Scope & Coverage

What it is

Professional indemnity insurance, also known as errors and omissions insurance, is a liability policy. It protects professionals and their firms against claims by clients for financial loss caused by a negligent act, error, omission or breach of professional duty in providing professional services. For medical practitioners the claims come from patients, for harm caused by negligent treatment.

In India it matters particularly to doctors, chartered accountants, lawyers, architects, engineers, IT consultants and insurance brokers. These are professionals answerable to their professional bodies or, in the case of insurance brokers, to IRDAI. The policies themselves are general insurance products regulated by IRDAI.

Why clients can claim

A professional holds out special skill, and a client who suffers loss because that skill was exercised carelessly can seek compensation. For doctors the position under consumer law was settled in Indian Medical Association v. V.P. Shantha (1995). The Supreme Court held that medical practitioners who provide services for a fee are providing a service under the Consumer Protection Act, so patients can bring consumer complaints for medical negligence. Services given free of charge to everyone fall outside it.

The claims-made trigger

Professional indemnity is almost universally issued on a claims-made basis. The policy responds to claims first made during the policy period, regardless of when the error occurred, subject to the retroactive date.

The retroactive date is the earliest date from which professional errors are covered. An error before it is excluded even if the claim is made during the current policy period. Two further conditions usually sit behind the cover: the insured was not already aware of the error when the policy began, and the claim is notified as the policy requires.

Continuity follows from this design. A claim made while no policy is in force is not covered, and switching insurers can reset the retroactive date, leaving earlier work uninsured. The extended reporting period, also called tail cover or run-off cover, extends the time for reporting claims about past acts after a policy expires. It matters most to professionals who are retiring or closing a practice.

Defence costs and exclusions

Defence costs may be within the limit of indemnity, where they reduce the amount available for damages, or in addition to it, where they are paid separately. The second structure leaves the whole limit for damages and is priced higher. Which applies is a matter of the policy.

Wordings generally exclude the insured's own deliberate, dishonest or fraudulent acts; the cover is for genuine professional errors and negligence. Details vary. Some wordings pay defence costs until fraud is established, and some protect innocent partners or cover dishonesty by employees.

Rules at a glance

Key points

• Professional indemnity insurance covers clients' financial loss caused by a professional's negligent act, error or omission.
• It is almost universally written on a claims-made basis: the claim must be first made in the policy period.
• The retroactive date is the earliest date from which errors are covered.
• Cover needs to be continuous; a gap, or a reset retroactive date on switching insurers, can leave past work uninsured.
• The extended reporting period is also called tail cover or run-off cover.
• The insured's own deliberate fraud is excluded, with details varying by wording.

Common misunderstandings

• The date of the error does not trigger the policy: the claim being first made in the policy period does, provided the error is not before the retroactive date.
• Professional indemnity is not cover for dishonesty: the insured's own deliberate fraud is excluded.
• A new policy from a different insurer does not automatically cover old work: the retroactive date may have been reset.
• V.P. Shantha does not bring every medical service under consumer law: services given free of charge to everyone fall outside it.

Questions people ask