|
LIABILITY
CRISIS
Implications for Professionals
The term “liability crisis” has been bandied around
by the media for the last two years. Primarily, this has focused
on the issue of Public Liability, however in reality, Public Liability
for professionals is readily available and still very affordable.
It is often included within Office Insurance package products of
which the Liability Premium accounts for a few hundred dollars.
Professional Indemnity,
on the other hand, is a massive issue for all types of professionals
in today’s market. In many instances it is not so much what
it costs, but rather whether this type of cover is available for
your occupation at all! Premiums for some classes of professionals
have risen from around 1% of gross fees to a staggering 8% over
the last three years - this would equate to premiums increasing
from $10,000 to $80,000
Who Is Affected?
As Professional Indemnity Insurance provides cover for claims made
by third parties for acts, errors, emissions, wrongful acts and
breaches of professional duty, almost all professionals and consultants
require this cover. The few professionals who have been reluctant
in the past to purchase this cover are now often finding that it
is simply a pre requisite of many contracts and tenders (e.g. government
bodies).
However, certain occupations
have borne the brunt of premium increases more than others, due
to the claims history of their particular field. Those occupations
that have been most adversely affected include consulting engineers
and other construction professionals, accountants, environmental
planners and financial planners.
Professionals in these
fields have experienced premium increases of up to 500% in a single
year! Clearly, many businesses are struggling to survive as a direct
result of the increased burden of insurance expenses.
Causes of the Crisis
New South Wales has now become (for several years running) statistically
the second most litigious state in the world (not Australia but
the world), behind California, USA. Whilst more recent data is not
readily available, trends in litigation certainly suggest that we
are challenging California for that most unsavory of mantels.
The frequency with which
claims are made continues to increase and are reaching almost plague
proportions. As every claim automatically accrues legal costs in
order to investigate and defend the action, the days of $1,500 premiums
are long gone. Further, they will probably not ever return.
To exacerbate the situation,
we are still seeing enormously large payouts to claimants and the
“reasonable persons test” looks to have been abandoned.
The reasonable persons test is often the basis on which liability
is apportioned - that is, “what would a reasonable person be
expected to do, think, or know in the given circumstances.”
These factors have made the Professional Indemnity class of insurance
extremely unprofitable for most insurers. As a result, a number
of insurers have withdrawn from offering Professional Indemnity
cover or in some cases, withdrawn from the Australian market altogether.
Examples of these insurance companies include FAI, HIH, GIO, AMP,
St. Paul and Gerling.
As with all markets, the
basic economic principals of supply and demand and their consequence
on the price function applies here. The small number of insurers
offering Professional Indemnity are being flooded with submissions
from applicants allowing cherry picking of the clients they deem
to be of lower risk.
Tort Reform
Legislation has recently been passed in all states of Australia
in an attempt to cap liability by placing ceilings on maximum payouts
available to claimants. The Federal Government is revising its legislation
in order to close any loopholes that may otherwise be exploited
by plaintiff lawyers. The effectiveness of this strategy is critical
as whenever state and federal law differ; the federal law prevails.
Whilst everyone in the
industry and in the business community in general is hopeful that
this will prove to be an effective strategy, it is not envisaged
that insurers will provide any premium relief until some precedent
is set. Thus providing them with the comfort that the legislation
is effective. It is estimated that this will be no less than two
years.
What can you do?
As insurers have many applications on their desks to consider on
any given day, it is critical that the information you supply be
as comprehensive as possible. In addition, here are some handy hints
to help your application get to the top of the pile and receives
favourable consideration.
- Write as clearly as
you can on your application form. Make it easy for the underwriter
to read about who you are and what you do. Messy proposals will
always go to the bottom of the pile and will often just be declined
as being too difficult.
- Don’t leave any
blanks. Answer every question and don’t be scared to refer
to addendums in order to best describe your business.
- Avoid industry generic
terms or those with dual or multiple meanings. Use nuts and bolts
examples to illustrate what you do in simple terms.
- Always provide CV’s
(real ones not ones that you would put forward to a prospective
employer) for all principals and where relevant, key staff. Demonstrating
the experience and qualifications within your organisation will
result in the underwriter feeling more comfortable about putting
their money on the line behind your business.
- Capability statements,
web address references, examples of work, standard contracts of
engagement, standard employee contracts are also often of enormous
benefit in painting a picture to the insurer (who really doesn’t
know you from Adam) as to who you are and what you are all about.
Buyers Check List
When seeking to purchase Professional Indemnity cover, it is important
to ensure that the following issues are thoroughly understood:
- “Claims made”
policy. This means that the policy
you have in force on the day you receive notification of a claim
or incident is the policy that responds. It is not the policy
that was in force when you did the work. You may need to keep
a policy in force even after you have ceased trading or finished
the given project.
- Retroactive date.
This is the date stated on the policy from which time work done
that gives rise to a claim during the policy period is covered
under the contract. Ideally, this should be “unlimited.”
In simple terms it is how far back the net is cast to capture
previous work done.
- Exclusions.
Insurers are using more exclusions and restrictions all the time.
Often this is simply in order to clarify the intention of the
policy but sometimes the presence of these endorsements can be
very dangerous as they serve to exclude cover for the very exposures
facing your business. When in doubt, always clarify beforehand.
Don’t wait for a claim to occur before asking insurers to
clarify what it is they specifically mean by their exclusions.
- Size and type of
excess. When do you start to pay and how much? These vary
enormously and are fairly technical in nature. Look for terms
like “cost inclusive” and ask what they mean.
Finally, due to the complexities
of Professional Indemnity Insurance, it is absolutely critical that
you use a qualified practicing Insurance Broker (QPIB) who is a
specialist in this class of insurance. There are at least a dozen
excellent specialist Professional Indemnity brokers in Sydney. When
looking for a broker, ask them to explain some of the above terms
and if they have had experience in your type of business. If the
answers provided are not to your satisfaction, then it is recommended
that you find someone who can.
About
the Author
John Davaine is Manager of Corporate and Professional Risks at Chegwyn
Craig Australia, and is widely regarded as one of Australia’s
pre-eminent Professional Risks Insurance Brokers. For more information
on Professional Indemnity, contact John on 02 9437 9355, mobile
0413 610 523 or email john@chegwyn.com.au
©
COPYRIGHT
All articles are copyright. These articles may be used for publication
in magazines and newsletters with prior permission from the author and Samperi Consulting Group Pty Ltd. Please contact Samperi Consulting
Group Pty Ltd for further information at karina@samperi.com.au.
NEWS
& TIPS INDEX |
NEXT>
|
