Professional Indemnity Insurance

Claims and litigation can potentially bankrupt businesses of any size. Professional indemnity insurance protects businesses against claims for negligence or breach of duty arising from an act, error, or omission in the provision of professional services. In other words, it indemnifies the insured party against legal liability. It is particularly relevant to professions whose main function is to provide advice, such as lawyers, accountants, architects, engineers, real estate agents and travel agents. If a client suffers injury or financial loss, professional indemnity insurance covers the cost of legal services, settlements and court orders. It can also cover unexpected costs such as investigations into claims and public relations consultancy to repair reputational damage.

What is covered?

Many insurance companies offer professional indemnity insurance.

Standard coverage includes:

• breach of duty;
• breach of privacy or confidentiality;
• intellectual property infringement;
• defamation;
• lost or damaged documents;
• reputation repair;
• costs of investigating claims.

It does not cover existing claims, intentional damage, the costs or expenses of complying with a contract, or bankruptcy.

Some insurers offer professional indemnity insurance tailored to specific employment positions or situations, such as medical malpractice, multimedia, management, superannuation trustees, information technology, and associations and non-profits.

Public liability insurance is also designed to protect a business in the event of a claim for injury or damage, but only professional indemnity covers professional advice or services.

Regulators

The two key regulators of professional indemnity insurance in Australia are the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC). Both are independent statutory authorities. APRA sets standards for the general insurance industry, while ASIC is responsible for the licensing of financial services providers and consumer protection.

Examples of professional indemnity claims

Professional indemnity insurance is used to cover a variety of situations in different professions as illustrated in the below examples..

Real estate agent

• After an agent sold a caravan park and business, the buyer discovered the property boundaries were not as described in the contract. Several caravan sites were not located on land that had been sold. The buyer launched proceedings against the seller, the agent and the solicitor who acted for the buyer. The matter settled with the agent paying $40,000 and legal costs of $80,000.
• The owner of a shopping centre set a light timer switch in the centre to turn lights off at 6.30pm. A person fell down an unlit flight of stairs at 9.30pm and was injured. The injured person sued the shopping centre owner and real estate agent who managed the centre. The matter settled with the owner and agent agreeing to each pay half of the damages on the basis the agent was responsible for ensuring the premises were safe.

Lawyer

• A married couple engaged a law firm to create wills for them. The wife had a specific provision in her will for a bequest to a child she had adopted 45 years earlier. Her husband had no knowledge of the child and the woman had made a strict instruction to the law firm that her will was to remain confidential until her death. The law firm sent copies of both wills to the couple, disclosing the wife’s will to her husband. The wife sued the firm for emotional distress related to the breach of confidentiality. The damages were covered by the law firm’s professional indemnity insurance.

Marketing agent

• A marketing agent was engaged to create a printed advertisement. The advertisement omitted a digit from the client’s phone number and left out the client’s website. The matter was settled with the agency agreeing to reprint the advertisement at no cost to the client.

IT consultant

• An IT consultancy business was established with a name similar to a US company’s Australian subsidiary name. The Federal Court issued an injunction preventing the continued use of the name. Legal costs were more than $100,000.
• A not-for-profit organisation engaged an IT consultant to develop a software program. Delays and a cost blowout in developing the program led to the termination of the consultant’s contract. A second IT consultant was engaged to determine whether the system could be salvaged or a new system would be needed. The cost of losses resulting from the first IT consultant’s negligence was almost $300,000.
• A small business owner engaged an IT consultant to solve problems with a laptop computer. As part of the service, all software and applications on the laptop needed to be backed up, removed, then reinstalled. Upon reinstallation of the information, critical files were found to be missing, and the business owner sued.

Bookkeeper

• A bookkeeper was engaged to work remotely for a company, with emails used for all correspondence. The bookkeeper fulfilled an email request from the company to transfer large payments to a third party, which was not unusual. However, the company’s email account had been cloned. The claim was settled for the full amount transferred.

If you require legal advice on professional indemnity insurance or any other matter, please contact Armstrong Legal.