When businesses think about the cost of Professional Indemnity Insurance, the first number that usually comes to mind is the annual premium. 

But the premium is only one part of the picture. 

The true cost of Professional Indemnity Insurance, and professional risk more broadly, can also include excesses, legal and expert costs, time away from your business, contractual insurance obligations, the impact of claims on future premiums, and even the cost of maintaining cover years after you stop providing the service. 

These were some of the issues explored in our recent webinar, Beyond the Premium: The Hidden Costs of Professional Indemnity Insurance, featuring Daniel Webber from Webber Insurance, Yen Tran from Martello Law and Raoul Basile from Woodina Underwriting. 

So, what are some of the costs businesses should be thinking about beyond the annual insurance premium?  

1. The immediate cost of a Professional Indemnity claim

A Professional Indemnity claim can create costs well before any settlement is reached. 

Depending on the circumstances, a claim may involve: 

• legal advice; 

• expert reports; 

• document collection and review; 

• staff and management time; 

• payment of an insurance excess; 

• disruption to normal business operations; and 

• management of client relationships and reputation. 

There can also be a significant personal cost. 

Receiving an allegation that your professional services have caused a client financial loss can be stressful, regardless of whether you ultimately did anything wrong. 

And that is an important point: you don’t necessarily need to have made a mistake to become involved in a Professional Indemnity claim. 

A client may misunderstand what you were engaged to do, disagree with your advice or simply believe that you are responsible for a loss. Even an unfounded allegation can still require time and resources to investigate and defend. 

This is why early notification is so important. If a client expresses dissatisfaction or raises an issue that could potentially develop into a claim, speak with your insurance broker or insurer rather than waiting for a formal demand or legal proceedings. 

2. Your excess may cost more than you expect

An often-overlooked feature of a Professional Indemnity policy is whether the excess is cost-inclusive or cost-exclusive. 

The difference can be significant. 

With a cost-inclusive excess, claim-related costs such as external legal fees can begin eroding your excess from the start of the matter. If your excess is $10,000, for example, you may effectively be responsible for the first $10,000 of those costs, even if the allegation is ultimately successfully defended. 

A cost-exclusive excess generally operates differently. Depending on the policy wording and circumstances, the excess may only become payable where an indemnity payment or settlement is made. 

This means two Professional Indemnity policies with similar premiums and the same headline excess can produce very different outcomes when a claim occurs. 

When comparing PI insurance, it is therefore important to look beyond the premium and understand how the excess actually works. 

3. Time away from your business is a real cost

Responding to a Professional Indemnity matter can require a considerable amount of your own time. 

You may need to locate documents, reconstruct conversations, review correspondence, meet with lawyers, provide instructions to the insurer and respond to questions about work that may have been completed years earlier. 

That time has an opportunity cost. 

Instead of focusing on current clients, business development or productive work, key people within the business may be spending hours assisting with a claim. 

This is one reason why good record keeping is so important. 

Contracts, emails, text messages, meeting notes, photographs and written confirmation of verbal discussions can all make it easier to establish what actually occurred. 

Where important instructions are provided verbally, following up with a short written confirmation can create an invaluable record if the matter is later disputed. 

4. A claim can affect your future insurance costs

One of the concerns businesses commonly have when notifying a potential claim is whether their insurance premium will automatically increase. 

The answer isn’t necessarily. 

A notification that goes no further may have little or no impact on your future insurance costs, and insurers generally want policyholders to notify potential issues early rather than allowing them to escalate. 

Where a claim does result in substantial legal costs or a settlement, however, the matter may be considered by underwriters at future renewals. 

Importantly, insurers may look beyond the headline claim amount. 

They may consider: 

• what actually caused the claim; 

• whether the insured was at fault; 

• the amount paid in settlement; 

• the amount spent on defence costs; 

• whether the issue is likely to recur; and 

• what risk management steps have since been implemented. 

A $50,000 claims history, for example, can mean something very different if almost the entire amount relates to legal costs defending an allegation that was ultimately unsuccessful. 

That is one reason why simply settling an unfounded claim to “make it go away” is not always the best long-term outcome. It may still become part of the business’s claims history and potentially affect future insurance arrangements.  

5. Retirement doesn’t necessarily end your PI exposure

Professional Indemnity Insurance generally operates on a claims-made basis. 

Broadly speaking, this means the relevant policy is usually the one in force when a claim or circumstance is first notified — not necessarily the policy you held when the original work was completed. 

That becomes particularly important when a business closes or a professional retires. 

An error in a design, report or piece of professional advice may not become apparent until years after the service was provided. 

For example, a design may be completed today, construction may occur two years later, and a defect may only become apparent several years after that. 

If you have stopped trading by then, you may still need Professional Indemnity Insurance in place for the claim to be covered. 

This is where run-off insurance becomes important. 

The appropriate period of run-off cover varies depending on factors such as contractual obligations, the type of work performed, the structure of the business and the potential period in which claims could arise. 

The cost of run-off insurance should therefore be considered as part of long-term business and retirement planning, rather than something to think about only when the doors are about to close. 

Looking beyond the premium 

Professional Indemnity Insurance isn’t simply an annual premium. 

The true cost of professional risk can include: 

• the excess you need to fund when a claim occurs; 

• legal and expert costs; 

• time taken away from running your business; 

• the longer-term effect of claims; 

• insurance requirements hidden within contracts; 

• maintaining higher limits for years after a project; 

• run-off insurance after retirement; and 

• changes in the broader insurance market. 

Understanding these costs before they arise can help businesses make better decisions about contracts, pricing, risk management and insurance. 

And perhaps most importantly, the cheapest Professional Indemnity policy isn’t necessarily the lowest-cost option when something actually goes wrong. 

Want to learn more? 

Our webinar Beyond the Premium: The Hidden Costs of Professional Indemnity Insurance takes a deeper look at these issues with insights from an insurance broker, Professional Indemnity underwriter and insurance lawyer. 

WATCH THE WEBINAR 

If you would like to discuss your Professional Indemnity Insurance, contractual insurance requirements or run-off cover, contact the team at Webber Insurance on 1300 932 237.