Small Business Guide to Professional Indemnity Insurance

Although silly mistakes may be made on a daily basis in most organisations, businesses that provide professional services to customers can face huge financial losses should small errors or inaccuracies be overlooked. Although business owners strive to employ only the best employees, no matter how experienced the individual, mistakes cannot be completely avoided. As the great Alexander Pope once said, “To err is human”.

This is according to Nkejane Mofokeng, Underwriter at SHA Specialist Underwriters, who says that it is for this reason that all professional service providers, especially small businesses, need to have sufficient PI insurance in place to reduce their risk of financial loss should they face legal action as a result of an employee’s oversight.

He explains that PI insurance provides cover for businesses that provide a professional service to their clients in exchange for a fee. “PI will protect the business in instances where a client sues a company for financial losses they suffered as a result of an error, mistake, omission or negligence when providing a professional service.”

He provides the below guidelines and insight for small business owners questioning whether they need this type of insurance cover:

  • Should the small business not have the financial means readily available to cover all costs related to defending themselves in a professional liability claim, PI insurance is certainly a serious requirement. If a disgruntled client’s claim is successful, most businesses face massive financial setbacks as they would need to pay the compensation due to the client from their current balance sheet, and if it is not in a strong financial position, the costs could potentially force the business to close its doors. PI offers the business sufficient protection as the policy will cover the legal costs of defending a claim, as well as the compensation which may be awarded by the court in favour of the client.
  • It is advisable that any business providing a professional service have PI insurance in place. The world is evolving and more companies are depending on and trusting the advice supplied by their specialist service providers. In any instance where the business has not provided adequate services or the correct information the client has the right to sue the service provider to compensate for their financial loss.
  • There are industry bodies in South Africa that have requirements regarding insurance before a professional can belong to the association. For example, legal professionals are obliged to pay a premium to the Attorneys Insurance Indemnity Fund as part of their membership fee to their law society. Many businesses also insist that any professional with whom they go into a contractual agreement with, also have their own PI insurance policy in place.
  • In the corporate space in South Africa an emerging trend is for large companies to outsource specialist services. One of the contractual requirements of this type of relationship is often the purchase of PI insurance cover, with the service provider needing to provide proof of their cover before they will be awarded the contract. In this case, a business could lose a prospective high paying client due to not having PI cover in place.
  • There are certain instances where losses are suffered by clients, even when there was no negligence on the professional’s part, but the client believes that the professional is at fault for the losses. In other instances, the professional could be working on a project with other service providers and could be included in litigation as a result of their involvement in the project, even when the insured was not at fault. The handling of these type of claims can have serious reputational implications for professionals, especially if the claim is handled badly. In such cases especially, the defence costs cover provided by a PI insurance policy can be truly beneficial to the professional wishing to defend its reputation as these actions can be extremely costly.

“To fully understand the risks that small businesses face in this regard, it is key that business owners discuss the need for PI cover with their insurance broker. The insurance is underwritten on a declaration basis, and the proposal form is the essence of this cover. The small business owner must therefore be sure to disclose all the information, as accurately as possible, as required by the proposal,” states Mofokeng.

“It is advisable that all businesses that provide a professional service, regardless of size, speak to a reputable broker to ensure that well-structured PI cover is in place to avoid the risk of financial tragedy due to legal action”, he concludes.

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