Professionals have a duty to offer ‘reasonable skill and care’, as part of the service they provide. If they fail to exercise this duty and are subsequently proven to be negligent and if any loss is caused, they may be liable for the losses incurred by their customers or other third party. No matter how good professionals are at their jobs or how good their attention is on detail , there is always the potential for small mistakes to be made. Proving innocence may cost and it pays to be protected.

Professional indemnity insurance offers indemnification to professionals who provide advice or services to their customers against legal liabilities arising from acts, omissions or breaches in the course of discharge of their professional duties. In simple terms, this means that if a professional does something or omits to do something in the course of his/her work, and the principal suffers injury or financial loss as a result, professional indemnity insurance responds. This policy is also known as Errors& Omissions (E&O) Liability insurance policy.

Professional liability insurance policies are generally issued on claims-made basis, meaning that the policy only covers claims made during the policy period. Claims which may relate to incidents occurring before the coverage was active may not be covered, although some policies may have a retroactive date, such that claims made during the policy period but which relate to an incident after the retroactive date (where the retroactive date is earlier than the inception date of the policy) are covered.

Common claims that professional liability insurance covers include negligence, misrepresentation, violation of  good faith and inaccurate advice.

An indicative list of examples is given below:

  • Architects: Architects may be liable for incorrect drawing of plans, designs or specifications as well as incorrect advice.
  • Engineers: Engineer may be liable if they do not design an air-conditioning / heating system correctly resulting removal and redesigning of the system
  • Accountant and Auditors: They may be liable for negligence if they overlook information and if they make statements which they fail to substantiate
  • Medical Professionals; When the treatment goes wrong resulting in death, bodily injury, side effects or worsening of the existing condition, medical practitioners ,ay be held liable.
  • Information Technology companies: In the Indian context, IT companies form sizeable number of PI policy buyers. Some of the actions resulting in exposure for them:
    • Failure to complete and deliver crucial components.
    • Failure to test and implement the applications and systems as promised.
    • No tool in place to run regression and performance tests and very insufficient unitary tests and inexistent integration tests.
    • No procedure for life cycle management
    • Software fails, client can’t offer services online as anticipated
    • A routine test on a client’s system causes a crash resulting in lost business.
    • Software corrupted, data destroyed resulting in lost business/increased cost.
    • Software fails, resulting in lost time and production & lost revenue.
    • Failure to back up customer’s data or inadvertent erasure of client’s hard drive

PI policy affords protection against liability arising from actions connected to insured person’s professional duties. The policy provides indemnity in respect of:

  • Legal costs in defending proceedings brought against them alleging wrongful acts.
  • Any damages awarded to the claimants including out of court settlements

As in the case of other insurance policies, this PI policy also has extensions and exclusions which need to be clearly understood before the commencement of cover so as to avoid contract unpredictability.

(The information contained and ideas expressed herein represent only a general overview of subject covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisers regarding specific coverage and/or legal issues)