For many businesses, professional indemnity insurance claims has always been a complex area. While most people seem to agree that having professional indemnity (PI) insurance is a requirement in doing business, many are still in the dark when it comes to the claims risks of not having cover.
In a nutshell, PI insurance covers claims made against you by unhappy clients who have lost money as a result of errors in your work, as well as cover legal fees.
The types of PI claims take many forms and vary by industry. Here are some of the most common claims scenarios consulting and project professionals businesses need to be aware of.
1. Negligence
An IT consulting company and you designed a customer database for a client. A glitch in the go-live implementation prevents anyone in the company from accessing data for one whole week. Your client sues you, using weekly sales figures to argue that the company has incurred financial injury.
2. Wrongful advice
You have a management consulting firm engaged in a restructuring project for a client company. You advise the client that they can expect immediate cost savings of $2m, and the project is completed. But due to a miscalculation on your part, the cost savings are not realised. Client files a claim against your firm.
3. Intellectual property infringement
Some professional indemnity policies include cover for intellectual property infringement. For instance you are a marketing consultant creating an advertising campaign for a client. You unknowingly use a trademark that is similar to another business. Although the act is done unintentionally, you infringed the intellectual property rights of the other party and there is a chance you can get sued.
4. Loss of documents
You are a management consulting firm tasked to run a change campaign for a client. In the process of completing the project, you accidentally lose or damage the critical documents handed to you by the client. The professional indemnity insurance may cover for the costs of repairing or replacing documents damaged or destroyed while in your possession.
5. Dissatisfied or dishonest clients
One type of claim could arise when a client simply isn’t satisfied with the work you did. Or worse still, the client decides to “have a go, regardless of the merits” and sue you. This is called a “vexatious claim”. If you’re fortunate, you can negotiate a solution with your client. Worse, your client decides to sue you to avoid paying the amount they owe you. And you find yourself defenseless against their well-equipped legal department.
It’s easy to downplay these scenarios and the risks they present to your business. However, it is important to note that the risks are not based on the possibility of your losing a lawsuit, rather that of your client bringing a lawsuit against you. Chances are, even if the case is completely baseless, you can still face considerable financial and emotional costs defending yourself against the claim.