A question that is regularly raised by clients is:
How do I decide what on limit of Professional Indemnity cover I need?
This can be a pretty tricky question to answer as there is no real set answer. Every business is different and is governed by different industries, associations and regulations.
Some industries have set limits of minimum cover that is required for membership. This is usually the first port of call.
For an accountant to be a member of the CPA, they are required to take out a minimum of $1,000,000 cover. Similarly for a mortgage broker who is part of the MFAA – they are required to take out a minimum of $2,000,000 cover.
Stipulation in contract
Another guideline to the required amount of cover is via a stipulation in a contract. Most standard contracts for contractors have minimum limits set out that one must comply with to meet the requirements of the contract.
These are usually the simplest guidelines for selecting a level of cover but lead to an expectation that the industry limit will be sufficient. To correctly set a limit of cover for Professional Indemnity one must consider the following:
1. The size of your largest client or contract
Though needs to be taken as to the overall size of the contract being worked on. Although you may only be working on a small part of a project, the exposure should something go wrong could be significantly higher.
2. The number of parties relying on your advice
Whilst advice may only be provided to one party, considerations need to be made into what that advice is going to be used for. A engineer for example may provide a small amount of advice to their client. Their client provides this information to all the other parties involved in the remaining steps of a project. If this advice is incorrect, then a domino effect of affected parties can occur causing significant losses.
3. Remembering to include defence costs
Some policies include defence costs in the sum insured, some policies have it as a separate limit. Consideration needs to be given to what the costs would be involved with defending an action against you. A long court case can incur signification costs that, if not taken into consideration when setting a limit, can be the difference between having enough cover or having to pay some costs yourself.
4. Future proofing your cover
A Professional Indemnity policy is of a ‘Claims Made Basis’ meaning that consideration needs to be given not only to the costs now, but also for your past activities. Inflation and other factors need to be considered, as a financial loss of $250,000 several years ago, is likely to be significantly higher now.
Professional Indemnity insurance is a complicated policy requiring great care in setting a suitable limit of cover. We have had plenty of experience in assisting clients with their Professional Indemnity Insurance requirements so give us a call if you are concerned about your level of cover.