Imagine this, a lot owner within a strata scheme is suing the owner’s corporation (OC) for damage to their lot. In response, the OC is blaming the strata managers for failing to notify them about the maintenance required and not actioning requests in a timely manner, causing the damage to worsen.
As a strata management business, your clients rely on you to provide professional advice, and OC's depend on this information when managing their properties. Mistakes can sometimes be made, leaving your business at risk of a claim from a client or third party. As such, strata managers are required to hold a professional indemnity (PI) policy that is customised to their services, as per the Owners Corporation Act 2006. Not all PI policies are the same, so here are 6 important considerations to keep on hand when you’re reviewing and comparing quotes.
What is professional indemnity insurance?
Professional indemnity insurance protects your business against claims of negligence arising from professional advice and/or services you provide that result in a client or third party’s injury or financial loss. Professional indemnity insurance covers your legal defence costs and damages if a client or a third party endures a loss in connection with the advice you provided to them.
The cost of professional indemnity insurance is determined by several factors, including your business revenue, professional services offered, number of years in operation, number of employees, and claims history.
6 essential for comparing professional indemnity quotes
1. Know your limits
The level of cover is limited for any one claim, along with several reinstatements. This means if you have a policy with a limit of $2m for any one claim with two reinstatements, the aggregate limit of liability is $6m. When an insurance policy is arranged on an aggregate basis, the limit of indemnity is the total amount that the insurer will pay out over a policy term (usually one year) for multiple claims. The number of reinstatements is not to be confused with the number of claims you are entitled to per policy period. The total limit of cover is $6m however, each claim is limited to $2m.
2. Costs inclusive vs costs exclusive
- A cost inclusive limit option means that any legal defence costs are deducted from the total limit of liability.
- A cost exclusive limit is less common but more advantageous to the policyholder. This option means that any legal defence costs are covered by the insurer, and they are not deducted from the limit of liability.
3. Check the excess level
In some cases, insurers may offer different excess levels depending on the professional services from which claims arise. For example, real estate agencies will have a separate excess (generally higher) for claims arising from property management claims.
Insurers view property management activities as ‘high risk’ because of the frequency and severity of associated claims. It is important your broker reviews the policy excess each year because it is not always listed on the schedule and it can take the form of an endorsement, which is an add-on to the standard cover.
4. Retroactive date
Every policy will have a retroactive date which will limit any notifications/claims that arise from any professional services provided prior to the retroactive date. This can sometimes be unlimited depending on your business’ claims history and the insurer’s willingness to cover the risk.
5. Run off cover
The purpose of run off cover is to ensure you have an active policy in place so if claims arise within the indemnity period, the policy will respond accordingly. Under the statute of limitations, clients have 7 years to lodge a claim or notification against your business from the time they received your professional services. A PI policy works on a claims-made basis. This means there must be an active policy in place at the time the claim or notification is made. If you retire or sell your business, run off offers protection for services provided before you ceased practicing. Insurers generally provide run off cover for 1,3,5, or 7 years, depending on their risk appetite.
Only the insurer who holds your policy at the time you cease practice can provide you with run off cover and you will not be able to obtain a standalone run off policy from competing insurers.
6. Note the typical exclusions/limitations
The following items are likely to be excluded or limited in cover:
- Dishonest, fraudulent, and criminal acts.
- A limit in jurisdiction (generally advice provided in the USA and Canada is excluded).
- If there is a history of known claims or circumstances, insolvency, and fines and penalties.
This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Honan shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and any analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.
