The time is past when a $1 million sum insured is adequate for most Professional Risks policies.
For more than 20 years, for small to medium-sized professional practices, this sum has been considered a reasonable limit for Professional Indemnity, Directors & Officers Liability and Management Liability policies.
But a significant number of claims are now exceeding $1 million, even for Insureds with annual fees/revenue much less than that amount.
A review of CGU Professional Risks’ claims records shows that, of our 46 largest claims:
- 16 incurred (i.e. claims yet to be finalised) amounts are equal to or exceed the policy limit, and
- 11 of these claims were on policies with a sum insured limit of $1 million or less.
The corresponding fee income of these Insureds is also well below $1 million, showing that fee income is not a reliable indicator of an appropriate sum insured.
It’s important for everyone that the sum insured is adequate.
It is obviously bad news for the Insured and their broker when they receive a claim on a policy where the sum insured is inadequate; it brings no joy for CGU Professional Risks either.
It is also an unwanted surprise for the Insured's client to discover that his or her professional adviser did not have adequate insurance to cover the loss.
It is bad news for everybody, and that’s why it is so critical that careful consideration be given to the adequacy of the selected sum insured when renewing or taking out a new policy.
Some questions to consider when considering sum insured:
- In a worst-case scenario, if something went wrong, what would be the financial loss to third parties?
- What is the potential for bodily injury claims, and even multiple injuries?
- What is the potential for consequential economic loss to any third party?
- What is the potential for multiple claims in any one policy year? (Note: the policy limit is in the aggregate but normally with an automatic reinstatement for PI policies.)
- What is the level of potential legal and investigation costs which may be incurred by a successful claimant or claimants over the life of the claim?
- What is the level of potential defence and investigation costs incurred by or on the Insured's behalf over the life of the claim?
- Is the policy limit inclusive of defence costs or not?
- How long may a claim take to settle? Sometimes this can be eight to 10 years or longer, which means the legal costs and interest liability will mount, as will the effect of inflation.
- How many parties are likely to be implicated in any claim or action? The more parties there are, the more difficult and costlier it is to settle a claim.
- What is the nature, scale, and complexity of work done in the past and during the policy period? (Note: a policy covers exposure from past work where the retroactive date has been extended to do so.)
- What is the overall contract/project value the Insured works on? The Insured may have a small part and only earn a small amount of fees, but their acts, errors or emissions could delay the entire contract/project.
- How many prior years are there where risk exposure may arise? In some cases it may take years before a liability becomes apparent to the Insured.
- What is the exposure from incoming principals’ risks at prior corporate entities, or merged or acquired entities?
In general, a sum insured of less than $5 million is unlikely to be adequate for even a small practice which assesses its exposure as low.
Email CGU Professional Risks today at pri@cgu.com.au so we can help you.