How MUch Professional Indemnity cover is enough?
A million dollars might not be enough for professional riskAccording to CGU a million dollars sum insured is no longer always adequate for Professional Risks policies. They say, “for more than 20 years, for small to medium-sized professional practices, this sum has been considered a reasonable limit for Professional Indemnity, Directors & Officers Liability and Management Liability policies. But, there are many claims now exceeding $1 million, even for insureds with annual fees/revenue much less than that amount.”Claims records from CGU Professional Risks shows that of their 46 largest claims:· 16 incurred (claims yet to be finalised) amounts are equal to or exceed the policy limit, and · 11 of these claims were on policies with a sum insured limit of $1 million or less. The corresponding fee income of these insureds is also well below $1 million, showing that fee income is not a reliable indicator of an appropriate sum insured.Some questions to consider when considering sum insured:· In a worst-case scenario, if something went wrong, what would be the financial loss to third parties? · What is the potential for bodily injury claims, and even multiple injuries? · What is the potential for consequential economic loss to any third party? · What is the potential for multiple claims in any one policy year? (Note: the policy limit is in the aggregate but normally with an automatic reinstatement for PI policies.) · What is the level of potential legal and investigation costs which may be incurred by a successful claimant or claimants over the life of the claim? · What is the level of potential defence and investigation costs incurred by or on the Insured’s behalf over the life of the claim? · Is the policy limit inclusive of defence costs or not? · How long may a claim take to settle? Sometimes this can be eight to 10 years or longer, which means the legal costs and interest liability will mount, as will the effect of inflation. · How many parties are likely to be implicated in any claim or action? The more parties there are, the more difficult and costlier it is to settle a claim. · What is the nature, scale, and complexity of work done in the past and during the policy period? (Note: a policy covers exposure from past work where the retroactive date has been extended to do so.) · What is the overall contract/project value the Insured works on? The Insured may have a small part and only earn a small amount of fees, but their acts, errors or emissions could delay the entire contract/project. · How many prior years are there where risk exposure may arise? In some cases it may take years before a liability becomes apparent to the Insured. · What is the exposure from incoming principals’ risks at prior corporate entities, or merged or acquired entities? In general, CGU asserts, a sum insured of less than $5 million is unlikely to be adequate for even a small practice which assesses its exposure as low.