professional indemnity insurance do I need?
A. How long is your piece of string? Varies widely depending on your industry. Businesses should get professional advice on this from a qualified business insurance professional. Every business is a little different – a good adviser will ask you lots of questions to ensure all your risks are adequately covered.
Q. Does professional indemnity insurance cover volunteers?
A. Depends on the contract between the Employer and the Volunteer. Volunteers and their Employers should include this in their discussions before starting work.
Q. Does professional indemnity insurance cover vehicles?
Q. Does professional indemnity insurance cover consequential loss?
A. Some policies do, and some don’t, so speak to your broker / business insurance Adviser and check your policy wording carefully.
Q. Does a Certificate of Insurance need to be displayed?
No, but you can be asked to produce a certificate of insurance, in some circumstances, and it can help win contracts. If you’ve got it, flaunt it.
Q. Does it cover theft?
A. No, you’d need a Material Damage policy for that.
Q. Does professional indemnity cover damage to property?
A. It depends how you view it. Professional Indemnity is designed to protect the policy holder from claims made against them. It is possible that aggrieved parties could apply any damages they are paid to any property damage they have sustained, but the cover is there to cover the policy holders’ costs associated with claims, not the party bringing a complaint.
Q. Are claims made under professional indemnity policies on a ‘claims made’ basis?
A. Depends on your policy wording, some policies are, some are not. Check with your qualified broker who can advise, as well as your policy wording.
Q. Is professional indemnity insurance necessary?
A. You can self insure, but claim amounts can be in the millions. Very few businesses have this much cash available to set aside against such eventualities.
Q. Is it expensive?
A. It really depends on the size of your business, the work that you do, who you do it for, and where you do it, but compared to the cost of paying claims and defence costs yourself if something should go wrong, its pretty cheap. We could quote a range from a few hundred dollars to a few hundred thousand dollars depending on whether you are a ‘one man band’ accountant, or an international consulting firm, but that wouldn’t really help. We can give an indication pretty quickly over the phone, once we know a bit more about your business – Contact Us
Q. What professional indemnity insurance do I need to be contractor?
A. It depends on what type of contractor you are – a building contractor should certainly have Public Liability as a minimum, statutory liability and material damage recommended, also as a minimum, an IT contractor may be OK with Public Liability and Professional Indemnity. It all really depends on the circumstances and activities of the business in question, and the arrangement they have with their contracting Clients. Ask us for best advice.
Q. Who provides Professional Indemnity Insurance in New Zealand?
Well of course as a broker, we at Saffron can provide you quotes from the whole range of New Zealand insurers at no additional cost (since our service fees are usually paid by the insurer), but they would include companies such as : AIG, Allianz, Ando, Berkshire Hathaway, Chubb, Delta, Dual, IAG, IUA, Lumley, NZI, QBE, Vero Liability, and Zurich. Each insurer has a slightly different profile and risk appetite, defined by the type of risks they specialise in, so its important to ensure there is a good match between your needs and the features and benefits of a particular policy or insurer. Some policies contain or omit particular clauses that will suit specific industries or professionals, so knowledge of comparative policy details is key.
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