How to Avoid Underinsuring Your Professional Services

Tara Burke — Wed, 01 May 2024 05:42:25 +0000

Underinsurance is a silent risk for Australian businesses and it’s not just about insuring physical assets. If you hold Professional Indemnity insurance with an Average Provision clause, without setting accurate sums insured, your business could be exposed to significant risk of underinsurance. When your business has inadequate cover for your assets, the co-insurance clause may leave you uncomfortably out of pocket.

A quick recap on Professional Indemnity Insurance

Professional indemnity insurance (PI Insurance) is most common in businesses that offer advice and services for a fee. That’s because their advice can significantly influence people’s decisions and actions.

For example, a client may use your services and suffer a financial loss as a result of your advice. They may take legal action against you. Your PI insurance policy can assist with the defence costs and any compensation you must pay.

How to Avoid Underinsurance for Professional Services

What is the Average Provision?

The average provision is the percentage of costs the insurer will pay towards your legal defence and settlement costs. Your sums insured amount dictates this percentage, therefore it’s critical to set realistic dollar limits.

While you may save on premium costs with lower sums insured, you may be significantly out of pocket later. That’s underinsurance. Setting the optimal level of cover helps.

When does Average Provision apply?

It applies to Professional Indemnity Insurance policies or PI Insurance policies that contain a defence cost exclusive indemnity limit. That means the policy includes provision for the insurer to cover any reasonable costs. Costs such as defending, investigating, responding to, or settling a claim including the legal costs.

Will the Average Provision apply when I make a claim?

It applies when the compensation payment you must make to resolve a claim exceeds the sums insured limits in your policy. The Average Provision calculates the percentage of your costs that the insurer will cover. At this point, the dollar limit (sums insured) amount is vital.

For example:

Say you have a PI Insurance policy with a defence costs exclusive indemnity limit. You decide to set the limit at $1m with an Average Provision clause.

A third party takes legal action against you. So, you make a claim under your PI insurance policy. The legal action settles on a $2m compensation payment to the third party.

As your policy limit is $1m, it only covers 50% of the amount owed to the third party.

Therefore, the Average Provision states that your insurer will only cover 50% of the costs.

That means the insurer pays 50% of the compensation amount. However, it also means the insurer pays 50% of the costs associated with defending the claim.

The table below shows the breakdown.

A recap on PI Insurance limits, inclusions and exclusions

Professional indemnity claims can be expensive. Therefore, adequate insurance coverage helps cover the costs of claims. Your policy may help cover the cost of legal advice, investigations, public relations advice and compensation payments.

Typical exclusions from a PI policy may include intentional damage, bankruptcy, bodily injury or property damage.

Your PI insurance may include an Average Provision clause which dictates how much insurers pay. We’ll go into this in more detail now.

Ask your insurance broker to explain the inclusions, exclusions and limits within your PI insurance policy.

Your Policy Limit	$1,000,000
Third Party Compensation Payment	$2,000,000
Limit minus compensation amount	-$1,000,000 (or 50%)
Average Provision for the Insurer	50%

Insurers 50% Average Provision contribution to Third Party Compensation	$1,000,000
Your Gap Payment to Third Party Compensation Payment	$1,000,000

Your Total Costs to Defend the Claim	$750,000
Insurer’s50% contribution to your defence costs	$375,000
Your Gap Payment for your defence costs	$375,000

Total Out of Pocket Costs to You	$1,375,000

In the example, the business must pay $1,375,000 to cover the gap.

How to increase your Average Provision

Accurate sums insured can increase the average provision the insurer pays. However, it can also increase your insurance premium. Your insurance broker can help you set the sums insured limits for your business needs and cash flow.

How do I check my professional indemnity insurance?

You can talk to an insurance adviser at any time about your insurance program and the risk of underinsuring. You don’t need to wait until renewal time to make a change.

The adviser can take you through your current insurance program and explain your risk exposure.

They can reassure you that all is well. If your risk exposure is too high, your broker will explain the options available to you. Which may include transferring your financial risk to insurance. Otherwise, your broker may explore other ways to reduce your risk exposure.

Good advice supports and protects your business success. So, find a broker that you feel you can trust.

Professional Indemnity Underinsurance FAQs

What is the Average Provision?

It’s a clause that reduces your claim payout if you’re underinsured. If your policy limit is half of what it should be, you’ll only get half your claim paid even if the claim is well within your limit. The rest comes out of your pocket.

How much PI cover do I actually need?

It depends on your revenue, the work you do, and what your contracts require. Some professions have minimum regulatory amounts, but the real question is: what’s your actual exposure? An adviser can help you work through the scenarios specific to your business.

Does every PI policy have an Average Provision?

No. Some policies are “defence costs exclusive” meaning legal costs sit outside your limit and the Average Provision usually doesn’t apply. Others include defence costs within the limit and often have the clause. Check your policy wording or ask your broker which applies to you.

What if I’m underinsured when a claim hits?

You’ll wear the shortfall: both the settlement and defence costs. That could mean hundreds of thousands out of your business, even when you thought you were covered. It’s not theoretical; it happens.

Can I increase my cover mid-policy?

Usually, yes. If you’ve taken on bigger clients or higher-value work, talk to your adviser about adjusting your limit. It’ll cost extra premium, but it’s better than finding out you’re underinsured after a claim lands.

Need Good Advice?

Clear Insurance makes insurance easy for you with clear, practical advice. We work on for a fee-for-service, zero-commission basis.

Should you wish to discuss your insurance program, contact the Clear Insurance team today.

General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

Clear Insurance Pty Ltd. ABN. 41 601 916 689. AFSL No. 548953.

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Last Updated: 20 May 2026

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