Market viewpoint: Are you really an expert?

Unexpected professional indemnity claims can cause the line between prosperity and financial devastation to wear extremely thin. Yet plenty of businesses are still not aware that claims can be frequent and burdensome, often leaving companies

Be they multinationals operating across the world or smaller private firms or partnerships, if the businesses offer advice, designs or similar services in a professional capacity, they are at risk from clients who regard them as experts. However, as we witness higher consumer awareness, clients who have relied on this expertise will pursue a claim without hesitation should they feel they have received a service they deem to be sub-standard.

All it takes to trigger a claim is a simple error, omission or mis-statement and lawsuits are becoming more commonplace, with greater access to the courts where awards have risen sharply over the years. Whether the professional person is guilty or innocent, the time lost and legal defence costs can be financially devastating - in many cases defence costs can even outweigh the actual damages awarded!

Now, it is not just the traditional professions, such as accountants, surveyors and solicitors, that need protection against liabilities coming from legal obligations to their clients. Clients today have extremely high expectations of the professionals who advise them - regardless of their field -- and are also very aware of their rights in this litigation-conscious society.

Professional indemnity protection is therefore no longer regarded as an expensive and unnecessary overhead by businesses who advise clients. As the environment in which professionals work is constantly changing, with client expectations continually rising, even the slightest oversight can lead to a claim.

However, the consequences of being caught out can be extremely damaging and, without adequate insurance cover, the financial security of a business could be severely threatened.

Although professional indemnity insurance is compulsory for many professions, the scope of cover available can vary significantly from the minimum requirements of the regulatory bodies.

Comprehensive cover should include indemnity against legal liability to pay damages and claimant's costs and expenses as a result of a breach of professional duty on the part of the business. These policies should also pay for all costs and expenses incurred by the business, with consent from the insurer.

The policy should also offer businesses liability cover for the acts, errors and omissions of partners or former partners, directors or employees and agents. In addition they should include cover for liability arising from the dishonesty of employees, libel and slander and lost or damaged documents (including the cost of replacement). Finally, businesses should look for protection for defence costs, which may be paid in addition to the limit of indemnity.

Businesses need to assess properly the amount of cover appropriate to the business, which involves taking a realistic view of potential damages and legal costs.

Those businesses that are underinsured face similar risks to those with no professional indemnity insurance. Companies specialising in professional indemnity cover will generally recommend that businesses should not take out an insurance policy with a limit less than L250,000. Cover up to a limit of L10,000,000 or more is available..

The advertising and marketing world is an example of a business at major risk from wide-ranging liabilities. At one end of the scale are public relations consultants issuing straightforward press releases and at the other, advertising agencies handling complete campaigns for multi-national clients.

The rates and premiums charged to this sector vary depending on the range of services undertaken and the type of client. For small consultancies carrying out straightforward work, insurance companies will normally quote minimum premiums of just a few hundred pounds.

Leading professional indemnity insurers have policy wordings specifically designed for advertising agents and marketing consultants. In addition to basic cover for legal liability for neglect, error or omission, the policy should provide. legal liability cover for plagiarism, infringement of property or contract rights or TV exhibiting rights (such as breach of trademark or patent), libel, slander and defamation and breach of copyright. The policy should also provide cover for `in-house' losses.

The advertising and marketing industry must also make sure that indemnity for additional costs incurred by the insured in successfully rectifying any neglect, error or omission, which could otherwise lead to a valid third party claim under the policy, should also be covered as `in-house' losses.

For example, if an advertising agent is contracted to place an advertisement in the press on a certain day and mistakenly arranges for it to appear on the wrong day, the agent will wish to rectify the error as soon as possible to maintain a good relationship with the client. If the insured does not correct the mistake, the client could sue for damages for which the insured would be legally liable.

Advertising agents also face a raft of liabilities. Often in a direct contractual relationship with a provider of media space, such as a magazine or TV company, they can be faced with dissatisfied clients who may simply refuse to pay the fees owed. This leaves the advertising agents personally out of pocket because they will still be contractually committed to pay the subcontractors. In this case a conventional professional indemnity policy would not apply because there is no third party claim, however an advertising agent's policy would provide for a claim to be settled without third party legal action.

Examples of claims include:

* Advertising Agents

- The insured were instructed to carry out direct mailing in connection with a new product launch. A large number of addresses proved to be incorrect necessitating a complete re-mail.

- A promotional campaign was organised in which a free gift was offered to purchasers of a product in exchange for a number of proofs of purchase. The description of the gift inadvertently quoted a registered trade mark and the advertising agents were obliged to supply the authentic product at an increased cost.

- A commercial shown on television had the wrong soundtrack.

* Public Relations Consultants

- It was alleged that research to gauge public opinion on a new product was not sufficiently comprehensive, resulting in delays to the product launch.

- A translation mistake in a press release resulted in a successful suit against a consultant.

* Graphic designers

- Advertising literature produced by the insured contained an error that was only discovered after all the copies had been printed. This resulted in a claim for reprinting costs.

The construction industry and related professions form another sector constantly faced with professional indemnity risks. Most P.I. insurers will cover design and construct risks, quantity surveyors, project managers. When asked to provide cover for large risks, some insurance companies may limit their involvement to writing an excess layer of "follow lines" only.

Examples of claims include:

* Heating, ventilation and electrical engineers

- The insured designed and supervised the installation of the mechanical and electrical services in an office block. Operational difficulties became apparent with the air-conditioning, allegedly due to a design fault.

- The insured designed the electrical services for a factory unit. The client alleged that the lighting was inadequate and did not comply with relevant regulations

* Mechanical engineers

- The client alleged that the design of a furnace by the insured was negligent

- The design of a machine proved inadequate to cope with the weight of items being produced

* Civil and structural engineers

- The client alleged that the design of a water scheme was negligent

- A claim was brought alleging negligence in a redevelopment project

- The roof of a car park designed by the insured started to leak and the client alleged negligence.

Risk management can never eradicate the risk of legal liabilities from professional negligence claims, yet at least 35-40% of claims continue to be caused by easily preventable circumstances. The following risk management procedures can help businesses to reduce exposure to allegations of neglect, error or omission:

* Get written work instructions and checklists from your client, which follow a job from its inception through to its completion. By doing this businesses understand the job completely and are aware of how long it will take, what stages need to be completed by when, etc. Thus failure to comply with these instructions and checklist will flag immediate concerns and allow businesses to make amends before it is too late.

* Obtain letters of engagement. Letters of engagement outline the services to be provided by the business to the client for a particular job, together with the procedures the business intends to go through to achieve these and ensure that the specifications are met.

* Review working procedures regularly. Businesses constantly need to assess whether they are working effectively and safely for a particular job to ensure continuing suitability of working procedures.

* Use a diary system that works! The sheer number of claims made as a result of missed deadlines is incredible. Efficient diary systems that work can eliminate these.

All records of the original contract, plus any amendments to it, including subsequent verbal agreements, must be kept on file. In order for a case to stand up in court, businesses must report from all meetings and document all actions agreed with clients - be it over a drink or during short telephone conversations. Anything is better then nothing - even a scrap of paper can be used as evidence in court.

* Arrange a meeting with the client and an independent partner following completion of the job to obtain feedback on how the business fulfilled its role. This procedure has multiple advantages for the business. Firstly, businesses are able to redress any discontent early on and avoid claims by rectifying any perceived problems before it is too late. Secondly, the procedure makes clients feel valued - it therefore strengthens the client relationship. Thirdly, the procedure can be used as a valuable market research tool that can be used to reduce the risk of future claims from similar jobs undertaken by the business.

Demonstrating and adhering to such strong risk management programmes may also have a beneficial effect on the level of premiums charged and the extent of cover an insurer is willing to grant.

With clients' high expectations of skill and care, incidences of professional liability claims continue to rise and, irrespective of guilt or innocence, all cases require defending which involves high costs and valuable time. In today's litigious society professional indemnity is therefore essential protection and will cover businesses not only for errors they make but also, and perhaps more importantly, from the cost of defending allegations of professional negligence.