professional indemnity workshop

Professional IndemnityMarch 2015

Ram Garg CFA, MBA

2

Disclaimer

The information provided should not be relied on as legal advice or a definitivestatement of the law in any jurisdiction. For such advice, an applicant, insured,listener or reader should consult their own legal counsel.

3

Professional Indemnity

4

Legal liabilities of Professional

The basis of liability is negligence which means a failure to exercisea fair, reasonable and competent degree of skill as judged withreference to the standard expected of the profession.

– An expert will be judged by the standard of experts

Negligence arises when there is a duty of care, a breach of that dutyand consequent loss or damage by the breach

The duty of care– Any professional owes a "Duty of Care" to anybody who might reasonably

rely on his or her service or advice. The same Duty of Care is owedwhether a fee is charged or not, even if it is for an obvious secondaryfunction or service.

5

Legal liabilities of Professional

….Continued

The professional is vicariously liable for the negligence of hisemployees arising out of and in the course of their employment

Liability may also arise under the Consumer Protection Act

6

Example: What are the liability exposures for a BPO?

A BPO/KPO‘s duty of care extends not only to their original client, but

They are also vulnerable to claims from other aggrieved persons such as potential client of client due to an alleged negligence.

Even if the claim is successfully defended, there may still be a large proportion of unrecoverable legal fees.

And if the claim is successful, without insurance, the company may be exposed to bankruptcy or liquidation.

7

What is PI Insurance?

PI insurance protect Insured against financial loss resulting from liabilities for breach of professional duty by reason of a negligent act, error or omission.

This insurance contract is comprised of an operative clause, terms, conditions, definitions of cover, and exclusions that outline the obligations between the insurance company and Insured.

8

PI – Source of Professional Liability

Common Law

Civil Code

Statute - Laws, rules, regulations etc passed by Government

Contract

9

PI Cover – Who purchase?

A. Commercial Organisations like;– Information Technology Service

companies– Property (real estate) managers– Accountants, auditors– Lawyers– Media companies– Management consultants– Architect and Engineers– Hospitals and Medical

Professionals

B. Financial Institutions like– Banks / Financial Institutions – Investment Managers / Fund

Managers– Stock Exchanges– Financial Consultants– Insurance / stock brokers

10

PI Policy – The Key Components

Cover for the firm or partnership for acts of negligence - or in some

cases broader civil liability/wrongful act language

Must arise out of the professional business of the firm or partnership

Responds to a claim made by a third party for compensation

Covers damages/settlement and defence costs

It is claims made cover

Circumstances and claims can be notified

Will contain a limit of indemnity and be subject to policy deductible

11

PI Policy – Various Professional Services

Some policy forms are drafted specifically for certain common types of professions; or

Miscellaneous PI form define services in the policy schedule –such as:

– Accounting and audit services– Architect / engineering– Supervision– Management consultant

Review to ensure definition reflects services that are performed by Insured

12

PI Cover – Civil Liability Wording

PI policies are broadened to provide cover for an insured’s ‘civil liability’ to a third party arising out of the insured’s conduct of their professional business or the provision of professional services.

Civil liability is liability of one party to another arising out of civil law, as opposed to criminal law.

13

PI Cover – Civil Liability Wording

There are four branches of civil law:

1. Tort law ( the common law torts of negligence, nuisance, and defamation);

2. Contract law (breach of contract)

3. Statutory law (eg the Trade Practices Act)

4. Equity - (a system of law based on the principle of ‘fairness’ designed to furnish remedies for wrongs which were not legally recognised or for which no adequate remedy was provided by the common law).

The policy only responds to civil liability for claims arising from the conduct by the insured of the nominated professional services stated in the policy schedule

14

PI Policy - Limit

Limit of indemnity is set as “Each and every claim and in aggregate”for any period of insurance

On payment of a claim the aggregate limit is reduced by theappropriate amount until the next renewal date

The cost and expenses incurred in the action can either be includedwithin the limit of indemnity or in addition to it.

15

PI Policy - a Claim Made Basis Policy

The Policy only covers Claims made during the Policy Period arising from Wrongful Acts committed on or after the Retroactive Date.

Policy allows to notify any circumstances which may lead to Claims in future. Such notified circumstances are logged in during the Policy Period and insurer of that policy period will need to pay any claims related to it.

Known Claims or circumstances before policy incepted are excluded.

16

PI Policy – Claim Circumstances

17

Retroactive Date

If Retroactive Cover is full - the Policy will respond in respect of Wrongful Acts committed since commencement of business.

If Retroactive Date is Specified - Policy will respond in respect of Wrongful Acts committed on or after specified retroactive date.

Subject to No Known Claims, Circumstances and Prior & Pending Litigation exclusion.

18

Optional Extensions

Loss of documents Extension

The Policy may be extended to cover the Assured for any reasonable costs and expenses incurred in replacing or restoring any Document which is lost, damaged or destroyed during the Policy Period.

However, Insurer will not pay for any loss brought about or contributed to by the dishonesty of the Assured’s Partners, Directors or other Employees.

Sub-limit will be applicable

19

Optional Extensions

Dishonesty of Employee Extension

The Policy may be extended to indemnify the Assured for any claim brought about, or contributed to, by the fraudulent, criminal or malicious act or omission of any person at any time employed by the Assured

The policy doesn’t cover any person, company or other entity who has committed or condoned the fraudulent or dishonest conduct

Sub-limit will be applicable

20

Optional Extensions

Indemnity to Employee Extension

In the event of a claim being made against any employee of the Assured or former employee of the Assured whilst acting within the scope of his employment with the Assured which, if it had been made against the Assured, would have been the subject of indemnity under this Policy,

Insurer will indemnify such employee in a like manner to the Assured.

Sub-limit will be applicable

21

Optional Extensions

Libel & Slander Extension

The Policy may be extended to indemnify the Assured for all legally liable to pay in respect of claims made upon them in direct consequence of any Libel or Slander committed by the Assured in their professional capacity.

Sub-limit will be applicable

22

Optional Extensions

Breach of Confidentiality Extension

The Policy may be extended to indemnify the Assured for claims made during the Policy Period arising from the unintentional breach of confidentiality.

Sub-limit will be applicable

23

Optional Extensions

Infringement Of Copyright Extension

This Policy may be extended to indemnify the Assured in respect of actions or claims brought against them arising out of inadvertent breach of confidential information, copyrights or the unauthorised use of or infringement of the systems or designs of others whether negligence is proved or not

Sub-limit will be applicable

24

Optional Extensions

Vicarious Liability Extension

The policy may be extended to pay on behalf of the Assured the Loss which the Assured becomes legally liable to pay as a result of a Claim alleging an act, error or omission by an Agent (Sub-consultant etc) of the Insured in the provision of Professional Services.

Insurer will not be liable under this extension for the Agent’s own liability, nor will insurer be prevented from seeking recovery from any Agent

Sub-limit will be applicable

25

Optional Extensions

Inquiries Costs Extension

Insurer will pay on behalf of the Assured the Inquiry Costs which the Assured incurs on its own behalf and with the prior written consent of Insurer in preparing for and attending an Inquiry

Provided that the notice requiring the Assured to attend the Inquiry is first served upon the Assured during the Policy Period and reported to Insurer during the Policy Period

Sub-limit will be applicable

26

Optional Extensions

Extended Reporting Period (ERP)

If a Change in Control occurs during the Policy Period then the Insured may request an extended reporting period of up to certain months commencing from the end of the Policy Period during which time the Insured may notify any Claim to Insurer provided it results from an act, error or omission committed or allegedly committed prior to the effective date of the Change in Control.

The Insured must request this extended reporting period before the Policy Period expires.

If Insurer decides to offer an extended reporting period, it may do so on such terms and conditions and for such additional premium as it may reasonably decide.

27

Common Exclusions

Contractual liability - this is liability assumed under any express warranty, agreement, guarantee or the like unless such liability would have attached anyway.

Personal Injury

Employer’s liability

Property damage

Insolvency/bankruptcy of insured

Circumstances known at inception

Fines and penalties

Claims by financially associated parties - some insurers will cover these claims if they emanate from a third party

28

PI Underwriting Process

Underwriting Information – To check

Proposal form, signed and dated

Revenue classifications

Past five years claim history

CVs of key staff

Press articles/ Internet search

29

PI Underwriting Process – Proposal form

There are specialised proposal form / questionnaire for certainprofession categories which would enable the underwriter to ratepremium as well as underwrite the business

Proposers profession should be described accurately andcomprehensively.

The date of business started is useful information– Well established firms are generally more attractive risks than new

firms

The experience of key personnel is critical and CVs might be required

Proposals form is to be duly signed preferably by a senior partner or director

30

Underwriting Considerations ?

Each Insurer will assess risks differently and may look at following;

Total income;

Required limit of indemnity and level of excess;

Risk profile of the business; and

Nature of the business

31

Underwriting Considerations ?

1. Continuity Risk (Past litigations or circumstances)

2. Claim experience

3. Staff experience

4. No. of staff

5. List of largest contracts undertaken in the past three years

6. Details of largest three contracts expected to be undertaken in the forthcoming year

7. Income from largest clients

8. Details where end product relates to overseas

9. Standard contracts used – copy brochures etc.

32

Coverage Consideration

How much limit of liability for Policy?

Sub-limits for various extensions– Loss of documents– Fraud & Dishonesty – Continuous cover– Intellectual Property Rights– Libel & Slander

Add on covers– Auto reinstatement – Discover period

33

Thanks