Statistics reveal that in the UK three quarters of business owners fear making professional mistakes, yet the majority remain both unprepared and unprotected to attend to a compensation claim should it arise. This is according to Gillian Wolman, Head of Litigations at Risk Benefit Solutions (RBS).
Wolman says many South African professionals do not have Professional Indemnity insurance in place, which can be equivalent to running a business on a knife’s edge. “A professional’s work is constantly in the spotlight. Regardless of how careful you are, clients are becoming increasingly aware of their rights to hold a professional responsible for any damages or loss that they may incur.”
Recent research by a UK based small business insurance specialist, constructaquote, revealed that 64% of sole-traders and small business owners in the country don’t own Professional Indemnity insurance.
“Professional Indemnity is no longer a luxury but a necessity, and allows professionals to concentrate on their business’ operations with the knowledge that they are protected should a client claim for compensation due to the quality of their service or advice,” says Wolman.
Any professional providing professional services involving specialised knowledge or expertise – including advice, design, consultancy, opinion, or analysis services – requires Professional Indemnity, adds Wolman.
“Whether a doctor, lawyer or engineer – reputation is critical to the success of the business and individual as the business transaction is founded entirely on trust. The business’ longevity is based on the professional’s ability to provide a robust product and reliable service.
“Even seemingly indestructible business relationships can be broken via an error, whether avoidable or not, and the associated financial implication could be catastrophic for the client, business and even the professional.”
She says that in such an instance, this is where professional indemnity cover will provide the necessary funds and pay for the necessary parties to solve the issue at hand.
“Such cover can keep a business and its reputation intact.
“Without Professional Indemnity insurance, professionals could face hefty amounts of legal expenses and compensation damages which could potentially cripple most small to medium sized businesses. This is not to mention the loss of income due to the time spent defending the allegation, which could also ultimately cripple a firm.”
She points to the UK research to support her findings. “Of the 36% of respondents who indicated that they owned Professional Indemnity insurance, 35% of them stated that they purchased the cover as they knew others who had encountered a compensation claim without it, and lost their business as a result.”
Wolman stresses that professionals need to assess their risks and ensure that the availability of adequate Professional Indemnity insurance is in accordance with the professional’s conditions of engagement.
“There are various circumstances that can arise which are often overlooked by many South African professionals, thereby leaving them exposed. For example, while a professional might retire or change jobs, the advice provided to a client in the past is still in effect. In other words, clients are still making use of the advice sold to them, and should there be a breach or an omission, regardless of when it occurs, the professional remains liable even though he or she might not be practicing anymore.”
Wolman advises that when investigating Professional Indemnity insurance options there are a few circumstances to be wary of:
- The specialty of the cover should equate to the degree of expertise that the professional works in.
- When choosing an insurer, price should not be the only metric as low prices often have a costly alternative outcome. Furthermore, make sure that the insurer has a reputable track record and is likely to remain in operation for many years to come. Should that company go bankrupt, the personal indemnity cover will lapse, leaving a professional extremely exposed.
- Should the need arise to change insurers, it is highly unlikely that the new insurer will cover the professional for any existing claim, and any current claims prior to the insurer placing cover will need to be declared. The insurer will not process a claim if the client is found in breach of this clause.
- Professional Indemnity cover lapses as soon as the policy is cancelled. Even if the claim applies to when the policy was in place i.e. the error was made six months prior to the policy’s cancellation, the professional still will not be covered. It is for this reason why so many professionals continue to pay for the policies when changing careers or even after retirement.