VKN Financial Services.
SAIPA has received a very interesting question from one of the Practitioners, and found it necessary to seek clarity from the appointed Professional Indemnity insurance service provider, and hereby share the information with all members.
1. Are there any industry guidelines one can use to determine fair value, on limits of liability for insured events?
2. Are there any guidelines on related excesses and premiums in relation to professional indemnity, public liability, to name a few?
To illustrate the origin of the questions: Why should client consider R50 million public liability insurance and not R20 million? Are there key indicators that should validate or question the underwriters’ proposal?
Another example; why would R10 million be considered fair value for professional indemnity and not R1 million?
GUIDELINES FROM VKN FINANCIAL SERVICES
Determining the appropriate Professional Indemnity Insurance (PI) limit to purchase is not a straight forward calculation. There are several key factors that should be considered when deciding the limit that is right for your business. The selection of the most appropriate limit should be driven by your desire to protect your business and personal assets. Many firms simply purchase the minimum (PI) limit possible in order to satisfy their statutory or contractual obligations. Some of the key issues to be considered when reviewing or deciding your policy limit are:
Usually prescribed by Regulation or Legislation, compulsory insurance is often required to support a statutory registration or accreditation. For example Financial Services Providers are governed by the FAIS Act 2002 and are required by law to have a minimum limit of R 1,000,000, however VKN Financial Services Pty Ltd purchases R 40,000,000.00 per annum because we believe that our exposures in relation to the advice we provide is huge.
Contractual obligations: These are obligations assumed by you under professional service agreements with your principal. In recent years with reductions in the cost and increased availability of higher PI limits there has been an increase in the limits that principals have been requesting of their consultants. Often these requirements are considered unreasonably high by the consultant because of the significant cost implications.
We have outlined in the following comments some negotiating points to assist you in negotiating reduced demands of principals where you are of the view that the insurance levels requested are unreasonably high.
Project Values and Types
One of the most commonly used measures assumes there is a strong correlation between both the value and nature of project you are involved with and your professional negligence exposure. Whilst we support this view, this one measure should not overshadow the following important factors to be considered. A relatively low value project can still give rise to a significant professional indemnity claim.
This involves an assessment of the possible causes of loss, injury or damage that may give rise to a professional negligence claim against you.
This can be considered from three perspectives: Property damage. The resultant damage to property as a consequence of an actual or alleged breach of professional duty, example: Structural failure in a building as a result of a design engineer under specifying a supporting beam.
Personal Injury (Including Death)
Injury (or death) as a result of an actual or alleged breach of professional duty of care. A common misconception is that such risk is insured under a public liability policy. Public liability policies usually contain a specific exclusion in relation to claims arising from the provision of professional services therefore personal injury claims are a core professional indemnity exposure for many engineers. For example, an engineer providing certification services in relation to amusement rides would have an appreciably greater personal injury (professional) risk exposure than an engineer providing strategic management advice.
Monetary loss suffered by a third party as a result of an actual or alleged breach of professional duty. For example: Costs incurred or income lost due to delayed delivery of a project arising from the actual or alleged breach of professional duty by the project manager responsible for timely delivery.
It is important to also remember that a cause of action and resultant claim may contain elements of one, two or all the above.
Your Willingness and Ability to Carry Financial Risk
This requires an assessment of the extent to which you are prepared to expose your assets by either carrying a higher excess or lower policy limit and your ability to control the risk or transfer liability to other parties involved.
With PI being a significant overhead for many consultancies you will need to weigh up the above factors against what is economically viable for you. In this regard increasing the limit for a particular client or project may not be feasible however if carrying a higher limit opens up the possibility for additional clients or projects the business case may be justified.
However it is important to appreciate that due to the claims made nature of PI, once you have selected a higher limit you will need to continuously purchase at least that limit in the future to maintain that level of cover for your past work.
A common misconception is that there is a strong correlation between fee income of the professional for a particular project and professional negligence exposure of that engagement. This is not the case with significant PI claims arising from projects that generated minimal fee income.
Some useful tool is the Professional Indemnity Insurance Guidelines involves a detailed risk assessment from the client’s perspective considering a range of issues including the consultant’s skills, experience, resources and method of project delivery.
If the limit of indemnity provided by your policy is insufficient to settle a claim the insurer is likely to pay up to the policy limit with your own assets being exposed above this amount. For policies that operate on the “costs exclusive” limit basis (subject to the particular policy wording), if you are underinsured the insurer may also reduce their liability for legal costs in proportion to your underinsurance.
Increasing the limit of indemnity from any general industry minimum of example R1,000,000 up to R 2,000,000 for example may only add 20-30% to the total cost of your policy; this relatively small cost increase effectively doubles the level of protection.
Ultimately the limit you purchase is an extremely important decision to make because your professional Indemnity Insurance is likely to be your last line of defence in the event of a claim. This is a decision that demands serious consideration by you.
To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on the above information you should obtain advice specific to your needs by directly contacting VKN Financial Services