Professional indemnity Featured

8:00pm EDT March 26, 2009

If you represent yourself as an expert in your field, mistakes can be detrimental to your business. Noreen Salas, executive vice president of risk management for Royal Marine Insurance Group (RMIG), says professionals whose clients rely on them to provide advice should include a professional indemnity policy as part of their business insurance plan.

Professionals are expected to have extensive knowledge or training in their particular area of expertise. They are also expected to perform the services for which they were hired, according to the standards of conduct in their profession. If they fail to use the degree of skill expected of them, they can be held responsible for any harm they cause to another person or business.

When liability is limited to acts of negligence, professional liability insurance may be called ‘errors and omissions’ liability.

“Professionals in health care, legal, architecture, accounting, engineering and service businesses (e.g. consulting or investment firms) should examine their need for such coverage,” says Salas.

Smart Business spoke with Salas about how professional indemnity insurance can safeguard the prosperity of your business.

Why would business owners need professional indemnity in addition to their existing insurance?

We are in a society that is quick to sue and litigate, and defending and/or settling those liability claims can be costly. Whether a claim is valid or not, you’ll still incur the legal expenses of defending yourself. And if a claim is valid, you’ll have the additional expense of paying the claim. If your business doesn’t have the deep pockets to handle these potentially large expenses, professional liability coverage can serve as a cost-effective resource.

Depending on your trade, your state and local governments may require you to carry professional liability coverage (e.g., most states require medical doctors to have malpractice coverage). As well, it is common practice for government agencies or private companies to require this coverage when awarding contracts.

What should you look for in a professional liability policy?

Occurrence and claims-made are the two main types of available policies. With an occurrence policy, coverage is for an incident that occurs while the policy is in force, regardless of when the claim is filed. This coverage is not cheap, as you can imagine. If a claim is filed this year for work done 10 years ago when you were insured, you’re still covered even if you’re no longer in operation. Also, the policy limits in force at the time the policy was purchased would apply today — 10 years ago, $500,000 may have been enough, but may be insufficient today.

In a claims-made policy, you’re covered for any claim that is made during the term of the policy. In other words, if a claim is made after the policy expires, there is no coverage, regardless of if the claim occurred while the policy was in force. The benefit of a claims-made policy is that it is more affordable for young or start-up companies. Also, consider supplemental insurance, such as ‘tail’ and ‘nose’ coverages, which are available to fill the gaps of a claims-made policy.

How much coverage does a business need?

Usually, it depends on the industry you are in and the volume of business you conduct. It is generally based on gross receipts. If you deal with many high-profile companies and you’re working on projects that are quite substantial, it would be best to get higher limits to make sure you have adequate protection.

Typically, you pay legal expenses up to your deductible. In some policies, legal defense costs are outside of your deductible — they will cover it from zero dollars on up. Policies with zero dollar deductibles are more expensive. But if you require defense, not only will they pay from the first dollar on up, but it also won’t affect the limit of liability. In other words, if you have $100,000 in defense costs, which can easily happen, and you have a $1 million policy, the face value of your policy will not drop to $900,000 should you be found guilty or have to pay or contribute to a loss.

Another factor to consider is loss of earnings. If you have to spend time in court as part of the defense, then you’re probably not generating income.

What advice can you give someone who isn’t sure what type of limits or deductible they should get?

The deductible really has to do with how much financial hardship can be tolerated. Also, factor in the frequency of claims in your industry. It depends on where you stand financially. You have to realize that if there is a loss, you are going to have to pay that amount of money out of your pocket if the policy you purchased does not include first-dollar defense. In terms of limits, consider the size and scope of the projects. There is not a formula, per se; you have to review your policy with an agent to ensure limits are in line with the state of your business.

Bottom line, insurance should always be an integral part of your business.

NOREEN SALAS, AAI, is the executive vice president of risk management for Royal Marine Insurance Group. Reach her at (305) 477-3755 x208.