Quote from a live twitter feed a few days ago - "PI Insurance – quote on line £268 – quote form a broker £2,568 – compute that!" It's a good question and highlights beautifully the dangers of assuming that all Professional Indemnity insurance products are simple contracts which can be purchased as a commodity without the need for specialist advice.
The individual posting this question is an IT professional providing predominantly web based services such as Internet Marketing, SEO,
Web Hosting and Web Design Solutions. He is a sole trader with experience in PHP programming and transport model programming using Fortran, Visual Basic and C languages. He describes himself for the purposes of his insurance proposal as a "Computer Consultant".
This case highlights a number of misconceptions and problems that arise when trying to purchase Professional Indemnity Insurance. The first issue is one of language – what you understand by way of your job description may not be the same as a Professional Indemnity insurer. Take for example the "Management Consultant" whose main role was to "Advise Management" on the technical specification of Missile Systems. Without going into too much detail what was needed in this case was an Engineer's Professional Indemnity policy, with some very special extensions. What the client tried to buy was a Management Consultant's Professional Indemnity policy which, whilst much cheaper, would not have provided any cover in the event of a claim.
In the case of our "Computer Consultant" we need to consider what insurers mean by way of Computer Consultant. IT companies and the services they offer are not easy to categorise, largely due to the wide range of business and industrial environments in which IT professionals work. On line quote engines, which maybe ideal for the most simplistic IT professional, will have significant limitations in respect of the protection they provide and the business activities that they cover. They are unlikely to provide adequate cover for anything more than the most simplistic risks.
The problem facing buyers of professional indemnity insurance on line is that there is, from a risk perspective, a world of difference between a firm which provides advice on packaged hardware and software to a firm that provides bespoke solutions or internet services or financial trading platforms. There is a significant gap between the cover that is required for the different business activities.
What insurers are looking at when they consider an IT professional for Professional Indemnity Insurance is the potential that the particular firm or individual presents for immediate financial loss and other consequences if data is incorrect or a system fails or becomes unavailable for any period of time. Much depends on the precise function of the software and the commercial application it is being used for. In the case of the IT consultant selling packaged hardware and software there is clearly less risk to insurers of a claim being made than where a bespoke system has been provided. Equally a web designer has less chance of being sued than a company providing web hosting services.
The main areas that give rise to litigation against IT companies are Failure of the software / system to do the job which it was intended for (fitness for purpose), Failure to deliver the system on time, Failure to deliver the system to budget. There are also smaller, but more frequent, claims which relate to breach of copy-write, plagiarism and libel. Typical claims involve a client that withholds or claims for return of the purchase price / fees paid, an action against the IT company for the direct financial and consequential losses arising from the negligence of the IT company, damages for breach of copy-write or libel. Breaking down the risks in this way it can be seen that the simple computer consultant selling his packaged hard and software solutions is less at risk of a major claim than our programmer, web designer or internet hosting company.
Consideration also needs to be given to the geographical exposure that a risk presents. The basic IT Consultants package is likely to restrict cover to domestic territorial limits, or provide worldwide territorial limits, but domestic jurisdiction limits only. This can be confusing, but the distinction is very important and it is vital for the IT company to understand the limitations of their policy.
In layman's terms the territorial limits are about which countries you can work in, the jurisdiction limits are about the countries in which you will be able to claim for legal representation in the event that a claim is made against you. It is important to realise that these may be different.
For an IT consultant specialising in hardware or software sales in the UK with no overseas exposure, UK territorial limits and UK jurisdiction maybe fine, however a web developer may well need Worldwide cover for both Jurisdiction and Territorial limits even if he only works in the UK for UK companies as his work will be open to claim throughout the world.
Another factor that insurers will consider when underwriting an IT Consultants Professional Indemnity policy is the type of client that they look after. Areas of particular concern to insurers include clients in the financial sector, games developers, trading systems, process control systems, Application Services Providers and Internet Services Providers, Managed Service Providers and Mission and safety critical systems. There is also a direct relationship between the size and complexity of the work undertaken by the IT professional and the resultant exposure to potential claims. Underwriters will charge a significantly higher premium for this type of work, particularly if it is carried out US or Canadian firms.
In most cases Insurers' first line of defence will be a written contract between the insured and their client. It is very important that smaller firms take the time to understand the extent of their policy coverage in this respect as some policy wordings can exclude contractual conditions, particularly if they are overly onerous or include consequential losses. One of the benefits of using a professional Indemnity Broker such as PI Expert will be that the broker will be prepared to advise on policy coverage for individual contracts as and when they arise. This is particularly of benefit for smaller IT firms who are asked to sign onerous contracts with larger customers. This can be vital as insurers often expect that consequential losses will be excluded, or at least limited, by the IT company in their contract terms and conditions.
So what else should the IT consultant be looking for when they buy Professional Indemnity Insurance? Most policies will provide insurance under several different heads of cover. These are typically Professional negligence, Negligent misstatement or negligent misrepresentation, Failure of software to be fit for purpose, Infringement of intellectual property rights, Breach of confidence, misuse of confidential information, Defamation, Dishonesty of employees. Whilst a good policy will provide cover under all of these headings, some basic policies may cover only one or two items of coverage only.
Another factor to consider is how claims are handled. Many IT Professionals expect their professional indemnity policy to automatically pay out that if they identify that they have made a mistake or an error, however most basic policies require a claim to be made against the IT Firm by the client before the policy will respond. This will take time and imposes a burden of proof of negligence on the IT firm's client and normally results in the loss of the business for the IT firm. It is possible to buy enhanced cover – often called first party cover – which provides ability in the wording to allow insurers to put right a problem discovered before a loss occurs. In this case it is the policy holder, not his client, who will make the claim.
An IT professionals cover should always be on an "Any One Claim" basis. Some basic Professional Indemnity policies will seek to limit liability under the policy to an "Aggregate" or "In All" limit. An Aggregate limit can be disguised by some insurers as an "Any One Claim and in the Aggregate" basis of cover. Another trick is to include defence costs within the claim limit – these should always be shown as "Payable in Addition". Ideally the excess should not apply to defence costs as this is where most claims will start and finish. I have seen one policy which is being sold to a very large group of IT professionals which whilst it provides a limit of £1,000,000 on an Any One Claim Basis, the cover is limited to £2,000,000 in the Aggregate for all of the members of the group – meaning that only two large claims are needed to blow the cover for the remaining members.
The final point to consider is the policy coverage in respect of past work. This is called "Retroactive cover" and is necessary because all Professional Indemnity policies are written on what is known as a "Claims Made" basis rather than as is more usual (in motor or office insurance) a "Claims Occurring" basis. In simple terms you need to have a Professional Indemnity policy in place not just when you do the work, but also when a claim is made against you. The cover needs to be continuous. This is important to remember when pricing work as most claims tend to come after a contract has been completed and you could occur after the business has finished trading. You should therefore be budgeting to continue buying Professional Indemnity cover for at least five years after you cease to trade.
Retroactive cover is either shown as "Inception", "None" or with a date. If the policy states "Inception" as the retroactive date then you are only covered for the work that you have done from the start of the policy. If it has a date then the cover under the policy includes all work that you have done in the past back to the sated date. If the retroactive date is "None" then the policy covers you for claims made during the current policy year for all work done, including in the past, without time limit.
In most cases if we are looking at the basic premiums then you can be sure
In conclusion returning to our Computer Consultants post I have to agree that what he is saying is true – it is possible to buy an insurance policy for £268 for a "Computer Consultant". The problem of course is that there is not a hope in heck that it will provide any cover in the event of a claim. What he actually needs is something completely different, and yes if he wants to be covered in the event of a claim, it will cost him more than £268, although not necessarily £2,568 as the final price depends on whether he has consulted a broker like PI Expert who specialises in Professional indemnity Insurance with access to every insurer or just one with a small amount of knowledge and limited access to the market.
Buying professional indemnity insurance cover is one of the most important decisions that you will make about your business. In a no win no fee world you need to be sure that the professional indemnity insurance cover you buy will protect your business in the event of a claim. With so many different insurers and so many policies to choose from it can be difficult to know what to buy. That's why many professionals turn to PI Expert to help them find the find the best professional indemnity insurance cover for their business at the best possible price. Contact PI Expert by phone on 01825 745 410, by email at enquiries@piexpert.co.uk or check us out on line www.piexpert.co.uk
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