Considering cancelling your PI policy?
If you are closing or selling your business, retiring from your profession or looking to cut costs during a business downturn, some businesses may be considering cancelling/lapsing their Professional Indemnity Insurance.
Before cancelling or letting your policy lapse, it is important to be aware of the possible risks involved.
How Professional Indemnity works
Unlike other forms of insurance, Professional Indemnity (PI) insurance operates on a 'claims made' basis. This means that your PI policy must be active, and in force at the time when you are made aware of a claim or a claim circumstance - regardless of when you undertook the work or provided the professional service.
This means that when a claim arises, there must be a policy in place at the time in order to receive financial protection against any damages or legal expenses that may result from the claim.
What are the potential risks if I cancel my PI cover?
Due to the 'claims made' basis of PI policies explained above, if you choose to cancel your policy or let it lapse without renewal, you will have no cover for any work and professional services you have undertaken in the past.
Should a business not have cover at the time of a claim, it would be left to incur the potential associated costs and damages. If a business is in a position where it is unable to afford these expenses, business and personal assets may be exposed to significant loss.
Potential costs can include:
- Legal defence costs - regardless of who is at fault, defending yourself and your business can be very costly.
- Damages Payable - if you are found to have been at fault for the third-party loss or damage that resulted in the claim, you could be required to pay considerable damages to those affected.
PI insurance is also a mandatory requirement for some professions in Australia such as solicitors, financial advisors, healthcare professionals and engineers. Therefore, letting your PI policy lapse can also put you in breach of your professional licence obligations in your state and territory.
If PI insurance is not mandatory for your profession, maintaining active PI cover may be a condition of membership with professional bodies or franchise groups.
It is also common for clients to require this type of cover before they hire you and it can be written into work contracts. Failing to maintain your PI policy in accordance with your contractual obligations can mean a breach of your legal contract.
Can I take out PI cover for past work or to include a temporary lapse in cover?
If you elect to cancel/lapse your PI policy, with the intention to take out cover in the future, it will be very unlikely that a future insurer will provide cover for your past work and past professional services.
If there is a gap in cover, insurers will likely set the retroactive date in the PI policy from the date the new policy is taken out, meaning you will only be covered for work and professional services moving forward from that date, excluding any historic period due to the gap in cover.
What if I can't afford the insurance?
If your business is continuing to provide professional services either now or in the forseeable future, it is strongly recommended that you consider keeping your PI cover active.
Your insurance broker can look at ways to help you reduce your costs. This may include considerations on the policy limits and deductibles on the policy.
You can also consider premium funding (monthly payments) which may help businesses experiencing cash flow problems.
What if I am closing my business or retiring from my profession?
If you are closing your business or retiring from your profession, you should strongly consider arranging 'Run-Off' coverage under your PI policy.
Even if your business has wound down or you are no longer providing professional services, you still carry an ongoing risk of receiving a claim for damages as a result of your past work and past professional services.
Therefore, it is important that businesses maintain continuous PI cover.
In Australia, the limitation period to bring an action of a claim of professional negligence varies between 3 to 7 years depending on the statutory legislation applicable in each state.
Run-Off cover is a form of PI insurance that provides cover only for past work between dates clearly specified in the policy schedule. It does not offer any protection for new professional services provided.
This form of cover can typically be more expensive than a traditional PI policy as it can cover a longer period (up to 7 years). Run-Off cover can be considered on an annual/yearly basis, or some insurers can offer multi years of coverage upfront, i.e. up to 7 years.
How Coverforce can help
At Coverforce, we understand the exposures faced by businesses and the professionals that work within it. Our expert insurance brokers will work with you to provide personalised risk advice tailored to your profession and quality PI insurance cover at competitive rates. Contact your local Coverforce Office or call 1 3000 COVER to find out how we can help you.
The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact Coverforce directly.
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