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Professional Indemnity Insurances – Part 2

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Professional Indemnity Insurances – Part 2

The concept of insurance dates back many centuries and is believed to have its roots in early China. Merchants ferrying goods down the Yangtze River faced strong rapids at certain points. Some boats would inevitably be overturned, and cargo lost. As a means of reducing risk, merchants would often agree to distribute their loads into the boats of several other merchants. They could never be sure which boats, or how many boats would be overturned. But at least they realised some chance of cargo safely passing the rapids. And so, the concept of modern insurance began.

Last month we started looking at the topic professional indemnity insurance (PI). Two things for us to be conscious of. Firstly, some professions arguably do not have a need to carry more insurance than is required under certain New South Wales legislation. Secondly, if you want to determine the right level of insurance coverage for your risk, you really need to do a thorough risk analysis.

In New South Wales, the Professional Standards Act 1994 and the Professional Standards Regulation 2019 are relevant. Two of the objects of the Act are to:
“(a) to enable the creation of schemes to limit the civil liability of professionals and others,
(d) to constitute the Professional Standards Council to supervise the preparation and application of schemes and to assist in the improvement of occupational standards and protection of consumers.”

Using solicitors as an example, the Law Society of New South Wales runs an approved scheme known as Lawcover. This scheme provides cover for up to $2m for each claim including claimant’s costs and defence costs. Smaller legal firms may choose to rely on that $2m cover as being adequate. Any firm is at liberty to seek extra cover and many large firms do. This is known as ‘Top-Up’ professional indemnity insurance. However, if you seek to impose a requirement for a higher level of cover than required under an approved scheme, be ready to justify your reasons.

So how do you justify that higher cover requirement? This is where the risk analysis comes into play. For those who are serious about understanding this process, you can obtain a copy of relevant risk management standards e.g., AS ISO 31000:2018 Risk Management – Guidelines or AS/NZS IEC 31010:2020 Risk management – Risk assessment techniques. You need to list your likely risks, then assess each one based on likelihood and severity of impact were it to occur. This will then enable you to determine a level risk rating for each risk and a risk priority e.g., most important, least important. Using this information, you will also be in a better position to estimate the $ impact of each risk and just your insurance requirements.

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