As a business owner, your enterprise is one of your most valuable assets. Therefore, it makes sense to take the necessary steps to protect it.

In Australia, inadequate cash flow is the primary reason small businesses fail. [1]

Which highlights the importance of having a robust risk transfer strategy in place, which may include transferring risks to insurance to safeguard against financial losses. 

“1 in 10 Australian small businesses with insurance don’t have enough cover to protect themselves.”

The importance of a comprehensive risk transfer strategy

Insurance is a risk transfer tool that businesses can use to safeguard against financial losses when the unexpected occurs, such as loss of income due to equipment breakdown or storm damage. A well-designed risk transfer and insurance program can help safeguard your business against unexpected financial losses and build resilience for your business during challenging times.

Did you know that ‘one in ten Australian businesses with insurance don’t have enough coverage to protect the business from the losses associated with business disruption, legal liabilities, or loss or damage to assets [2]? It highlights the potential risks associated with underinsurance.

Understanding underinsurance: Is it a risk you can afford?

Underinsurance refers to having inadequate insurance cover for your business, increasing the risk of severe financial strain if something goes wrong. The temptation of low premiums can lead business owners to overlook adequate insurance protection.

• Outdated Coverage: If you have not updated your insurance to reflect recent or future business growth, you may make your business vulnerable.
• Inaccurate Replacement Valuations: Underestimating the repair or replacement of equipment or other business assets can lead to significant out-of-pocket expenses following a storm, fire or other claimable event.
• Inadequate Sums Insured: If financial limits (sums insured) are inadequate, it may expose the business to financial losses following management or legal liability claims, or business interruption events.

The impact of proper insurance cover

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.

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Managing Director Lisa Carter says, “I founded Clear Insurance 12 years ago as an Insurance Advisernet Corporate Authorised Representative following an 11-year career with AON, which included being an Authorised Representative to AON for 7 years. I’m incredibly thankful for my time with Insurance Advisernet. It’s a great organisation and continues to be one of Australia’s leading Authorised Representative networks.”

“For us, it was time to step out of the AR model and continue to build Clear Insurance as a stand-alone business in partnership with the Steadfast Group. We’re delighted to have the support, resources, technologies and strength of Steadfast behind us as AFSL Holders.”

Clear Insurance remains steadfast in its commitment to providing professional advice to clients on a transparent fee-for-service remuneration model.

Lisa says, “Our focus is, and always has been, to delight clients with clear risk and insurance advice and a transparent approach to remuneration. We charge fees commensurate with our work to support our clients’ success. Our approach reinforces our value as business advisers, so we’re not interested in under-cutting our competitors or driving clients to make price-focused decisions which may risk under-insurance. It’s simply not in the client’s best interests.”

“We do it the Clear Way. We believe in transparency and nurture relationships with our people – our clients, team, insurers, and industry partners – they’re our people,” said Lisa.

Lisa remains focused on our steady growth and devoted to our goal of attracting, nurturing, and retaining the next generation of elite risk and insurance advisers.

“Our goal is not to build another AR network in an already saturated marketplace. Our goal is to meet client needs and present insurers with high-quality, reliable business by continuing to build a highly coveted and rewarding workplace for our team – from a personal, professional, and financial perspective. We bridge the gap between the big international companies and the AR networks by offering motivated professionals unique career opportunities with better work-life balance,” says Lisa.

“We’re passionate about work-life balance and actively encourage good health and wellbeing for our team members. When you feel good, you have a stronger mindset to reach your personal and professional development goals. Our supportive team environment enables us to have our cake and eat it!”, Lisa continues. “I’m delighted that Clear Insurance has the solid foundations to support a stable and transparent future. It’s clear, the transition from transactional broking to professional advice is rapidly becoming a sustainable pathway for the future.”

“We’re fortunate to have the resources to concentrate on the satisfaction of our people – clients, staff and industry partners – and attract insurance professionals that want to learn the Clear way”, says Lisa.

You can learn more about becoming part of Clear’s future on our careers page or contact Lisa Carter.

So, what is PI insurance, and why do you need it?

PI insurance is a specific cover designed to protect an individual, organisation or business providing professional advice or services to a third party, especially for payment.

The PI insurance policy provides the financial resources to cover claims. It sets out the maximum the insurer will pay out. Importantly, it’s for claims made against your business because of an error or omission in your advice or services that cause a customer or third party to suffer a financial loss.

Therefore, a hospitality business will need PI insurance if it engages in other revenue streams that include advice or services for a fee, such as offering formal training or contractually managing other venues.

Seeking professional risk and insurance advice is critical to help you decide whether you need the policy and to ensure the policy amounts cover your business risk.

Here are five factors that may determine the maximum amounts specified in the PI policy and the premiums you pay:

1. Type of Professional Advice & Company Income

Different types of advice and services generate different levels of risk exposure. Therefore, your level of risk exposure depends on the kind of service and advice you provide. As such, it’s essential to understand where and how claims may arise from your specific type of advice or service.

Secondly, your company income affects your level of risk exposure. When your business generates a high income from its advice or service, it increases your exposure risk to multiple claims within the same policy period.

Examples:

The risk exposures for a bookkeeping service earning $50,000 are less than an accounting firm earning $2,000,000 for its financial planning and taxation advice.

The risk exposures for a hospitality business that also earns professional fees of $200,000 as a formal training facility has lower risk exposures than an established hospitality business that’s engaged to operate another venue turning over $5m in income.

Qualified risk and insurance advisers use their experience to help identify real-world situations that can cause a financial loss to one or more customers because of your advice or service.

2. Your Customer

Your level of PI coverage depends on who is receiving the advice or services you provide.

If, say, your primary customers are multi-million-dollar companies. Your PI requirements are higher than a business whose direct customers are individuals or small businesses. That’s because the potential financial loss suffered by a multi-million-dollar company is substantially higher than that of an individual or small business.

Example:

A large RSL has a contract to operate a smaller licensed club with an $8m turnover. The large RSL receives $300,000 per annum as part of the contract.

The large RSL’s PI policy limit was $1m. A risk review determined the limit was too low for adequate protection and recommends an increase to $5m. The outcome is a 47% premium increase to protect cash flow and reduce potential out-of-pocket costs for claims.

3. Potential Value of Loss to One or More Customers

With improved clarity on the risk exposures for your services, your adviser can negotiate the PI insurance policy limits and premiums on your behalf. The adviser and insurer take into consideration the following:

• The maximum financial loss a single customer could suffer from a single event or series of related events.
• The maximum financial loss multiple customers could suffer from a single event or series of related events.

4. Legal Fees

Unlike Public & Products Liability insurances, insurers may not pay legal defence costs under PI policies in addition to the limit of the liability selected. In such cases, you must work with your adviser to ensure that the limit you purchase is sufficient to cover compensation amounts awarded to third parties and your legal defence fees.

Selecting a policy that pays legal defence costs in addition to the limit of liability is always best.

5. Automatic Reinstatement

A PI policy with automatic reinstatement automatically restores your financial limits once used.

So, what does this mean? Say you have a claim limit pot of $1m, but a claim uses it all up. If your policy has automatic reinstatement, the insurer will refill your $1m claim pot to protect you against future claims in the same policy period.

A quality PI policy should include at least one reinstatement as standard. After considering all the factors, your adviser can help you decide how many automatic reinstatements suit your business needs and risk profile.

Where can I get advice on PI insurance for my hospitality business?

Clear Insurance offers a risk review on a fee-for-service basis. It will assess your existing insurance program against your company risk profile for peace of mind.

You may find the review highlights a gap in cover; in that case, you will gain clear recommendations to guide your next steps.

Contact our team today to book your risk review.

That’s where professional indemnity insurance can help.

So, here are five things to know about Professional Indemnity Insurance.

1. What is Professional Indemnity Insurance?

Professional Indemnity insurance, or PI insurance, is a policy designed to protect an individual, organisation or business providing advice or services, especially for a fee.

It provides the financial resources you need to respond to any claims made against you because of an error or omission in your advice or services.

Suppose a client uses your services. They then suffer a financial loss due to incorrect advice provided by your company. The client can claim against you. The professional indemnity policy will assist with the cost of defending the claim and the payout, if your business is found negligent.

2. Who typically needs Professional Indemnity insurance?

The most common types of organisations and businesses that need professional indemnity insurance are:

• Accounting Professionals
• Legal Professionals
• Real Estate Agents
• Consultants
• Brokers
• Engineers
• Architects and Design Professionals
• Educators
• Health and Fitness Professionals

That’s because these professions provide advice for a fee. Importantly, they can significantly influence the decisions and actions people take.

For example, suppose an engineer designs a building. Should that building collapse and harm multiple people, they can each make a claim. The PI Insurance policy can help cover the costs of the claim.

3. What types of claims trigger PI Insurance?

Typical claims that trigger professional indemnity insurance could include the following:

• Professional negligence, such as providing the wrong advice
• A breach of a client’s confidentiality
• Supplying misleading or unfinished work
• Failing to provide a promised service
• Leaving out important information
• Defamation or dishonest behaviour
• Violation of copyright or trade practices
• Loss of a client’s documents or data
• Loss of client’s money or goods

4. What’s covered by PI Insurance?

Professional indemnity claims can be expensive, time-consuming, and incredibly stressful. Typically, a professional indemnity policy includes the financial resources to pay for items such as:

• Legal Advice
• Legal Defence
• Claims investigations
• Reputational advice, such as public relations guidance
• Payments awarded to clients for damages and settlements

Just because you have a professional indemnity policy, it does not mean your policy automatically covers you for everything. Always take the time to understand what is and isn’t included.

For example, not all professional indemnity policies include legal costs. So, suppose you have a claim against your business for negligent advice. You’ll be out of pocket if the policy does not include legal fees.

It’s vital to ensure you work with a professional risk and insurance adviser to set the correct financial limits within the policy. With the proper financial limitations, you should have adequate financial resources to cover the worst-case scenario.

While the cost of premiums can seem expensive, they are small compared to the cost of any legal defence fees and financial penalties you may incur.

5. What will PI insurance not cover?

Like all insurance policies, there is often a list of exclusions. So, for professional indemnity, these typically include:

• Contractually agreed on costs or expenses
• Accidents or incidents that arise before your policy starts
• Intentional damage or behaviour towards a client
• Claims made against your business due to bankruptcy or insolvency
• Bodily injury claims
• Property damage claims

It’s worth noting that some professions or situations may require cover for bodily injury or property damage claims that may arise because of your advice or design.

In that case, it’s essential to engage a qualified risk and insurance adviser. Your adviser will ensure the policy meets your business needs and negotiate an endorsement into the insurance contract on your behalf.

The endorsement is a special clause that ensures the insurance contract includes additional cover for items such as bodily injury or property damage claims.

Need advice on professional indemnity (PI) insurance?

Our experienced risk and insurance advisers use their extensive industry knowledge to build a risk profile for your business.

Using our fee-for-service risk review, you gain a complete picture of your current insurance program. Therefore, enabling you to identify areas of concern and confidently move forward.

Contact us today to learn more.

Whilst it’s important to ensure that all employees are protected during these difficult times, company directors must also address their own level of protection. That’s because when a business goes into insolvency, the personal and family assets of the company’s directors can be accessed during the liquidation process. This can lead to significant financial stress and bankruptcy for unprotected company directors.

There are two main avenues for protecting the assets of company directors, senior staff and business owners, as follows.

1. Legal protection for company directors

Directors can be found personally responsible for their company’s debts and liabilities if they are found to have acted unlawfully. These breaches can include trading while insolvent, personally guaranteeing a company loan, and fraudulent trading. However, if the insolvency is not due to any wrongdoing on behalf of the directors, but to loss of revenue (as occurred recently due to the pandemic), their assets can still be accessed to pay debts.

Unless of course, the company directors have protected their assets against such an eventuality. Asset protection for directors should be considered a key component of their salary package, ensuring that the family home for example, is not threatened during the insolvency process. Some avenues that can be utilised by company directors to protect their assets include holding all assets in a trust or a self-managed superannuation fund. Other strategies include transferring assets into their spouse’s name, establishing testamentary trusts as part of estate planning, and death benefit nominations for superannuation payouts. Company directors should ensure they take professional advice when considering any of these strategies.

2. Insurance protection for company directors

Directors and Officers Liability Insurance is designed to protect the assets of senior management in large multi-nationals, but it’s also applicable to SMEs. It’s designed specifically for business owners and managers or directors who run companies, because they are personally responsible for their decisions and actions within the business. In cases of insolvency, they can protect the assets of senior management against liquidators, if they have behaved appropriately and not abused their director’s duties.

This type of insurance can also protect senior management against unproven criminal charges that require a court defence, as well as lawyers and investigators. Legal costs for both past and present officers, as well as compensation or penalties that may result from a claim can all be covered under this type of insurance. Apart from liabilities and debts due to insolvency, other claims that can be covered include breach of contract, overstepping of director’s authority, legal non-compliance, misrepresentation, and so on. With many decisions made frequently every day by senior officers of a company, suitable insurance protection is vital.

Whilst SMEs can cover their senior staff with a Directors & Officers Liability Insurance, they also have the option of Management Liability Insurance, as this is designed specifically for smaller businesses.

We can help

To decide what type of insurance policies are suitable to protect your senior staff, talk to an insurance specialist today and contact Lisa Carter, Clear Insurance.

What professional indemnity covers?

The past decade has seen big changes in the litigation world. Not only are the numbers of cases against SMEs continuing to increase fairly rapidly, but settlement times are also being stretched, often taking up to five years for a resolution to be reached. Added to Australia’s changing litigation landscape is the additional complexity that comes with occupations that didn’t exist a decade ago (web designers and developers, social media specialists, app developers, data miners, and so on). As you can imagine, any business that provides a paid service to the public is fair game for litigation, which is why now, more than ever, SMEs need the protection of Professional Indemnity Insurance. Whilst this type of insurance policy is only one of a suite of policies SMEs need to reduce their overall risks, it is no less important to their ongoing success.

What types of litigation are covered by Professional Indemnity Insurance?

Essentially, Professional Indemnity Insurance covers against claims of alleged or actual negligence occurring during the performance of a professional duty. Generally, these claims focus around giving people incorrect advice or the client misinterpreting the advice given to them. It can also include instances when an unintentional mistake has been made, whether that’s overlooking a critical piece of information or misinterpreting a fact. These alleged acts of wrongdoing feed litigation, because as a professional, you should not make mistakes that result in a loss to your client. As mentioned above, the number of occupations that can benefit from Professional Indemnity Insurance continues to increase, because the number of services people demand have increased. Professional Indemnity Insurance has always been essential to lawyers, accountants, builders and real estate agents for example, but now landscapers, wedding planners, life coaches, cloud engineers and digital specialists have also been embraced by the world of litigation. The only way to reduce these litigation risks is to either never make any mistakes or to invest in Professional Indemnity Insurance. All it takes is one unintentional mistake to create an unhappy client who talks to a lawyer and a claim against you begins. The result can be a long drawn out litigation process that damages your company’s reputation and results in not only settlement costs, but also court costs and lawyer’s fees that can easily devastate your business. Professional Indemnity Insurance is designed to reduce these costs and help you to weather the litigation storm.

What costs are covered by Professional Indemnity Insurance?

This type of insurance cover is essential for SMEs in the service industry. Costs covered by this insurance policy include, but are not limited to, the following:

• Damages and court costs awarded to the litigator and against your company
• Costs of investigating the alleged claims
• Defence and legal costs of defending against these claims

Without a doubt, the increasing complexity of the litigation landscape in Australia means that any SME operating within the service industry require Professional Indemnity Insurance. If you are not sure what cover you need in your line of work, talk to an insurance specialist today.