Professional indemnity & the national reinsurance scheme – what does it mean for insurers?

Professional indemnity & the national reinsurance scheme – what does it mean for insurers?

The professional indemnity crisis in Australia has led to calls for a national reinsurance scheme to be put in place, sooner rather than later. Is this the right solution and what does this mean for the insurance industry?

What is professional indemnity insurance?

This is the type of cover taken out by accountants, builders, certifiers, architects and engineers, people who provide services based on specialised knowledge. The policy is to protect their businesses against legal claims of alleged or actual negligence occurring during the performance of a professional duty. Generally, these claims focus around giving people incorrect advice or the client misinterpreting the advice given to them. It can also include instances when an unintentional mistake has been made, whether that’s overlooking a critical piece of information or misinterpreting a fact.

What is the professional indemnity insurance crisis?

The cladding crisis has resulted in rising premiums for building certifiers with a knock-on affect to the building industry. With many certifiers unable to obtain Professional Indemnity Insurance, projects have been delayed or not even completed.

The Grenfell Tower fire in 2017 was ground zero for this crisis, highlighting the risks of using combustible cladding on high rise buildings around the world. A recent government report found that more than 400 buildings in NSW and QLD are at risk, noting that some premiums for building certifiers have risen from $40K to $100K. All of this means that many construction projects worth billions of dollars may not be able to proceed, as rising premiums or reduced cover, force building certifiers out of business.

A further complication to this already escalating problem is that insurers are not only liable for historical cladding works, but also for liabilities resulting from remediation of these issues.

What is the national reinsurance scheme?

Last December, the Victorian government called for a national reinsurance scheme, but this was not taken up by the BMF (Building Ministers’ Forum). The BMF is composed of Australian government, state and territory ministers and oversees policy and regulatory issues for the building and construction industry.

The proposed national reinsurance scheme was meant to provide coverage for new construction, but no national policy changes have been made so far. What has happened is that insurers have ceased providing exemption-free insurance to building certifiers.

What insurance solutions have been put in place so far?

A ruling by VCAT (Victorian Civil and Administrative Tribunal) who investigated the Lacrosse building fire in Melbourne, caused by combustible cladding in 2014, has further lashed the building industry. The tribunal decided that the builders needed to pay more than $5.7 million damages to the apartment owners; 39% paid by the fire engineer, 35% by the certifying group, 25% by the architects, and only 3% paid by the actual builders.

This has led the insurance industry to put in place short term measures to ensure that certifiers can continue to operate, easing the construction industry away from this ongoing crisis. These measures include issuing building certifiers with cover that excludes non-compliant external cladding until June 30^th 2021 in QLD and until June 30^th 2020 in NSW. However, certifiers who continue to work on buildings with combustible cladding will need to pay much greater premiums to continue operating.

Long term solutions to the professional indemnity crisis have still not been tabled, but at least insurers now have a clear avenue for moving forward, even if it’s only in the short term.

To decide on what type of insurance may be suitable for your business, talk to an insurance specialist today.

General Advice Warning

The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.

Professional Indemnity Insurance

Professional Indemnity (PI) Insurance isn’t just limited to typical ‘professions’ such as accountants, engineers, lawyers, doctors and architects. Essentially, anybody providing advice or consultancy services for a fee has an exposure that needs to be considered.

Professional Indemnity Insurance

What is Professional Indemnity Insurance?

If you or your business provide professional advice or services, then you’re likely to need Professional Indemnity (PI) Insurance.

This insurance provides and pays your legal defence costs in the event that a customer complains that they followed negligent advice and suffered a financial loss – even if there’s no real basis for the complaint. If there was negligence, PI Insurance will also pay any damages awarded by the court.

Without Professional Indemnity Insurance, you or your business could be faced with having to organise your own legal defence, and pay potentially large legal bills as well as damages awarded by the court. The average claim amount is over $100,000 for legal costs, expert reports, and damages, so it can be a large amount to have to find quickly.

Typical professionals that purchase PI Insurance include:

real estate agents
construction consultants
healthcare or allied health
IT consultants
lawyers
doctors.

Why is Professional Indemnity Insurance important?

Professional Indemnity Insurance is mandatory for many professions and must be in place before starting a business. It’s recommended that you check with your association or insurance adviser to find out if PI cover is compulsory, and the sum insured required.

For other professionals, although this insurance cover may not be compulsory, it’s an easy way to protect yourself and your business from large financial losses. Even with the best training or risk management, people still make mistakes, contractors can provide incorrect specifications, and advice can be misunderstood.

It’s worth noting that the cover provided by Professional Indemnity is different from Public Liability Insurance which covers defence costs and any damages relating to personal injury caused to people or damage to their property. This is not the same as financial loss caused by an architect placing walls in the wrong location on plans or an IT professional recommending the wrong software.

What does Professional Indemnity Insurance cover?

The exact cover will depend on your occupation and scope of activities. Broadly speaking, Professional Indemnity Insurance covers any negligent act, error or omission relating to:

misleading, inaccurate or negligent advice; breach of confidentiality or privacy
breach of consumer, competition, and fair trading laws
loss of documents
infringement of intellectual property rights
malpractice, misdiagnosis, failing to order the appropriate tests, failure to treat
defamation, libel or slander, including costs of disciplinary proceeding costs, claim investigation and expert reports
public relations costs
legal defence costs
payment of damages.

As you can see, Professional Indemnity is a complex insurance with a wide range of cover options. We’ll work with you to understand your business, provide options to manage your professional risks, and recommend insurance cover.

Frequently Asked Questions

Who needs professional indemnity insurance?

Anyone who is specially trained, provides advice or service, and is a member of an association or profession can purchase this type of cover. Real estate agents, construction consultants, engineers, healthcare or allied health professionals, designers, lawyers, IT consultants and doctors all need Professional Indemnity Insurance.

In some workplaces or industries, it is mandatory to have this cover. Even if not compulsory, this insurance is important to protect you and the business from having to pay significant legal costs, as well as damages, if found to be at fault.

How much does professional indemnity insurance cost?

Professional Indemnity covers you or your business for legal costs and any damages if there is an actual or alleged act, error or omission that causes a financial loss to a client or customer.

Premiums are typically based on:

Your industry – for example, construction, IT, or medical, some are at higher risk than others.
The scope of your business activities – for example, whether you’re a fire engineer or an IT engineer, the turnover/ revenue and number of employees or contractors.
Prior claims experience – the more claims or lawsuits, the higher your premium (and excess) are likely to be.

● What is the minimum professional indemnity insurance?

The amount of Professional Indemnity cover you need depends on:

your occupation and potential for financial loss to the customer if there was negligent advice
any mandatory requirements of your association
the level of cover you choose, based on your level of risk, as well as the cost of the insurance.

Because different professions present varying levels of complexity and risk, we recommend talking with your insurance adviser – they are professionals who can work to understand your business and provide you with options to choose from.

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