What is professional indemnity insurance?
Professional indemnity insurance is a type of business insurance designed to protect professionals who offer advice or services in Australia. In the event that a client suffers a financial loss as a result of your actions, professional indemnity insurance provides cover for your legal costs and any payable damages.
How does professional indemnity insurance work?
In Australia, qualified professionals are legally required to provide advice and services to an acceptable professional standard. If a client believes you have not acted in a suitable manner, they may take out a negligence claim against you. Professional indemnity insurance works by:
- Providing cover for legal costs in the event of a negligence claim
- Providing cover for any compensation payable to the client if the claim is successful
This type of professional insurance can cover legal costs regardless of whether the claim is justified or not - some professionals may be subject to many such claims even where none are successful. Ultimately, professional indemnity insurance works by allowing you to maintain operation in your profession without restricting cash flow due to ongoing legal disputes.
Professional indemnity insurance and negligence claims
Negligence is determined in legal terms by a failure or breach of duty or care which results in damages to an individual or entity, either through carelessness on the part of the professional, or through lack of information or incorrect information presented to the client.
Professional indemnity insurance covers various forms of negligence claims:
- Inappropriate or inaccurate advice or information
- Mistakes made while performing a service
- Failure to deliver a service to an acceptable standard
- Failure to offer appropriate advice
How does a negligence claim affect a business?
Negligence claims do not need to be proven to be brought against a professional in Australia, the client only needs to believe the professional has acted negligently in their advice or services. While this does not mean all claims will be successful, it does mean a string of claims can prove costly to defend.
In this situation, expensive court proceedings and legal teams can limit your ability to operate, which ultimately will lead to greatly reduced profits. As reputation is also a core part of any professional’s services, ensuring proper cover will allow you to defend yourself sufficiently against any unjustified negligence claims.
Equally important is the issue of negligence as a result of employee carelessness. For example, you may offer quality legal advice to a client, but one of your employees may then fail to deliver crucial documents to the client.
What does professional indemnity insurance cover?
Professional indemnity insurance policies cover a range of costs associated with claims of negligence, including:
- The cost of legal fees
- The cost of damages
- The cost of any investigations resulting from a claim
Depending on your specific policy, you may also find professional indemnity insurance covers certain incidents specific to your profession, such as:
- Breach of duty
- Damages resulting from employee negligence or dishonesty
- Slander or libel cases for media professionals
- Breaches of trading acts, including consumer, competition, or Fair Trading Acts
- Personal defamation cases
- Failure to meet contractual liability
What isn’t covered by professional indemnity insurance?
In general, most types of insurance policy won’t cover incidents which arise as the cause of malicious or knowledgeable action. In the simplest terms, if you intentionally commit a breach of duty, you cannot claim cover through your policy. This includes:
- Employee injuries - this is covered under compulsory Workers’ Compensation Cover.
- Action which directly conflicts with Australian law
- Punitive damages as the result of excessive negligence
- Intentional damages caused by professionals with full understanding of the consequences
- Asbestos-related damages or injury
Example of what is covered by professional indemnity insurance
| Covered | Not covered |
|---|---|
Breach of privacy or confidentiality | Employee injury |
Intellectual property infringement | Intentional damage |
Defamation, slander, and libel claims | Contractual obligations |
Lost or damaged documents | Bankruptcy |
Claims investigation costs | Asbestos-related claims |
Breach of duty |
Who needs professional indemnity insurance?
Australian law provides clients the right to make claims on the quality and accuracy of any advice or service offered by qualified professionals. Anyone who works as a qualified professional in Australia, and offers advice or services as part of their profession, should consider the need for professional indemnity insurance.
In general, this may simply cover the cost of any legal proceedings and potential damages in the event of a successful claim, however certain inclusions and specific policies may be required for various professionals due to the number of potential liabilities they may face.
Some common professions and reasons for professional indemnity insurance include:
- Artists or graphic designers defending a claim for copyright infringement
- Journalists defending a claim for libel or slander in the media
- Accountants defending a claim for improper or inaccurate auditing of accounts
- Personal trainers offering advice which results in injury
- Financial advisers offering advice which results in financial loss
- Tradies defending a claim of failure to deliver adequate service
- Medical professionals defending a claim for historic negligence
Most Common Professional indemnity insurance by trade and profession
| Trades & Services | Professional Occupations |
|---|---|
Carpenter | Accountant |
Cleaner | Beauty Salon |
Concretor | Bookkeeper |
Couriers | Disabilities Assistant |
Electrician | Hairdresser |
Gardeners | IT Professional |
Handyman | Real Estate |
Home Builder/Renovator | Life Coach |
Mechanic | Management Consultant |
Painter | Massage Therapist |
Plumber | Migration Agent |
Tiler | Personal Trainer |
Professional indemnity insurance by business size
Professional indemnity insurance can be an essential form of protection for businesses of any size. Each type of business - from small startups to large corporations - face their own potential issues through negligence claims, and may require cover for various reasons.
Professional indemnity insurance for small business
- Limited cash flow and security
- Reputational damage can prevent growth
- Less-established processes
- Cheaper or unfamiliar equipment
- Limited knowledge in the professional field
Professional indemnity insurance for medium-sized business
- Greater number of staff, and therefore potential risk
- Reliant on growth to support both the business and employees
- Reliant on reputation to maintain growth and client relationships
- Reduced supervision of multiple employees
- Established databases with greater potential for information breaches
Professional indemnity insurance for corporations and enterprises
- Stricter regulations and operating procedures to adhere to
- Complexity of the business presents much greater risk
- Increased reliance on business continuity by staff and shareholders
- Wider customer base with greater potential opportunities for negligence
- Greater public visibility and reliance on a clean reputation
Top 5 reasons for professional indemnity insurance
1. Legal and professional body requirements
For some professionals in Australia, such as medical and legal practitioners, professional indemnity insurance is a legal requirement of practising or registration.
Other professional associations choose to subscribe to a Professional Standards Scheme (PSS), administered by the Professional Standards Council. A PSS limits the liability of professionals who fulfil all its criteria - one of which is that they have adequate professional indemnity insurance in place.
2. Personal asset protection
If a client makes a professional negligence claim against you, your legal costs alone could run into the tens of thousands - even if the claim is found to be baseless. If the claim is successful, you may be required to provide payment to cover the financial loss the client has suffered as a result of your negligence.
3. Professional reputation protection
If a client makes an allegation of negligence and initiates legal proceedings against you, the reputation of your business is severely at risk. A business could be irreparably damaged by a negligence claim, regardless of whether the claim is founded in truth.
4. Retroactive cover for past claims
Retroactive cover provides protection for professionals in sectors where claims can be made years after advice has been given or service provided. Retroactive cover may be unlimited, or may start from a specific date (in which case, claims relating to advice given before that date will not be covered).
5. Runoff cover for protection in retirement
Similar to retroactive protection, runoff cover can provide protection once you are no longer practising, i.e. in retirement. This extended cover is important for professionals in sectors like accounting, law and medicine where claims may be made long after you have given advice or provided a service.
How much is professional indemnity insurance?
The cost of all types of business insurance is called a premium, and varies between policies and insurers. To reduce the cost of premiums, business-owners can often combine several types of business insurance into a single policy which is tailored for their specific needs and cover requirements.
You can learn more about premiums and the cost of business insurance in our guide.
Other types of professional cover
Professional indemnity insurance is only one type of business insurance available in Australia, some of which are compulsory depending on how your business operates, including:
- Workers’ Compensation Cover
- Third party Personal Injury Insurance
- Public Liability Insurance
Where to get professional indemnity insurance in Australia
Professional indemnity insurance is available through authorised insurance companies. Alternatively, you may wish to speak to a licenced insurance broker to find you a suitable policy at the most competitive rate. Insurance brokers must be licensed and listed on the Australian Securities & Investments Commission's professional register.
Brokers will charge a fee for their services, however working with a broker can greatly reduce the time spent comparing insurance options, while ensuring all appropriate cover for a business is included in its selected policy.
Summary
Professional indemnity insurance is the equivalent of product liability insurance for service-based businesses. If you are a qualified professional providing advice or a service in Australia you have a legal responsibility to deliver that service to an acceptable professional standard.
If you make a mistake, or if a client suffers financial losses as a result of your actions, you could be sued for professional negligence. Professional indemnity insurance covers both the legal costs of defending a claim, plus the damages you have to pay to the client.
FAQs
What is covered by professional indemnity insurance?
Professional indemnity insurance covers financial loss, injury, and damage which results from negligence on the behalf of a professional in Australia. It can cover both the legal fees arising from a negligence claim, and the resultant reparative costs should the claim be successful.
Do I need professional indemnity insurance?
Some professionals require professional indemnity insurance by law, while for others it may be a requirement by the state or industry body. However, any professional who offers advice or services may be subject to a negligence claim, and this type of insurance is specifically designed to cover those costs.
Does professional indemnity insurance protect my employees?
In some cases, yes. Professional indemnity insurance protects you and your employees from damages resulting from negligence on their behalf. However, it does not protect you in the event of employee injury, which will need to be covered under Workers’ Compensation Cover.
Does professional indemnity insurance only protect my business?
No, it can also protect you personally. Not only does this type of insurance protect your reputation, it also prevents limited liability companies from being personally sued for damages. If the court finds you guilty of negligence, this means your home and other assets could be at risk.
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