Professional indemnity insurance — known elsewhere as professional liability or errors and omissions (E&O) — is a form of liability coverage for specialists who provide professional advice or services to customers. In Australia, this coverage is mandatory for certain professions.

Professional indemnity versus general liability

Professional indemnity claims present a very different challenge than typical general liability policies. General liability policies are written to indemnify the policyholder against their liability in tort to the public at-large. If you examine the insuring clause of such policies, the language clearly requires the policyholder to be “legally liable” to pay “compensation” arising from property damage or bodily injury (or some similar wording).

To be liable in tort, the defendant must owe the plaintiff a duty of care, must have breached that duty of care in some material way and, as a result of that breach, there must have been bodily damage or property damage occurring directly therefrom.

In a general liability policy, there is typically an exclusion for any claims that arise out of a breach of professional duty or from advice given for a fee. This is because, in professional indemnity claims, liability usually arises out of a breach of a contractual term — leading to pure financial or economic loss, which typically does not arise out of bodily injury or property damage. Pure financial or economic loss is recoverable under contract, but not in tort. Thus, the policy needs to operate differently to reflect the closer nature of the relationship between the parties.

Policy distinctions

The language in the insuring clause of professional indemnity policies is notably different than what is seen in general liability policies. Professional indemnity policies typically say something along the lines of “liability arising from any act, error or omission arising out of the insured’s business activities resulting in financial loss.” The bodily injury or property damage requirement is absent.

There are other significant differences in the way the policies are written, such as when the policy responds or when a claim should be reported. General liability policies are written on an occurrence basis; the policy is triggered when a specified event occurs, such as when someone suffers injury or when property becomes damaged. The policy that responds is the one that is in-force when the damage or injury occurs.

Claims-made policies are different. Claims should be reported when the policyholder becomes aware of circumstances that may give rise to a claim, regardless of whether a claim has been made by the plaintiff. This is because there is often a latency between when negligent advice is given or services are rendered and the manifestation of the consequences arising from that act, error or omission.

For example, take a financial planner. If they provide advice on an investment product that is far riskier than their client’s risk appetite and the investment subsequently underperforms, they will cause the client to lose money. The manifestation of the consequences of that act, error or omission can take many years to manifest — even if the financial planner is aware, in the interim, that they have supplied improper advice. The financial planner is obliged to notify the insurers as soon as they become aware that they have supplied improper advice, not merely when their client subsequently makes a complaint or claim.

Actual and constructive knowledge

In practicality, knowledge of circumstances that may give rise to a claim typically occurs in a couple of ways:

• Actual knowledge: When a claim is presented to the policyholder, such as by receipt of a letter of demand, writ or summons.
• Constructive knowledge: Where no claim has been presented but the policyholder ought to be aware of circumstances that may give rise to a claim.

If the policyholder has actual or constructive knowledge of circumstances that may give rise to a claim and they fail to report it before the end of the policy period, and a claim is subsequently made, they may find themselves without cover on the grounds of nondisclosure or misrepresentation.

Specialist professionals, specific coverage

Professional indemnity policies are typically written to cover professionals that provide advice for a fee, such as lawyers, architects, engineers, doctors, accountants and financial planners. Because of the professional nature of the advice given and the likelihood of reliance on that advice by a very specific group of persons, significantly more underwriting considerations need to be made before cover will be offered. These include:

• The qualifications of the person giving the advice.
• The experience of the person giving the advice.
• Any prior claims of the person giving the advice.

In special circumstances where professional advice is given, a general liability policy is insufficient. Professional indemnity insurance provides more specific cover for the types of business activities undertaken by these policyholders. Beyond the financial protection, this coverage gives professionals added peace of mind, so they can focus less on claims that may arise and more on doing what it is they do best.

Sedgwick’s professional indemnity experts have insurance, legal and clinical backgrounds, so they’re well suited to manage these types of claims in Australia. Our team’s knowledge and experience help clients reduce costs, maximise resources, and achieve financially sound professional indemnity programs. For more on our liability capabilities in Australia, please refer here or contact Neil Wright.

This blog is part of a series in which our Australia experts are sharing their knowledge and expertise for the benefit of all in the industry. See the latest insights from our Australia team here.