PROFESSIONAL INDEMNITY INSURANCE

Introduction

Over the last decade there has been a sharp increase in the number of claims brought
against professionals especially in Europe and the United States. As people become more
and more aware of their rights they do not hesitate to seek legal recourse whenever they
feel that these have been violated. Increasingly, professional people like doctors,
accountants, lawyers, architects and many others are under pressure to operate with some
form of insurance against possible claims by their clients. The scope of liability is ever
increasing and the potential size of claims can be very high indeed.

The purpose of Professional Indemnity Insurance

Professional indemnity insurance is generally used to cover cases of professional

negligence or misconduct of an individual or company who is in a position to give advice
or render a professional service usually for a fee. People in such professions as medicine,
law, accounting, financial advisors and many others may require this type of insurance.
Anyone who suffers harm or injury as a result of professional negligence can look to the
law for a remedy in damages. It is this very risk that PI insurance is designed to cover.
Consider the case of a doctor. When dealing with patients the doctor is governed by
ethical principles like privacy and confidentiality. In addition, the doctor must also act in
accordance with the law. If the doctor breaches the doctor breaches the law, the result can
be criminal or civil sanctions or both. The same applies to other professionals as well. For
instance banks offer a range of financial and investment advice to their client’s especially
merchant banks. The following hypothetical situation illustrates how liability for
professional negligence may attach to a bank. Suppose A is considering investing in a
certain project but he lacks the expertise and know-how to evaluate whether the project is
viable or not. He approaches his bankers who profess to experts in among other things,
project appraisal. A provides all the information that the bank requires and after a few
days he is advised to proceed with the venture after the bank advises him that its
prospects are very good. A proceeds as advised only for the project to collapse after a few
months for technical reasons which the bank 'despite the information at their disposal
negligently failed to take into account. Under such circumstances A may very well have a
case against the bank for giving him negligent advice leading to financial loss.

It is clear from the above example that what is insured are the financial consequences of
professional negligence. In a way therefore, PI insurance is largely concerned with
providing indemnity for pure financial losses. A pure financial Joss is one where the
10ss'11ot related to any physical damage or loss. In the above example the bank provided
negligent advice to A when it knew or ought to have known that the advice was going to
be acted upon by A to his detriment.

Risk Assessment

Professional negligence risks require that the underwriter have a thorough and detailed
understanding of the business activities of the insured as these represent the source of
risk. The insured's business activities define the scope of potential risks likely to be
incurred. If one is dealing with a firm of accountants we need to know the range of
services they provide to their clients. In addition we also need to know the destination of
the various financial reports that they produce. The experience and reputation of the
insured is also crucial. Since the ultimate loss will depend on the compensation levels
awarded by the courts (assuming there is no out of court settlement) it also becomes
important to have some idea of judicial trends and developments. In other words the legal
environment needs to be taken into account. Thus a UK doctor who failed to warn a
pregnant woman with chickenpox that her unborn child faced the risk of serious
abnormalities because of the chickenpox was held to have been negligent when the child
was born with serious abnormalities caused by the mother's disease (Post Magazine, 29
January 2004, p41).It is also helpful when assessing PI risks to evaluate the lines of
command and the checks and balances that the insured has in place. Thus professional
negligence can be minimized where proper systems and procedures are codified and
clearly communicated to employees of the insured. Improper supervision often leads to
flouting of regulations and procedures and claims may be incurred as a result.