Professional indemnity (PI) insurance can keep you covered for past projects and well into the future, as long as you follow some key rules, as EngInsure explains.
An engineer, in their daily work, sells themselves to their client as an expert. The client relies on the engineer to provide trusted professional advice and make decisions on their behalf to achieve outcomes for which the engineer is engaged. However, if the engineer makes an error or omission in their advice that leads to financial loss for the client, it could come back to haunt them.
Fortunately, professional indemnity (PI) insurance offers just that – indemnity for the professional who made the decisions. But it’s not like car insurance, where the accident happens on a particular day and the current insurance policy offers cover for the event.
Instead, PI insurance must be in place on the day a claim is made against an engineer, likely several years after a project has finished. This highlights a major difference between insurance types known as occurrence based policies and claims made policies.
Occurrence based policies
In the case of occurrence based policies, the wordings of the policies are designed to only cover events that occur during the policy period. Car insurance and home insurance are typically occurrence based, and an ‘event’ might be a crash or a fire.
The policy in place when the actual event occurs is the one triggered to respond to the claim. It doesn’t matter when the claim comes to light, or when the insurer is notified of the claim. It is the timing of the event that is important.
Claims made policies
Claims against engineers are most likely to occur several years after a project has been completed. Cracking occurs in the building. The cladding causes a fire hazard. A bridge pylon subsides, etc.
So where an occurrence based policy is triggered by an event, a claims made policy is instead triggered at the time the insured is made aware of a claim or potential claim. In the case of an engineer, it is not necessarily about when they performed the work, it is about the time at which they became aware of the claim.
“With many other types of insurance such as home insurance, the date that the house caught fire is the date you need your insurance to kick in,” said Holger Schnabel, Account Manager with EngInsure, Australia’s first insurance and risk management business wholly dedicated to the engineering profession.
“But with professional indemnity insurance, you need the insurance on the date the claim is made against you. You might have designed something and made a particular decision that causes a future failure, or you might have made an error or an omission that is not discovered for many years.
“The claim will always be for something you did in the past, rather than on that particular day. This is why you need the insurance to activate on the date the claim is made.”
One key element of PI Insurance that is vital to understand is the retroactive date. When you first take out a policy with an insurer, you are automatically issued with a retroactive date (the date you are covered from). Most insurers will make this the date the PI policy is first taken out; however some can offer an ‘unlimited date’.
If not unlimited, the retroactive date becomes even more important if you change insurers. You must always notify the new insurer of your existing retroactive date to ensure this date does not reset when you commence a new policy. Failure to do so could mean you lose your retroactive cover.
Claim or potential claim notification is key
As soon as an engineer becomes aware of a possible claim, even if it is a verbal discussion, it is imperative that the insurer is notified. This is especially important if you’ve ever changed PI insurers. EngInsure offers this example:
- You start trading on 30/6/2010.
- Insurance Company A insures you from 30/6/2010 – 30/6/2016, making your retroactive date 30/6/2010.
- Insurance Company B insures you from 30/6/2016 to current day. Note: your retroactive date is still 30/6/2010 (as long as your new insurer has been advised of this, and they should be!).
- On 1/1/2015, a client advises you that you might have made an error on a project from 2012, but you do not advise your insurer, as it is verbal advice only.
- On 1/1/2017, you receive a letter from a legal firm asking for damages for this alleged error.
Outcome: You have no cover as the claim needed to be reported to Insurance Company A during the 2014-2015 insurance year when you were initially informed. Insurance Company B would say that you needed to notify Insurance Company A, and Insurance Company A would say the policy has expired. The retroactive date is immaterial, as you were aware of a potential claim, but did not report it.
As long as relevant insurers are immediately notified of claims or potential claims, and new insurers are properly informed of retroactive dates, cover lasts as long as the policy is current. When the policy ends and premiums are no longer being paid, cover also ends – unless the engineer elects to have run-off cover.
What is run-off cover?
Several years ago, Schnabel spoke with an ex-client who had retired from engineering three years earlier. Sadly, this engineer found himself having to cut his retirement short, returning to work in order to fund a $60,000 damages claim against him. This claim came from a job he had completed five years earlier.
Schnabel had strongly recommended run-off cover to the client before his retirement, but the client had decided against it. Run-off cover would have provided protection for up to ten years after retirement, despite the fact that he was no longer paying a PI insurance premium.
Note: there is a charge for run-off cover, however compared to PI insurance, it comes at a significantly discounted rate. A key determinant in the cost of run-off cover is the length of time for which cover is required.
Run-off cover is an excellent idea for retiring engineers, or for those selling a business, to continue their cover while they are no longer trading.
“It stops pieces of work from the past coming back to haunt you,” Schnabel said.
“This type of policy is usually taken out for a number of years, often for seven or 10 years, depending on your perceived risk of an error coming back to bite you.”
Policy wording for engineers
Specialist brokers at EngInsure have been advising engineers on policy wordings since the business was first launched. There are tailored PI policies for most industries and professions, so an engineer seeking insurance will naturally begin with a policy that applies to their situation. Policies can be further customised according to the individual’s risk profile.
“It’s important to look at exclusions and endorsements – what is covered and what is not,” Schnabel said.
“Some of these are negotiable and some are must-haves. An insurance broker can help clients interpret these exclusions and endorsements. It is our role to aid their understanding on the effect that each of these could have on their business, making tailored recommendations accordingly.
“It’s also important to understand that there’s little to stop anyone from suing you, even if it’s frivolous. Often, we receive PI claims that end up with zero dollars being paid to the claimant. However, to get to that zero-dollar agreement, we can see around $50,000 in legal defence costs paid by the insurer to lawyers. If you don’t have PI insurance, those legal defence costs, and any damages ordered payable, are all up to you.”
For further information about securing Professional Indemnity Insurance for you or your business, contact a member of the EngInsure Insurance & Risk Services team on 1300 854 251 or visit www.enginsure.com.au
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.