Liability insurance is a kind of insurance where the policyholder is compensated for the loss arising from a claim made by a third party. Professional indemnity insurance is a kind of liability insurance.
It is liability insurance taken by people who are professionals, to protect themselves against the risk of liability caused mainly due to negligence in their work. In other words, it provides indemnity coverage to people in different kinds of professional services such as architects and lawyers.
If the policy is on ‘negligence’ basis, the insured will be covered for all his acts of negligence or omission in the course of the service rendered. On the other hand, if the policy is on the basis of ‘civil liability’, then it would cover any civil liability of the insured.
In the case of an ‘each and every’ basis policy, there is a stipulation that each and every claim will be covered up to an agreed limit. Any loss over and above that will have to be borne by the insured. An ‘in aggregate’ policy cover fixes the maximum sum total in respect of all claims made during the period of the policy. Once the claim limit is hit, the insured will have no more coverage.
A combination of ‘each and every’ basis and ‘in aggregate’ basis policies are provided by some insurance companies. Such a policy is called a policy with a ‘hybrid cover’. Policies with such coverage will settle claims on ‘each and every’ basis up to the fixed aggregate limit.
Professional indemnity insurance policies with this coverage will exclude certain covers which can be bought back by the insured on the fulfillment of certain conditions.
As the name indicates, these policies are indemnity policies. So the insured can make a claim only when a liability arises.
The insured is indemnified by the insurance company for the loss caused due to a claim made against the insured by a third party for a negligent act, error or omission of the insured or an employee of the insured or a partner of the insured in the course of the business of the insured. This policy however does not cover loss caused by negligence of the client or the loss suffered by the insured by his own negligence.
Unless mentioned in the policy, the insured does not have to furnish ‘proof of payment’ made by him to the third party.
Though there are insurance policies which fully compensate the insured for all claims made within the scope of the policy, professional indemnity insurance policies generally fix a limit to the amount of compensation. The insurer wants the insured to bear a certain part of the loss. This loss up to a specified amount which has to be borne by the insured is called ‘excess’ or ‘deductible’. The insured is compensated for the remaining part of the loss by the insurer.
Though used interchangeably at times, the terms ‘excess’ and ‘deductible’ do not mean the same. Their meaning can be explained with an example. If a person has taken a professional indemnity insurance policy of 100,000 pounds with an ‘excess’ of 30,000 pounds, the loss to the extent of 30,000 pounds has to be borne by the insured. The insurer will then compensate for the loss up to the limit of 100,000 pounds. If the policy contains a ‘deductible’ of 30,000 pounds instead, then it would mean that the insured has to first to bear the loss of 30,000 pounds. The insurer will then indemnify the insured only up to the extent of 70,000 pounds.
Though an additional expense, professional indemnity insurance provides protection to professionals from any claims which arise from third parties due to their acts. In fact, many professional institutions insist that their members buy professional indemnity insurance.