Insurance concerns raised

CONSULTANTS beware. Professionals who cease trading and do not keep their professional indemnity insurance running could be left holding a smoking gun without any protection.

For many professions, a professional indemnity insurance policy has become a way of life. Indeed for some professions, including lawyers and professional bodies such as CPA Australia, such insurance is compulsory.

Claims made against normal policies, such as motor vehicle cover, are handled by the policy that was in force when the damage occurred.

Professional indemnity insurance works on a claims-made basis. That means any claim is handled by the insurance policy that is currently in effect, not the one that was in place when the damage was supposedly done.

Minter Ellison partner Bruce Goetze said claims in negligence could be brought up to six years after a loss was realised.

He said in the case of the legal profession, it could be an error made when a will was taken and was only noticed years later when the person died.

There is no problem if the professional’s insurance policy is up to date. But what happens after the professional ceases trading?

If there is no current policy running, the professional will not be covered.

Smith Coffey Insurance Brokers general manager Wayne Holt said that, to avoid being hit by claims years later, professionals needed to invest in professional indemnity policies that provided run-off cover.

In the cases where professional indemnity cover is mandatory, most of those policies include run-off cover.

“Professionals virtually need to have an insurance policy current for ever and a day after their company ceases trading,” Mr Holt said.

“Once a policy expires, no further claims will be accepted.

“In the case of architects, for example, design flaws in a building they designed may not be apparent for some years.

Aon Risk Services Australia solicitor Adam Rhodes said it was common for a claim against a consultant to manifest damage to the client within two to three years, and that a claim would be made within a further two to three years.

“It is for these reasons that we recommend run off cover be purchased for at least seven years following the cessation of business,” he said.

“It is then necessary to take an educated position as to the most likely time lag between the professional service provided and the time a client would most likely ascertain a loss following that advice, to determine whether any longer period of run off cover is appropriate.”

Mr Holt said professionals also needed to inform their insurance companies if they felt there was a possibility that a claim would be made against them.

“That way the insurance company can manage the case,” he said.

“If it is not notified and the case later blows up, the insurance company may refuse to indemnify the client.”

The least a professional could hope to pay for professional indemnity cover is around $1,500 per year.

But professional indemnity insurance rates vary according to the industry the professional is in and the amount of fees they bill.

At a recent Mortgage Industry Association of Australia forum, some attendees expressed concern about the collapse of HIH Insurance.

Many had professional indemnity policies with the company and fear any claims on those policies will not be honoured.

Mr Holt said because HIH was in provisional liquidation, its insurance policies still stood.

“At the moment professionals may need to find insurers with suitable security,” he said. “But they may not be able to get a refund on their HIH policy because of the company’s status.”

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