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The Cost of Having Professional Indemnity Insurance Vs Not Having Coverage

What type of IT services do you provide? Are you a website developer, an IT&T project manager, software developer, or a provide IT&T support services? Or perhaps you are IT&T Consultant or Contractor? No matter what your profession is, if you provide professional services and advice to your clients (for a fee) than there is an expectation on you to deliver accurate advice. However, in business, there are times when mistakes and accidents do occur. Unfortunately, even the most careful of individuals may do something that upsets a client due to an error or negligence, and that client threatens to sue when that mistake causes them a financial loss.

George’s story

George is an IT software developer and he has been doing business for a couple of years. He is a sole trader with no employees. He has never had an incident in which a client had become overly upset with him. As a matter of fact, he has a very high rate of satisfaction among his clients.

He recently won a new contract, which he’d been pitching for for close to a year, for a high profile client. The work involved a substantial upgrade to ERP system incorporating new product lines. He was thrilled. Even though it meant that his workload would dramatically increase and that he had to work longer than usual hours, it was only for the short-term and the hours would be well worth the rewards at the end, due to the prestige of having this client as part of his portfolio and the potential work that could be developed.

Unfortunately the same week he won the contract, he got a call that his mother had been in a car accident that put her in critical condition. In the following weeks, George spent most days by his mother side and worked nights to try and keep on top of his work. He spoke to his existing clients and advised them of the situation and they were willing to provide more time during this difficult period. However, as George wanted to impress his new client and did not want to risk losing their work, he did not advise them of his situation. Exhausted and stressed, he pressed on and completed the work for his new client and confirmed the completion of the project. After weeks of touch and go, George’s mother was in stable condition and in recovery. George feels a sense of relief and things seem to be getting back to normal.

A few weeks go by and he receives a call from his new client advising that there is a problem. There appears to be major inconsistencies with the new products and a review of the systems appears that the system is miscalculating the cost of products and a review indicates that this has cost them $40,000. They have subsequently suspended product sales until the problem is rectified. The client will incur a further substantial financial loss as they already announced the launch date of their new product and cancellation of the date would incur additional costs. The client advises George that they will be making a claim against him for the costs and any additional expenses incurred. George assures his client that if he is responsible for this error, that he has professional indemnity insurance in place which provides protection in the event that he is negligent.

Immediately after the phone call from his client, he phones his insurance broker. Fortunately, George had professional indemnity insurance that covered breach of professional duty which includes cover for acts, errors and omissions. When it was all said and done, the client recovered $60,000 (including legal defence costs), but not out of George’s pocket other than the policy excess. Following an investigation, his insurance responded to his clients claim and George could go on with his life and not worry about managing a claim from his client or worrying about were he was going to come up with the money to pay. Although George had made an error, the client was happy that they were compensated for his negligence.

George’s scenario is an example. Whether under pressure for work, or personal circumstances, or just a pure accident, mistakes do happen, we are all human.

The cost of not having professional indemnity insurance

The cost of not having professional indemnity insurance can be quite significant. Depending on the nature of financial loss caused to a client, a person can be sued for way beyond the value of the work or contract value with a client. It doesn’t take long for a business and client relationship to turn sour if there a financial loss suffered, whether it be by an individual person or a business. In many cases what happens next is legal advice sought from a lawyer or solicitor and, in turn, they will be appointed to explore all avenues to endeavor to recover the loss suffered against all parties involved and commence litigation. A person can be sued for any amount of money as a result of their client suffering a financial loss and actually be legally required to pay if it is found to be as a result of their negligence. If they don’t have professional indemnity insurance or are not well financed to cover a financial loss out of their own pocket, then they’re probably going to need to sell their home, business or a number of their assets in order to come up with the amount. Worst case scenario is to lose everything and file for bankruptcy. This can ruin credit and many other areas of a person’s life.

You never know when something may occur. You don’t have to be negligent for someone to make a claim against you, it may be an allegation that you are required to defend. It isn’t worth taking that chance to not protect yourself and your business when one lawsuit can literally ruin your life for years to come. Too many individuals in the past have done business without professional indemnity insurance and are paying for it many years later. Had they had the coverage, they probably still wouldn’t have paid in premiums what they had to pay to settle the claim. The yearly cost of the insurance is well worth the investment.