Professional liability insurance (PLI) is a tool to protect the professionals against the claims of losses made by their clients arising out of alleged negligence on the professionals’ part. It covers the professionals against legal claims of errors, omissions, professional neglect etc. having fallout as reimbursements to be made to the claimants. The professionals prominently seeking this protection are- doctors, engineers, architects, lawyers, chartered accountants, financial advisors, management consultants, brokers etc.

The policies under Professional liability insurance usually cover the amount of claim made by the aggrieved party and the cost of legal defence in the court of law. Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation of any law in existence is not covered. Policies are issued to individuals, group of individuals, and professional firms.

The negligence on the part of professional is accepted only when following conditions are satisfied:

• Existence of duty of care.
• Breach of this duty.
• Harm suffered by a person or property damaged as a result of that breach.

Need of PLI for Financial Advisor

Financial advisors are relied upon by their clients to help them secure financial well-being and prudent and tax-efficient wealth planning. In most of the countries, there are either regulatory bodies or professional self-regulatory institutions ensuring some minimum qualification for financial advisors. They usually rely upon lot of data and reports to give any financial advice. However, there is always some room for subjectivity due to certain view-points strengthened at the cost of others during their professional careers.

Also, changed market and economic conditions may render some advice redundant even in short term. As their advice is directly involved with the outcome of the investments of the client, the financial advisers are more vulnerable than most other professions to the blame of financial loss due to their allegedly wrong advice. Financial advisors usually face allegations of following natures [1]:

• Incorrect or inappropriate financial advice.
• Overlooking the specific needs of the client.
• Overlooking many factors affecting the client’s needs before rendering advice.
• Deceptive or misleading conduct.
• Failing to assess the need for insurance or some kind of hedging arrangement to prevent losses.
• Inappropriate estate planning.
• Breach of confidentiality clause of the bilateral agreement.
• Loss due to fraud or dishonesty of any employee of advisory firm.

Although there is no universally applicable set of acts against which the Professional Liability Insurance covers the financial advisors, following is a tentative list of risks which are covered by most policies [2]:

• Providing incorrect information or advice.
• Breach of privacy clause.
• Conflict of interest.
• Intellectual property rights infringement.
• Loss of documents.
• Ignoring a client’s instructions.

These risks are more or less applicable to most of the professions which seek cover under the PLI.

Global Scenario for Professional Liability Insurance

The practice of PLI is popular in the developed countries. The insurance companies in USA cover an extensive range of professions including IT security, stud farms and ranch, fitness and recreation centres, adoption agencies, mental health services providers, insurance companies and officials, personal identity theft coverage, private equity, reputation threat coverage, electrologists, day spas, body piercing, tattoo practitioners etc. [3]

In UK, many professional organizations have made it mandatory for their members to purchase the PLI policies to practice their professions. For example, in England and Wales, PLI is mandatory for solicitors as required by Solicitors Regulatory Authority. Similarly, the Institute of Chartered Accountants in England and Wales has made it mandatory for its members to subscribe to PLI.

Indian Scenario for Professional Liability Insurance

The concept of PLI is not as well conceived in India as in developed economies. The need for PLI was felt primarily as a reaction of courts awarding the medical professional hefty fines on complaints of the patients regarding medical negligence. Gradually, the need was felt to protect the professionals in case their services provided in good faith did not give intended results to the clients. Many general insurance companies are now providing a range of PLI products to professionals like doctors, engineers, lawyers, chartered accountants, financial advisors etc.

For example, The New India Assurance Co. Ltd. provides wide range of professionals including finance professionals coverage for professional errors and omissions and negligence. Similarly, Tata AIG Insurance Company provides Professional Indemnity/Errors and Omissions insurance to professionals as diverse as IT, BPO/Call Centres, Media, and Directors & Officers. Similarly, Reliance General Insurance provides professional indemnity insurance to many professional categories.

Merits of Professional Liability Insurance

• It helps the professionals to practice their profession in good faith with best of their abilities relatively free of fear of unintended consequences.
• It protects the professionals from financial cost inflicted on them due to unintended consequences of services provided by them in good faith.
• As the PLI policies do not cover the criminal liability and unlawful acts, this draws a red line for the professionals. This helps in bringing professional ethics and legitimacy of professional conduct to the forefront of their practices.

Conclusion

In the era of increasing awareness of consumer rights and legal framework of various professions, the claims of error, omissions and professional negligence are bound to rise. This is not necessarily because of the rise in professional laxity, but primarily due to ever-existent human nature to err, and growing interaction of consumers with the professionals due to their new-found urge to use the expertise of specialists for various needs. The only new thing is that the courts are liberally awarding punitive costs upon professionals for their mistakes. So, the practice of purchasing PLI policies has to become a norm so that professionals continue to render their services in a hassle-free manner.

References

[1] http://www.finder.com.au/professional-indemnity-insurance-for-financial-advisers

[2] Ibid.

[3] http://www.aig.com/Professional-Liability_3171_416864.html

 

Authored by,

Swarn Saurabh

Research Analyst

Pulse Labs Research & Technology Solutions Pvt. Ltd.

Bengaluru

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