Providing professional advice or services can create a particular kind of risk. A client may say your advice was wrong. They might allege that your work contained an error, that you failed to meet an expected professional standard or that something you did caused them financial loss.
Professional indemnity insurance usually called PI insurance, is designed to respond to certain claims arising from professional services. Not every business needs it, and the cover isn’t the same from one policy to another.
For some professions, PI insurance is a regulatory or professional requirement. For other businesses, a client contract may require it. Others choose to insure the exposure because of the type of advice or service they provide.
Understanding how the policy works is just as important as deciding whether you need one.
What Is Professional Indemnity Insurance?
Professional indemnity insurance is a form of liability insurance for people and businesses that provide professional advice or services.
Depending on the policy, it may respond when a client or another party alleges that an error, omission or breach of professional duty caused them a loss. That could involve incorrect advice. It might involve a mistake in a design, calculation or professional service. A claim does not necessarily mean you were negligent.
One of the valuable features of PI insurance can be assistance with the cost of defending an insured claim, subject to the policy terms. The amount available for defence costs is important. Some policies deal with those costs within the policy limit, while others may provide different arrangements.
What Can Professional Indemnity Insurance Cover?
The precise cover depends on the policy and the work you do.
Professional negligence is at the heart of most PI policies. Some policies may respond to other liabilities connected with professional services, such as certain allegations involving confidentiality, defamation or misleading conduct.
The wording can differ substantially between professions and insurers. A policy designed for an accountant, for example, may not be appropriate for an engineer or technical consultant simply because they are all described as professional indemnity policies.
That’s why it’s worth looking beyond the name of the product and checking what the policy covers.
What Professional Indemnity May Not Cover
PI insurance isn’t designed to cover every dispute involving a client.
Contractual Obligations
Contracts deserve particular attention.
A client may ask you to accept an indemnity, warranty or other obligation that gives them rights beyond the liability you would otherwise have at law. Your PI policy may not automatically cover that additional contractual liability. That doesn’t mean you should never agree to contractual provisions. It means the contract and the insurance need to be considered together.
Legal advice should be obtained on the contractual obligation itself. An insurance adviser can help you understand how your PI policy may respond.
Known Claims or Circumstances
PI policies generally contain provisions dealing with claims or circumstances you already knew about before the policy began. That becomes especially important when renewing a policy or changing insurers.
If something has happened that you think might lead to a claim, don’t wait for a formal demand before checking your notification obligations.
Deliberate Conduct
Policies commonly restrict or exclude deliberate dishonest, fraudulent or criminal conduct.
The treatment of innocent insured people can differ, particularly where the conduct involved another employee or person within the organisation. The individual wording needs to be checked rather than assuming one exclusion works the same way across the market.
Fines & Penalties
Cover for regulatory investigations, fines or penalties varies.
Some losses may not be legally insurable. Other policies may contain extensions dealing with particular statutory liabilities. It is safer to check the policy and applicable law than to assume PI automatically covers, or excludes, every regulatory penalty.
How Professional Indemnity Insurance Works
Claims-Made Cover
One of the most important things to understand about PI insurance is that it is commonly written on a claims-made and notified basis.
In simple terms, the policy in place when a claim is made and notified can be the relevant policy, rather than the policy you held when the original work was completed. That matters because professional claims can emerge well after the work was completed.
An accountant might provide advice this year and not hear about a problem until a later audit. A design issue may only become apparent after a project has been completed. That’s why the dates and notification provisions in a PI policy matter so much.
Australia’s Insurance Contracts Act also contains protections relating to the notification of facts that might later give rise to a claim. Section 40(3) can be relevant where written notice is provided to the insurer before the policy expires, subject to its requirements and the individual circumstances. The practical message is simpler:
If you’re aware of something that might lead to a claim, check your policy and notify your insurance adviser and insurer promptly.
The Retroactive Date
A PI policy may contain a retroactive date. The date establishes how far back the policy will consider acts, errors or omissions that later result in a claim, subject to the rest of the policy wording.
Suppose you have been providing professional services since 2018, but your policy has a retroactive date of 2024. A claim made today about work undertaken in 2020 may fall outside that policy. Therefore, the retroactive date needs specific attention when changing insurers.
What Happens When You Change Insurers?
Changing insurer doesn’t necessarily mean losing cover for all your earlier work. A new insurer may agree to maintain an existing retroactive date or provide another form of continuity. However, that shouldn’t be assumed.
Before moving a PI policy, check:
- the retroactive date on the existing policy
- the retroactive date being offered by the new insurer
- whether there are known circumstances that should be notified before the old policy ends
- any continuity provisions or exclusions in the new wording
It’s a more useful comparison than simply looking at which insurer has offered the lowest premium.
A gap in insurance can create challenges. However, it does not mean historical protection is erased forever. What a future insurer is prepared to cover will depend on its underwriting decision, the retroactive date and the circumstances involved.
Run-Off Cover When You Stop Practising
Stopping work doesn’t necessarily stop professional claims. Someone retiring, selling a practice or closing a business may still face a later claim arising from services provided while the business was operating.
That’s where run-off insurance becomes relevant. Run-off cover is intended to protect against certain claims relating to past professional work after the business has ceased operating.
The arrangements vary significantly between professions. For example, Chartered Accountants (CA) ANZ requires members leaving public practice to maintain run-off PI insurance for at least seven years, while professional arrangements for lawyers vary by state and territory. Check the requirements for your profession and registration.
Is Run-Off Cover the Same as an Extended Reporting Period?
Not necessarily. The terms run-off cover, extended reporting period and sometimes tail cover are often used loosely, but they can describe different arrangements.
An extended reporting period may allow certain claims to be reported after a policy expires. Run-off insurance generally refers to continuing protection for claims relating to professional services provided before a business ceased operating.
The important part is the policy wording and what it allows you to report, for what work and for how long.
If you’re planning retirement, a sale or closure, deal with this before the existing PI arrangements expire.
Do You Need Professional Indemnity Insurance?
Not every business does. A useful starting question is:
Could somebody rely on my professional advice, design or service and allege that a mistake caused them financial loss?
If the answer is yes, there may be a professional indemnity exposure worth considering. For some professions, there is also a more straightforward answer because PI insurance is required by a regulator, professional body or licensing arrangement.
Accountants & Financial Professionals
Public practitioners may be subject to PI requirements imposed by their professional body. For example, CPA Australia and CA ANZ have detailed requirements for practitioners, including policy limits and run-off arrangements.
Consultants & Professional Services Firms
A consultant can face a PI exposure when a client relies on their professional recommendations or expertise. The nature of the exposure depends much more on what the consultant actually does than on the job title.
Architects, Engineers & Design Professionals
Design and specification work can create professional liability that may not become apparent until well after a project is completed. Contract terms are particularly important in this sector because clients may ask consultants to accept broader responsibilities.
Technology Businesses
Software development and technical consulting can create PI exposures. A technology business may face allegations that its design or professional service didn’t perform as agreed or caused the client financial loss.
Technology PI can overlap with contractual and cyber issues, which makes the wording important.
Manufacturers
Not every manufacturer has a PI exposure. However, a manufacturer that provides engineering input, technical specifications or design advice may have professional-services exposure in addition to its product and public liability risks.
Health Professionals
Health practitioners may have specific professional or medical indemnity requirements associated with registration or their particular profession. Those requirements should be checked with the appropriate regulator or professional body rather than assuming a general commercial PI policy is suitable.
Professional Indemnity vs Public Liability
They deal with different types of liability.
Professional indemnity is concerned with claims arising from professional advice or services.
Public liability generally deals with third-party personal injury or property damage arising from business activities.
A business may need one, both or neither depending on what it does. For example, a consultant working from an office may have a PI exposure because clients rely on their advice, while also having a separate public-liability exposure if a visitor is injured at the premises.
The fact that one policy is appropriate doesn’t automatically mean the other one is.
How Much Professional Indemnity Cover Do You Need?
There isn’t a sensible universal figure. Some professions have mandatory minimum limits. Contracts may also specify a minimum amount of PI insurance.
Beyond that, think about the work itself. A consultant working on relatively small engagements can have a very different exposure from a designer whose work affects a major construction project.
Policy structure is also important. Check whether the limit applies to each claim or in aggregate across the policy period. Also look at how defence costs affect the available limit. A larger headline number doesn’t necessarily mean a better outcome if other parts of the wording are restrictive.
For more on limits and underinsurance, see How to Avoid Underinsuring Your Professional Services.
Your Duty of Disclosure
Professional indemnity written for businesses will generally fall within the Insurance Contracts Act provisions dealing with insurance contracts that are not consumer insurance contracts.
For those contracts, the Act contains a duty to disclose matters that are relevant to the insurer’s decision whether to accept the risk and, if so, on what terms, subject to the qualifications in the legislation.
In practical terms, answer the insurer’s questions accurately and don’t deliberately leave out information you know may be relevant. That can include previous claims or circumstances that may lead to a claim.
If your services have materially changed, that can also be relevant to underwriting. You can read more on Clear Insurance’s Duty of Disclosure page.
What Should You Do If Something Might Become a Claim?
Don’t assume you need to wait for a formal letter of demand. A client complaint or another set of circumstances may already be something the policy expects you to notify. Read the notification provisions and contact your insurer or insurance adviser as soon as reasonably practicable. Where appropriate, give the notification in writing.
PI policies may also contain conditions around admitting liability, settling a dispute or incurring defence costs without the insurer’s consent.
If you’re unsure, ask your insurance adviser before taking action that could affect the insurer’s position.
Can You Get PI Insurance After a Previous Claim?
Potentially. A previous claim doesn’t automatically prevent a business from obtaining PI insurance. The insurer will want to understand what happened. It may also ask whether anything has changed since the claim.
The previous claim may affect the premium, excess or policy terms. However, the outcome depends on the circumstances and the insurer’s underwriting assessment. Disclose the history accurately and let insurers assess it rather than assuming cover will either be refused or heavily penalised.
What Affects the Cost of Professional Indemnity Insurance?
There isn’t a single pricing formula. The nature of the professional work is one of the main considerations. An insurer may also consider the scale of the business and the types of clients or projects involved.
Previous claims can be relevant. The limit and excess you select obviously affect the insurance being purchased too. That’s why businesses with similar revenue can receive quite different terms.
Choosing Between Professional Indemnity Policies
Premium is only one part of the comparison. Start with whether the policy actually reflects the professional services you provide. Then check the retroactive date. Look at the policy limits and how defence costs are treated.
Contractual liability provisions can be especially important where your clients impose their own terms. It’s also worth understanding the insurer’s approach to claims and notification.
A cheaper policy can still be poor value if an exclusion removes the cover most relevant to your work.
Frequently Asked Questions
What’s the difference between professional indemnity and public liability insurance?
Professional indemnity generally deals with claims arising from professional advice or services.
Public liability generally deals with third-party injury or property damage connected with your business activities.
A business can have both exposures, but one doesn’t automatically imply the other.
Is professional indemnity insurance compulsory in Australia?
Not for every business. Some professions are required to hold PI or another form of professional indemnity cover as part of registration, licensing or professional membership. Contracts can also require it.
Check the requirements that apply to your profession rather than assuming there is one national rule for all businesses.
How much professional indemnity insurance do I need?
There isn’t a standard amount. Start with any legal, professional-body or contractual minimum. Then consider the potential financial consequences of the work you perform. Check whether defence costs sit inside or outside the limit and whether the policy has an aggregate limit.
An insurance adviser can help explain the available options, but the answer shouldn’t simply be based on a generic figure for your profession.
Will my historical work still be covered if I change insurers?
It can be. The key things to check include your retroactive date and any continuity provisions in the new policy. Known claims or circumstances should also be dealt with before the existing policy expires.
Don’t assume historical cover is automatically lost, but don’t assume it transfers automatically either.
What is run-off insurance?
Run-off insurance is designed to deal with certain claims arising from professional work completed before a business or practice stopped operating. It can become relevant when you retire, close or sell a practice.
Professional-body requirements vary, so the appropriate period and structure should be checked for your profession.
Do I need run-off cover when I retire?
Possibly, and for some professions it is mandatory. The fact that you’ve stopped working doesn’t prevent a former client from making a later claim about previous professional services.
Check your professional requirements and existing PI arrangements before the policy ends.
What happens if my PI policy lapses?
A lapse can create a serious continuity issue because PI is generally claims-made cover. That doesn’t mean every future insurer is legally prevented from covering all earlier work. The outcome depends on the retroactive date, known circumstances and what the new insurer is prepared to offer.
If a policy has lapsed, seek advice before assuming either that you’re fully covered or that all historical protection has disappeared.
Can I get professional indemnity insurance if I’ve had a claim?
Potentially. The insurer will usually want details about the claim and its outcome. It may affect the terms offered, but previous claims don’t automatically mean insurance will be unavailable.
What should I do if I think a claim might be coming?
Check your policy and notify your insurer or adviser promptly. You may need to notify circumstances even before a formal claim is made. Australia’s Insurance Contracts Act can also be relevant to notifications made before a liability policy expires.
How is a PI premium calculated?
Insurers consider the type of professional work involved and the cover being requested. The scale and complexity of the work can matter.
Previous claims and the structure of the policy may also influence the terms. This means similar-sized businesses can receive quite different premiums.
Professional Indemnity Across Different Industries
Professional indemnity doesn’t work exactly the same way for every profession. For more specific insurance considerations, see:
- Professional Services Businesses
- Technology & Start-Ups
- Construction Professionals
- Manufacturing Businesses
Useful Professional Indemnity Resources
For a deeper look at particular PI issues:
- How to Avoid Underinsuring Your Professional Services
- Do Hospitality Businesses Need PI Insurance?
- Duty of Disclosure
Understanding Your Insurance Options
If you’re reviewing PI insurance, the aim shouldn’t simply be to find the lowest premium. First understand whether the policy fits the work you actually do. Then check the structural details that can affect a later claim, particularly the retroactive date and notification provisions.
If you’re changing insurers or planning to stop practising, continuity and run-off arrangements deserve attention before the existing cover ends.
An insurance adviser can explain the insurance options and policy wording. Legal questions about professional duties or contractual obligations should be referred to the appropriate legal adviser.
Contact Clear Insurance
If you want help understanding your existing professional indemnity arrangements, you can contact Clear Insurance on 1300 721 132, email info@clearinsurance.com.au, or complete the online enquiry form.
There’s no need to decide in advance that you need a new policy. A review can start with understanding what you currently have and whether it still reflects the work you perform.
