If you, or your company, provide professional advice you may have heard that you need errors and omissions insurance. But what exactly is it? What does it cover? And how much do you need? We spoke with Martin Taylor, an expert in errors and omissions insurance at S-Tech Insurance Services to find out the answers to these questions and more…
Let’s clear something up, what actually is errors and omissions insurance?
“Okay. Errors and omissions insurance, which is often called professional indemnity insurance, covers your legal liability for advice you provide, whether that’s for a fee or not. That may be anything from an architect’s design to an accountant’s tax advice.”
So, it’s an insurance that’s covering the advice? i.e. if the advice someone gives turns out to be bad advice and somebody decides to sue them…
“Yes, it’s covering any damages and the legal costs including a solicitor and even expert witnesses if they need to be brought in. So the full cost of defending the action and the damages, which may include fines that a customer has incurred. So that would all be picked up.”
And what kind of businesses should consider having errors and omissions insurance?
“Anyone who provides advice. Basically, as long as it’s other than advice purely in connection with the supply of a product. I should point out that there are certain areas where that doesn’t apply, for example, insurance broking. Alan Boswell Group are supplying a product, but obviously, we’re providing advice. Or in IT where you may be providing software, for example. But normally, it’s where you’re providing pure advice. So, if you go into John Lewis, and they give you technical advice about a TV that you’re buying, you wouldn’t expect that to be professional indemnity. That’s to do with the sale of the product. If it’s purely selling a product, it doesn’t come under professional indemnity.”
Do you have to have errors and omissions insurance? I mean, is it legal requirement to have?
“I think the answer is that it’s not a legal requirement in the same way as employer’s liability insurance is, however, certain professions are obliged, possibly under statute, possibly due to their professional body, to have cover. So, for example, we as insurance brokers or financial advisors, are obliged to have it under FCA regulations. The same goes for, for example, solicitors who have an obligation, again set down in statute, that they have it but it is driven by their professional association. The same goes for Chartered Accountants, Chartered Surveyors, so people that have Royal Charters have obligations to have the cover. Other professional bodies may require them to have it, but there is no law so to speak.
“So, while certain organisations are required to have cover, every prudent, forward thinking company giving professional advice should think about having cover.”
Certain professions are obliged, possibly under statute, possibly due to their professional body, to have cover.
How much cover does someone need?
“There’s two sorts of scenarios. Number one is that the core professions, if you like, the solicitors, the accountants, the insurance brokers, we are all told a minimum level of cover we have to buy. But I think we need to underline the word minimum. Because your professional body says you have to have £2m cover, it doesn’t mean £2m covers is adequate for you. It just means you have to have at least that. The problem with that is that exposure can be completely different. Take, for example, two accountancy firms. One may do book-keeping for hundreds of self-employed small-traders and one may complete audits for four or five large, limited companies. Income may be similar but the exposure is completely different.”
So, how do you recommend a company understands the level of exposure and chooses the appropriate level of cover?
“Well, I think they really need to review their exposure with their broker. I deal with a lot of agricultural consultants and we tend to take a view, initially, looking at the maximum exposure if they have a total loss. But then we have to look at exposure if they cause contamination to water courses, contamination to adjoining crops, etc. So, I guess dealing with an experienced broker, who understands your particular profession, will give you a good heads up to what level of cover.
The other thing to say is, it will be driven by how much someone is willing to spend. They may need £5m, but if they’ve budgeted for just £1m then that’s all they can have.”
What about retrospective cover? Or for businesses that may have stopped trading, are they still potentially liable?
“Professional indemnity insurance is usually a ‘claims made’ policy. This means the policy that will be claimed against will be the one that is in force on the day you first become aware of circumstances that may give rise to a claim. You also must have told your insurers as soon as you become aware. It’s no good going back and saying, “Oh, we knew about this last year, so we want to claim on the policy”. It’s got to be notified.
And the other side of that is what we call the retroactive date. The retroactive date is the date from which claims for work you do are covered. So, if you have a claim for work that you did prior to the retroactive date on your policy, which will normally be either the date you started buying insurance or the date you started trading, then that won’t be covered. So, that is a restriction. People don’t always perceive it as such, but it is a restriction in cover. The ideal policy will either be silent on the matter or say ‘Retroactive date – none’. That just covers your liabilities back forever.
Looking at if you are retiring or planning to cease trading you need to consider two aspects. If you are a limited company selling to another company you’re normally selling all your liabilities as well as all your assets. Therefore, the new company take on the professional liability. On the other side, if you sell your business as a partnership or sole-trader you are selling your goodwill and you will be left with the liabilities. So, you would want to consider buying run-off cover for six years or more.
The reason that it’s for six years is the Limitation Act. The Limitation Act limits claims to six years from the date of the negligent advice. There are deeper considerations. Someone can bring a claim in tort which is six years from the date they suffer the loss but can be extended by a further three years from the date you become aware. And in some cases contracts can be signed ‘in deed’ or even under seal. In those cases the Limitation Act is 12 years. In all cases there is an absolute longstop of 15 years to bring a claim
So, if you’re in your late fifties, for example, and you sign something as a deed you may be paying for insurance well into retirement when you’re not receiving an income from the business.”
Martin Taylor is an account executive at S-Tech Insurance Services Ltd and an expert in professional indemnity insurance. If you would like some advice on your own PI cover needs you can call Martin on 01223 324233 or get in touch.