A question frequently asked by consumers is ‘What limit of Professional Indemnity insurance do I need?’
While this is a difficult question to answer, there are some guidelines that you can use when making your decision.
If you belong to a professional association, it is always a good idea to contact the association and check whether there is a minimum limit of Professional Indemnity Insurance you are required to maintain to comply with their compliance requirements.
They may also be able to provide guidance on matters such as this based on their expertise in your specific industry and their experience with other members.
In addition to guidance provided by a professional association, there are other factors to be taken into consideration when selecting an appropriate limit of Professional Indemnity Insurance. These include:
The size of your largest client or contract
While your earnings from a specific contract may appear minimal, the overall size of the contract itself can give a more accurate picture as to the full financial exposures in the event of a total loss.
The potential scope of your advice – how many people are relying on it?
This is particularly relevant to people providing any form of financial advice. While you may be providing advice in regards to one financial product, this financial product will have multiple clients. Multiple clients will mean multiple claims and needs to be taken into consideration when selecting an appropriate limit of Professional Indemnity Insurance.
When considering what limit of Professional Indemnity Insurance will be adequate, it is important to take into account the costs associated with defending an action. Some policies include the Defence Costs within the limit of Professional Indemnity ; some provide Defence Costs in addition to the limit of Professional Indemnity insurance. You need to ensure your limit of Professional Indemnity Insurance is adequate to encompass both the claim and the costs in defending it.
The nature of a ‘Claims Made Basis’ policy
The very nature of a ‘Claims Made Basis’ policy means you need to consider not only your current professional activities, but also all your past activities.
In addition to maintaining a limit equal to all past and current activities, factors such as inflation and an increase in interest rates need to be accounted for. What may have resulted in a financial loss of $500,000 several years ago, is likely to be substantially higher now.