Are you in the process of closing or selling your engineering business? Or perhaps you’re not working as an engineer for a period of time? Don’t make the mistake of cancelling your Professional Indemnity (PI) Insurance without the appropriate Run-off PI Insurance cover to protect against future claims.
Without it, there is no financial protection against damages or legal expenses should a new claim surface.
How does Professional Indemnity Insurance work?
Professional Indemnity Insurance is a claims made insurance policy. This means that for any insurance ‘claims made’, it is the current policy at the time of claim notification that responds to protect you, regardless of when the alleged error or omission event occurred. E.g. an error made could have occurred 5 years ago, but only came to light this year. It is the current PI insurance policy in place at the time of claim notification that protects you.
The nature of a PI policy means that you must have a policy in place at the time you become aware of a claim, or else there is no insurance protection against this exposure.
What happens if I cease working as an engineer? Am I still exposed to claims?
After you cease working as an engineer, there is still a high possibility of receiving claims for damages as a result of an error or omission in your past work. Further, contracts often stipulate that engineering contractors must hold PI Insurance for 7 years after completion of works.
The moment you cancel your PI policy, or let it lapse at expiry, you can be exposed without cover for any new claims alleging a breach in professional duty. You may also be in breach of a legal contract.
Example:
An engineer provided advice on a building’s foundation design 5 years ago, but it was only on April 1st this year when a claim came through alleging this advice led to a collapsed pylon and significant structural damage. The PI policy in place at the time the engineer is notified of the potential claim (April 1st), is the one that responds to protect them.
However, if the engineer cancelled their PI Insurance, or let the policy lapse at expiry on March 25th when they stopped working, there is no insurance protection in place when notified of this claim on April 1st. This is the case, EVEN though the claim relates to advice provided 5 years ago when they did have PI cover in place.
Without a current PI Insurance policy, there is clearly an ongoing financial and legal risk exposure when you cease providing professional engineering services. However, it is unrealistic to be expected to retain PI Insurance for eternity. This is where Run-off PI cover can manage the risk.
What is run-off cover, and how does it protect me against the risk of future claims?
Run-off cover usually comes in the form of a PI policy, but with an added policy clause that excludes any new work after the policy cancellation date, business sale or closure date. Therefore, it will protect you for past works only.
Depending on the insurer, run-off cover can be purchased for multiple years, or renewed on an annual basis over a number of years. At the very least, the length of cover should be governed by the statute of limitations period.
I have closed my business and have opted against run-off cover, what could happen?
Potential costs:
- No cover for legal defence costs – Regardless of whether you are at fault or joined to a Claim as one of multiple defendants, you still need to defend yourself. Legal defence costs can fast amount to tens of thousands of dollars.
- Damages payable – if you are found to be at fault for loss or damage incurred by a third party as a result of your error or omission, you could be required to pay significant damages to those affected. Depending on the claim, this can reach into hundreds of thousands of dollars, if not more.
Without run-off cover, you could be left to incur these expenses on your own, potentially exposing your business and/or personal assets to significant loss.
EngInsure are here to support you, providing quality insurance advice and solutions to address your unique risk exposures.
For guidance on PI insurance specific to your circumstances, please get in touch with one of our specialists:
T: 1300 854 251
E: info@enginsure.com.au
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.
