Professional indemnity cover-more crucial than ever

By: Malcolm Padayachee, Managing Executive of Professional Indemnity and Liability at SHA

The severity of risks in the liability space have increased two-fold – not only is the frequency of litigation on the rise, but exposures related to professional error have also increased. This is mainly due to factors relating to the poor economy and a skills deficit.

This is according to Malcolm Padayachee, Managing Executive of Professional Indemnity and Liability at SHA, who says that despite the above fact, it is worrying to see that many professionals still do not have professional indemnity (PI) cover in place.

“Our annual SHA Risk Review shows that around 12% of the professionals we surveyed have been sued at least once during their careers. Yet, only 57% of professionals currently have PI cover in place.”

Padayachee adds that the professional liability landscape has changed dramatically in recent years. “SHA’s claims statistics show that the cost of litigation against professionals has become considerable. The average intimated PI claim size for architects is around R1 million and climbs to roughly R3.7 million for attorneys, while for engineers it shoots right up to R13 million.”

He explains that the major trend driving this rise in the size of claims is the fact that litigation following a liability event has increased. “It seems that far fewer clients are now willing to settle disputes in an informal manner, rather opting for the litigation or arbitration route.”

Compounding this, the cost of litigation has also seen a considerable increase. “Looking at SHA’s own panel of attorneys, the cost of legal representation has grown by between 8-10% per annum. Consider the fact that PI claims can take up to 5 years to resolve, the inflationary effect of legal costs during that time, is significant. The cost of foreign litigation has increased by even more, with the average cost of attorneys in international cases nearly doubling between 2016 and 2018.”

Padayachee says that the other major reason for the toughening risk landscape is the fact that more professionals are unknowingly putting themselves at greater risk. “Competition on pricing between professional firms increases the risk of litigation. Firms that significantly cut their costs, often cut down on the resources and man-hours that are allocated to projects. It is also increasingly common for professional firms to supplement their incomes by diversifying into services that are not part of their core skills. Both of these behaviours greatly increase the likelihood of a professional or their firm making mistakes that could lead to litigation.”

From an insurance standpoint, Padayachee says that, subject to the insurer’s risk appetite, an underwriter may be able to structure adequate PI policies that account for the increased risks resulting from these behaviours at an additional premium. “However, there are many instances where this risk becomes uninsurable. In SHA’s own experience we have seen cases where firms expect their existing staff members to perform functions for which they are not qualified. If it is found that the professional gave gratuitous advice or performed services that they were not qualified for, their PI policy would not respond and the litigation costs will land on the firm’s balance sheet.”

Lastly, he points out that renewing PI policies on time is of absolute importance.  “SHA’ research found that 20% of professionals do not understand how late renewals affect them, and 22% indicated that they do not rely on a broker to explain policy requirements. It is a troubling finding, since only renewing a PI policy after it has lapsed means that the professional’s retroactive date no longer applies. Effectively, this means that if a new liability claim arises from a mistake that the professional made some years before, it will no longer be covered by the new policy. Long-tailed liability claims are commonplace, especially in incidents involving children, which is why it is vital to have uninterrupted cover.”

In closing, Padayachee reiterates that professionals across all business sectors are more vulnerable than ever to litigation by clients. “Even if it is found that the professional had acted responsibly, one is at risk of bankruptcy from the cost of legal defence alone. With this in mind, it is critical that professional service firms indemnify themselves and their professionals against the ever-increasing minefield of liability risks,” he concludes.