Practicing as a professional in today's financial world can be both exhilarating, and at the same time risky. Exposure is expensive, time-consuming litigation from disgruntled clients is a real threat. It is crucial that every professional ensures his or her activities are covered by a professional indemnity insurance policy.

SOME COMMON QUESTIONS ASKED ABOUT P.I. INSURANCE

1. Who is a professional?

Anyone who gives to another person advice and/or services of a skillful character according to an established discipline might be regarded as a professional. That means persons other than those in traditional professions, such as doctors and lawyers, are now considered to be professionals i.e. computer consultants, advertising agents, acoustics consultants and trade associations.

2. What protection will a professional indemnity policy provide?

A professional indemnity policy aims to shield the professional's assets in the event of a claim, ensuring that he/she is able to carry on their business. Every policy on the market is different. You need to compare each policy.

3. What is a claims made policy?

A 'claims made' policy requires all claims to be notified to the insurer within the period of insurance. The actual mistake could occur at any time, if there is unlimited retrospective cover, or otherwise it must occur during the period of insurance. The insured must not have had any prior knowledge of a fact, situation or circumstance before the period of insurance, which relates to a claim which may be made against the insured.

Claims and claims arising from a 'known circumstance', occurring prior to the period of insurance, are normally excluded from a 'claims made' policy.

In an occurrence wording (as for Public Liability policy wordings), the circumstances must occur during the period of insurance whilst the notification of this event can occur at any time subsequently.

4. What is a 'known circumstance'?

A 'known circumstance' could be defined as any fact, situation or circumstance, which a reasonable person in the insured's professional position would have thought, might result in someone making a claim against him/her.

Therefore, if a claim arises after the policy starts (the policy inception) from a fact, situation or circumstance that the insured knew (or should have known), at the time of the start of the policy might give rise to a claim, it will normally be excluded as it arose from a 'known circumstance'.

SOME PROFESSIONAL INDEMNITY INSURANCE CASES

1. Negligent design/advice

Fact: The insured was the design architect for a new warehouse for a scaffolding hire company. The insured's design provided for a suspended floor slab and the insured sub-contracted the design of the slab to an engineer. Because of the weight of the scaffolding in storage, the slab required to be specially strengthened, but was designed by the engineer at the minimum strength provided in the building regulations for a warehouse floor slab. When the error was discovered, the slab had to be re-built at a cost of over $600,000. The owner sued the architect and the engineer. The claim was compromised for a payment of $600,000, $350,000 paid by the engineer and $250,000 paid by CGU on behalf of the architect.

2. Negligent advice

Facts: The insured real estate agent was engaged to sell a town house in a Sydney suburb. The vendor insisted on a private sale and nominated a high sale price. The agent found several potential buyers at a lower price, but the vendor rejected their bids, insisting he would not sell below his nominated price. After some months, the agent found a buyer at that price and the property was sold. Shortly before settlement, an identical town house in the same development was put up for sale by auction and sold for $100,000 more.

The vendor threatened to sue the real estate agent. The vendor claimed that the agent should have appreciated that in the heated Sydney property market, the vendor was likely to achieve a better result by going to auction than through a private sale and should have recommended an auction to the vendor, notwithstanding the vendor's instruction that he wanted a private sale.

3. Alleged negligent supervision

Facts: The insured was engaged as the project manager of the refurbishment of a double storey office building, which included laying new carpet on the stairway connecting the office floors, with a metal strip with a rubber insert on the nosing of each stair.

A visitor fell down the stairs and was badly injured. She claimed that the heel of her shoe had caught on the raised edge of a metal strip which was missing its rubber insert.

The visitor sued the building owner which in turn sued the carpet layer and the insured. The carpet layer was uninsured and without assets. It was alleged the insured, in conducting an inspection of the work, should have detected that the metal strip was raised and did not have a rubber insert.

4. Breach of confidentiality

Facts: The insured was a personnel agency. X lodged his resume with the insured and at the same time disclosed he had a medical condition. The insured sent the resume to prospective employers and disclosed to them the existence of X's medical condition. X sued the insured, claiming he had not authorised them to disclose the medical condition.

5. Breach of copyright

Facts: Unknown to the insured, one of its employees had copied and used an overseas company's product to create a new software system for the insured's range of products. Copyright in the original program was owned and registered by the overseas company. The new product was then marketed and sold under the insured's name. The overseas company, after becoming aware that this derivative version was being sold in the local market, brought a claim against the insured alleging breach of copright and loss of profits and reputation.

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