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Doctors, lawyers, accountants, engineers, and many key professionals are sometimes accused of negligence and misrepresentation. Such accusations often lead to hefty penalties. In this regard, professional liability insurance protects the accused from legal consequences.
Every business is run by policies, ethics, and humans that weave these guidelines. These humans are experts in their fields and are regarded as key professionals in an organisation. While they take optimum care and due diligence in their field of work, they can sometimes make mistakes.
Since these people play a pivotal role in their organisation, any allegation of mistake, negligence, or malpractice can cost the company dearly. The organisation may face litigation and penalties. In such scenarios, a business professional liability insurance policy can save them from legal obligations or financial damages.
While such occasions can be detrimental for any organisation, they can be particularly challenging for small businesses. If you want to know more about professional liability insurance or professional liability insurance for small businesses, read this blog.
Here, we have explained what professional liability insurance is and what it covers.
What is Professional Liability Insurance?
Professional liability insurance (PLI) is an indemnity cover. It provides coverage to professionals against claims initiated by their clients accusing them of negligence, malpractice, or misrepresentation. Doctors, lawyers, accountants, engineers, and other professionals with expertise in some areas can benefit from professional liability insurance.
Professional liability insurance is also known as Professional Indemnity Cover because it provides indemnity against financial or legal obligations.
How Does a Professional Liability Insurance Policy Work?
Professional liability insurance is known by several other names depending on the industry. For example, in the medical industry, it is called malpractice insurance, while in the construction and realty business, it is known as errors and omission insurance.
A professional liability insurance policy comes into action when a third party sustains harm, injury, death or damage to property as a result of the professional service or advice provided by the insured. The client can often legally sue the professional for malpractice or negligence. Having a professional liability can help the policyholder take care of the legal expenses and also pay for the penalties if found negligent. However, the payout or the extent of coverage will depend on the policy coverage.
Typically, the policy compensates the policyholder during the policy period. Any claims made before the policy activation date do not come into its coverage.
Professional Liability Insurance Coverage: Inclusions and Exclusions
Inclusions:
Professional liability insurance coverage depends on the type of policy. Generally, it covers any legal liability arising out of negligence, malpractices, omissions, or errors made by a professional while rendering a service. If a third person gets harmed as a result of the negligence and demands compensation, professional liability insurance covers it for the policyholder.
Here is a quick list of what professional liability insurance covers:
- Mistakes, errors, and oversights in services provided.
- Missed deadlines
- Breach of contract
- If services are not delivered
- Negligence in service
- Failure to meet standards
Exclusions:
A professional liability insurance policy does not cover the following:
- Criminal prosecution for disobeying the law of the land.
- If the insured rendered services under the influence of drugs or alcohol that caused harm to the client.
- Cyber liability like data breach and other tech issues.
Understanding the Professional Liability Insurance Limits
In professional liability insurance policies, the sum insured is referred to as Limit of Indemnity, and it acts differently than sum insured in other types of insurance plans. If you are pondering over the purchase of business professional liability insurance, you should be aware of the following points:
- This limit of indemnity is set per accident in each policy tenure. It means the insured can only make a specific number of claims and the maximum limit of the sum insured will be set for each claim.
- The Limit of Indemnity can be of two types: Any One Accident (AOA) limit and Any One Year (AOY) limit.
- The insurance buyer can choose the ratio of the AOA limit and AOY limit.
- The insurance buyer should determine the maximum limit payable for each accident (AOA limit) before choosing the ratio.
Here is what the AOA and AOY ratio looks like:
Limit of Indemnity Ratio |
What does it mean? |
1:1 |
The policy will cover only one claim in a policy year up to the total indemnity limit.
E.g. If the indemnity limit is ₹10 crore, the policyholder can only raise one claim up to the indemnity limit. |
1:2 |
The policy will cover only two claims in a policy year, and half of the total indemnity limit will be reserved for each claim.
E.g. If the indemnity limit is ₹10 crore, the policyholder can only raise two claims in a year. The maximum claim amount for each claim cannot exceed ₹5 crores. |
1:3 |
The policy will cover a maximum of three claims in a policy year and one-third of the total indemnity limit will be reserved for each claim.
E.g. If the indemnity limit is ₹10 crore, the policyholder can only raise three claims during the policy tenure. Each claim's maximum amount will be capped at ₹3.33 crores. |
1:4 |
The policy will cover a maximum of four claims in a policy year, and one-fourth of the total indemnity limit will be reserved for each claim.
E.g. If the indemnity limit is ₹10 crore, the policyholder can only raise four claims during the policy tenure. The maximum claim amount for each claim will be ₹2.5 crores. |
Conclusion
Just like small and medium-sized businesses have SME insurance, having a professional liability insurance policy for small businesses is equally crucial. If you are an expert professional like a doctor, or a lawyer, or an architect, your professional mistake can have far-reaching consequences. Therefore, you should consider protecting yourself and your business with a professional indemnity cover.
