Short Term Professional Indemnity Insurance: 4 Things To Know Before Buying
Do you have a short-term contract that requires you to carry professional indemnity insurance? Are you wondering whether you can just buy coverage for a few months to save on costs? This is a common questions that our clients pose to us. In this guide, we explain:
- What is short term professional indemnity insurance
- When would businesses use short term professional indemnity insurance
- Whether it’s actually advisable to use short term insurance policies
- Where’s the best place to get short term professional indemnity insurance
#1. What is short term professional indemnity insurance?
When people talk about short term professional indemnity insurance, they’re usually referring to contract-based policies, rather than regular annual policies.
Being contract-based, a short term professional indemnity policy only protects the specific contract that it’s tied to. So if you only have 1 or 2 projects a year, this might be a feasible option. However, if you do lots of projects, then it’s probably a better idea to just go with an annual policy, since managing lots of policies would be an administrative nightmare. There’s also the issue of cost and run-off liability, which we discuss later in this article.
On the other hand, a regular annual professional indemnity policy provides 12 months of coverage. During these 12 months, all the professional work you do is protected by the annual policy (subject to policy exclusions). You could do 1 project or 100 projects – they’re all covered.
#2. When would businesses use short term professional indemnity insurance?
Usually, short term professional indemnity insurance is used when taking on large and infrequent projects that require professional liability coverage.
A common scenario is when a company wins a large project, but the liability coverage requirements exceed the limits of the company’s existing professional indemnity policy. If winning such large projects only happen infrequently, then it may not be cost-effective to increase the company’s annual policy limits just to meet the coverage requirements of this one project. In such a scenario, it may be more affordable to instead take on a short term professional indemnity policy. This short term policy will be used to just cover liability stemming from this particular contract.
We’ll use an example for greater clarity. Let’s say you run an IT consulting company. As part of your basic liability protection plan, you have an annual professional indemnity insurance policy with $500,000 coverage. One year, you happen to win a really large project worth $5 million. That’s awesome news! However, given that such large projects are not regular occurrences for you, you may not need to increase your annual limit to cover such projects. Doing so may be too costly in the long run. Instead, what you can do is to take on a contract professional indemnity policy that will specifically cover this $5 million contract.
Another common scenario that we see much too frequently is when businesses purchase short term professional indemnity policies only when clients require it in their contracts. For all other projects through the year, the business remains uninsured against legal liability from the work they do. Now, such situations are extremely dangerous for business owners. If you’re providing professional advice, you never want to remain uninsured against legal liability. A single lawsuit could easily cripple, or even bankrupt your entire business.
#3. Is it advisable for businesses to use short term professional indemnity insurance?
You should only use contract-based professional indemnity policies when taking on infrequent and large contracts that won’t be adequately covered by your annual indemnity policy. However, even when taking on such projects, do exercise caution when deciding to take on a short term policy. It’s important to note that contract-based indemnity policies run a real risk of leaving you exposed to liability after the policy expires. This is called “run-off liability” risk. Why is this so? Remember that liability from your projects does not exist only when you’re actively working on them. In many cases, service providers actually only get sued many months or years after they’ve completed their projects! This is because defects or mistakes in the completed work often take some time to become noticed, or to actually appear in the completed product. This is why maintaining continuous professional indemnity insurance is so important, because you never know when mistakes will manifest and result in liability for you.
When you purchase short term professional indemnity insurance, timing-related declarations are key. You must let the insurer know the following:
- Project start date
- Project end date
- Project maintenance period – for example, 18 months of servicing after the project is completed and delivered to the client
The short term professional indemnity policy will only cover you from point (1) to (3). Once the project maintenance period is over, you will be fully exposed to any liability claims that hit you.
So how should business owners mitigate run-off risk from short term professional indemnity policies? There’s 2 important things you need to do:
- Ensure that the maintenance period of coverage is sufficiently long. Some industries like construction may require many years of maintenance cover because defects often take a long time to show up.
- Ensure that you have an annual professional indemnity policy. In the event that you are sued after the short term policy expires, you’ll have to rely on your annual policy for protection.
To really protect your business, business owners need to have an annual professional indemnity policy in place. It’s really impossible to predict when lawsuits from your projects are going to come up, so in the event that the run-off cover from your short term policy expires, your annual policy will kick in to protect your business from liability.
Sometimes, clients will ask us: can we configure the maintenance period for the short term policy to be several years long? This is technically doable. However, the cost would be so prohibitive that you would be better off just getting an annual policy instead. Outside of taking on large and infrequent projects, it’s much more advisable to simply stick with having annual policies. You’ll be much better off purchasing an annual professional indemnity policy, and then increasing the limits of your annual policies as your business grows.
It’s not an uncommon practice for businesses to only take on a short term professional indemnity policy for 1 or 2 projects each year, while they leave the rest of their projects uninsured. In every possible situation, this is a really, really bad idea. As long as you provide professional advice, you can be sued by your clients. Most people downplay the possibility of being sued, until they end up actually facing a lawsuit demanding hundreds of thousands of dollars. In such situations, most people will say they could never have seen the lawsuit coming. But lawyers and liability insurance brokers will tell you differently, because lawyers and brokers see such lawsuits occurring so commonly to businesses of all stripes and sizes.
#4. Where’s the best place to get short term professional indemnity insurance?
Provide offers both annual and short term professional indemnity policies. With Provide, you’ll save up to 25% on your premiums. Our online operating model creates lower overheads, so we pass every dollar saved back to you. Get online quotes for professional indemnity insurance now!