STATE OF THE MARKET: PROFESSIONAL INDEMNITY INSURANCE
Professional Indemnity cover is a must for many professions and businesses but obtaining cover can be complicated.
For many professions – from lawyers to real estate agents, architects to GPs, miners to accountants – and under many contracts, Professional Indemnity (PI) insurance is a requirement. Essentially any self-employed person or business that provides specialist services or gives advice to a client in a professional capacity could be held liable for losses the client suffers as a consequence of that advice.
Despite utmost care, sometimes mistakes and lack of judgement can happen in the workplace. A PI claim could arise from any number of circumstances including:
- breaching a duty (e.g. privacy, confidentiality and fiduciary duty)
- providing faulty advice
- being negligent in rendering professional services
- providing poor, incomplete or incorrect work
- making mistakes or oversights
- accidently making omissions
- breaching consumer, competition and FairTrading acts
PI insurance (also known as E&O or Errors & Omissions) protects professionals against claims of malpractice, negligence, professional misconduct or breach of duty made by a client who suffers a financial loss or other damage as a result of receiving professional advice or services from the business. The insurance covers legal liability for claims arising from an act, error or omission of duty by the professional. The policy will generally cover:
- damage and compensation costs against the insured
- legal and court fees
- public relations fees (to help protect the insured’s reputation)
- investigation costs
Property damage and bodily injury are often excluded under PI policies as these are usually covered under Broadform Liability.
While PI insurance is mandatory for some professions and stipulated in some contracts, obtaining cover is becoming increasingly difficult.
Much like Directors’ & Officers’ (D&O) and Management Liability covers, the PI insurance market is being impacted by increasing litigation, a rise in royal commissions, inquiries and regulatory activity, and the losses being suffered by insurers that offer cover.
“The PI market has been hardening in the past couple of years, with many insurers reluctant to offer cover because of tougher regulations and increased legal action. Now COVID-19 is seeing things become even tighter as insurers ‘err on the side of caution’,” said Ryan Cameron, EBM Director – Broking.
“As a result, it is harder for insurers to predict market conditions in terms of pricing, coverage and capacity. This makes it difficult for brokers to secure cover for clients with a limited number of insurers providing cover in various industries, lower limits available and increased premiums.”
The fact is the PI market is unprofitable for insurers.
Statistics from the Australian Prudential Regulatory Authority (APRA) revealed the gross loss ratio at year-end March 2020 was 98%, and a 2% margin is simply not viable. The year prior, the gross loss ratio was 108%.
Towards the end of 2018, Lloyd’s of London undertook an extensive review of the worst-performing classes of insurance. PI was identified as one of the least profitable lines and resulted in a significant drop in capacity for Australian clients as a number of Lloyd’s syndicates were forced to exit the market. Since then, many of the syndicates that have continued to underwrite PI insurance have reduced the limits they are prepared to offer and are being selective on risks – the industries they are prepared to insure as well as individual risks within those sectors. Numerous Australian insurers have followed suit, withdrawing cover for some professions, changing policy terms and conditions, reducing breadth of cover and increasing premiums/deductibles.
Figures from APRA showed PI premiums saw an average 42% increase between March 2019 and March 2020. Some professions faced premium increases of 50-75%. For those in high-risk sectors (such as AFSL advisers in the wake of greater regulation post-Hayne Royal Commission, and those in the building/engineering industries given issues with combustible cladding products), premiums skyrocketed up to 200%. For many, it simply wasn’t available at all. Practically all areas of professional services and any business giving advice experienced premium increases.
The number of claims has also risen. KPMG notes gross incurred claims totalled $2.247bn in June 2020, up from $1.978bn in June 2019. Insurers are expecting COVID-19 will result in a significant rise in PI claims due to economic uncertainty and as losses are crystallised in a recessionary market.
“As an industry, we expect PI insurance underwriters will continue to be very risk selective on both renewal and new business,” Ryan said.
“The truth is that insurers are more willing to walk away if the risk is too great or they can’t charge the premiums necessary – and this poses a problem for businesses that need PI cover to fulfill contract obligations.”
With limited PI coverage available, it is important for businesses to review their contractual obligations in terms of the requirements for PI insurance.
“EBM’s contract review service is available to our clients to ensure they understand what insurance cover is required as part of any contract,” said Ryan.
“Liability obligations can be buried deep in a contract between principals, contractors and sub-contractors, and the exclusions detailed in many PI policies can often mean the policyholder doesn’t actually have the cover they need.”
“The contractual liability review helps our clients really understand their contractual indemnity obligations so we can seek the best and most appropriate cover to meet those requirements. Alternatively, we can advise our clients about what changes to the contract are needed to ensure their current insurance program is compliant.”
EBM works with clients to help secure the most competitive terms for the liability covers they need. We do this by understanding their business’ risk profile (exposures and mitigation strategies) and clearly articulating this to insurers.
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