Litigation - The Importance Of Adequate Insurance

Professionals are always at risk of being sued for loss or damage caused allegedly by mistake, omission, negligence or other error. The range of claimants is virtually endless. Today's client may well be tomorrow's plaintiff/applicant.

This article sets out the ways in which professionals can manage the risk of litigation by third parties, former clients, disgruntled staff or even Commonwealth and State Government instrumentalities.

The article explains the ranges of insurance cover available to professionals.

The second part of this article discusses a second area of asset and liability protection being the choice of practice structure. The various alternative structures are identified and their advantages and disadvantages identified.

The third part of this article talks about the threat to asset and liability protection by company winding up and insolvency.

Importance of Adequate Insurance

Insurance is a form of both risk transfer and risk financing. Insofar as a claim falls within an insurance policy, financial burden is transferred from insured to insurer. Alternatively, the insurer provides to the insured sufficient funds to pay third party demands.

Professionals such as architects, accountants, engineers, medical practitioners, quantity surveyors, lawyers, physiotherapists and others should consider a matrix of insurance to assist financial survival and then financial success.

Professional Indemnity

This policy provides cover for breaches of duties owed in a professional capacity as a professional practicing in a specific area. The protection is in relation to claims made against the professional and notified to the insurer within the period of insurance.

Public Liability

This insurance protects professionals against legal liability for personal injury and damage to property of third parties which arises in a non-professional context. Not everything a professional does in his or her business is a professional act. For instance, a building surveyor may be responsible for personal injury or property damage on a building site as a result of carelessness - e.g. causing a tripping, slipping or falling hazard at a building site or at the surveyor's office or at a client's business during visits before a professional relationship exists or after one has concluded which subsequently caused personal injury or property damage. There will be a number of exclusions including liability arising within a professional context.

Directors & Officers Liability

Where professionals practice via a company, they may be directors or senior officers. Particularly in larger private companies working as professionals, directors and senior corporate officers owe a variety of statutory and common law duties to a wide variety of persons such as shareholders, creditors and employees. For instance, company directors face civil liability and fines if they allow their companies to trade whilst insolvent. Directors may face personal liability if they discriminate against employees or potential employees when hiring or firing staff. Likewise, directors cannot give preference to certain classes of creditor if the company is facing insolvency or liquidation.

Business Interruption

Busy professionals, I suspect, give little thought to what would happen to their business if the premises from which they practise is destroyed by mundane risks such as fire or storm let alone more exotic risks such as terrorist action, civil unrest or nuclear radiation. In reality, a professional practice can be badly affected if the business is interrupted and cannot be carried out because buildings have to be rebuilt, offices have to be re-furbished, records need to be re-written and replaced and businesses need to be relocated, either temporarily or permanently. The cost to professional practices of this interruption is insurable through business interruption insurance.

Accident & Health/Income Protection

Many professionals practice in small partnerships or as sole practitioners. Most professionals have been very busy in recent times. Most professionals tend to assume that the money will keep on being generated indefinitely. What happens, however, if you befall a non-work work-related injury or illness which prevents you from working for a lengthy period of, say, three months, six months, twelve months etc? If you practice on your own, who will take over the responsibility for running your files? Who will generate the professional fees which you and your family need to live on? Who will pay for locums to run your practice? Accident & Health Protection policies, whilst expensive, do provide income streams in these circumstances.

Employee Dishonesty

Sometimes, employees of professional practices will have access to client funds, particularly where multiple permits and inspections are being organized where building estates with multiple allotments are created. This insurance provides coverage for employee theft of client funds. It is sometimes known as fidelity guarantee insurance.

Statutory Fines & Penalties

Traditionally, this type of insurance supplements professional indemnity policies. It provides coverage for the cost of lawyers in defending misconduct cases brought by disciplinary organizations such as the Building Registration Board, the Building Appeals Board, the Building Commission, the Medical Practitioners' Board, the Royal Australasian Institute of Architects, and the Victorian Legal Services Commissioner etc. The legal fees you may incur in defending such cases are indemnifiable whether the charge is established or not. Other policies go further and seem to provide indemnity for the final penalty imposed. You need to read those policies very carefully. They may be contrary to public policy. It would be wise to seek legal advice before paying premiums for those policies.