So, let’s explain short term professional indemnity insurance. You’re a freelance Contractor. You have just won a 6 month project tender. Now, the contract for this tender requires you to have a $2m professional indemnity insurance policy in place. Do you only need to buy a short term pi policy? No, this is one of the most common mistakes that we see when a contractor takes on a short term project.
How does it work? You see, All professional indemnity insurance (also called pi insurance) policies are arranged on what’s known as a ‘claims made basis’. ‘Claims made’ means the policy must be in place when the demand is made against you. Plus, you need to have cover in force at the time you undertook the work. This means, if your pi insurance is allowed to lapse or cease at the end of a short term contract, you have a problem. This is because the insurance company will not cover the claim. Why? Because the cover has lapsed at the time the demand is made.
By way of a real claim example. In this example we focus on the key events in the claim.
· 2005: Consultant was engaged to provide engineering drawings for a new Council pool.
· 2008: The pool had been completed and was open and ready for use.
· 2012: Unfortunately cracks and leaks started to appear.
· 2014: Council sues the engineer.
· 2014: Professional indemnity policy is triggered and responds, not 2005.
When examining a professional indemnity claim, insurance companies will consider the following factors:
1. Was there a professional duty owed;
2. Was there a breach of that professional duty;
4. Did the breach trigger a loss or damage;
5. Has there been a demand made against the insured by another party.
Remember, what we said earlier in this article. The professional indemnity policy responds at the time the demand is made against the insured by another party. From experience, we know that the demand usually follows the loss and/or damage. Not necessarily at the time the there was a breach of professional duty. For more information about ‘claims made’ pi insurance you can read an article from the Australian and New Zealand Institute of Insurance and Finance (ANZIIF).
Run off insurance, which is essentially a continuation of insurance in order to maintain protection against past activities.
If you’re a sole trader, you may have no choice other than to continue your pi insurance. This will ensure that you are adequately protected against claims made after the contract work was completed. That said, it doesn’t mean that the you to maintain the same level of premium payments for the run off period. Run off cover typically allows for reduced premium costs over time – in line with the amount of time since the work was done.
Your PI policy is worthless if the claim comes in the day after your annual PI policy expires. Remember, if you’re going to do more contracts in the future, keep insurance in place continuously. Alternatively, if there are no other contracts on the horizon, purchase “run off cover”.
If you’re a contractor, consultant or freelance professional looking for professional indemnity insurance, visit our free online insurance quoting tool . Get a free, instant, no-obligation online quote in minutes.