Professional Indemnity Insurance - Liability Insurance - Basics

Sumeet was interested in investing a lump sum amount in a plan which can provide him a certain level of income per year with a minimum risk of capital loss. So he went to a financial consultant, Akshay, who ran a financial consulting agency, to get some advice. Akshay suggested investing in a particular fund according to Sumeet's requirements.

However, Sumeet did not receive any yearly income from the fund, but in fact, suffered a capital loss during the two year investment period. Akshay has not even provided any updates to Sumeet during the investment period of two years regarding the performance of his fund. Later, Sumeet came to know from other sources that the fund was not performing well at the time of original investment.

Therefore, in this case, it is clear that reasonable judgement was not exercised by Akshay while performing his duty as a professional, which had resulted in big losses to his client. Sumeet filed a case against Akshay for professional negligence and the court awarded compensation to be paid by Akshay to Sumeet. Akshay also had to incur legal expenses in defining his case.

Now, we will discuss what is the standard of duty of care expected from professionals in performing their duty, when does a professional liability arise, how can it be covered under insurance and how do the clauses in professional indemnity policies differ from other liability polices..

• Need for professional indemnity insurance :- Professional Indemnity insurance policies are designed to provide insurance protection to professional people such as doctors, solicitors, chartered accountants and architects etc. against their legal liability to pay damages arising out of negligence in the performance of their professional duties. In India, the professional indemnity policy is generally given by the insurance companies to those professional:

1. Who are governed by practices and services as laid down by a statutory organization/body.
2. Who are answerable to the governing council in the event of failure to adhere to these practices.  

Thus the medical professional governed by the Medical Council of India or the Engineers or Chartered accountants would be issued Professional Indemnity Policies.  All other professionals would be issued Error & Omission policies. 

The need for insurance protection to cover these legal liabilities by professionals is felt due to:

• The increasing claims consciousness among their clients.
• More awareness in them about impact of litigation and the high awards in motor third party and other public liability fields nowadays.
• The fact that the professional people, like everybody else, are prone to commit errors in the conduct of their business and especially in the modern conditions of life which is becoming more difficult and complex.