Professional Indemnity insurance (also known as Errors & Omissions insurance or just “PI” insurance) protects you and your business against any legal liability claims you may face from your customers or others (third parties) if you provide them with incorrect advice, design, specification, inspection or certification services.
Professional Indemnity insurance pays for compensation (damages that are awarded against you) and legal defence costs that you may incur because of problems associated with work you carried out for others. This can cover:
Unlike Products Liability insurance, which covers the physical goods or products you sell (if these goods or products cause third party injury/death or third party property damage) , Professional Indemnity insurance covers professional services you give to others, which are intangible “knowledge-based” products (if these professional services are sub-standard or erroneous and cause a third party to suffer financial loss) . For manufacturers and suppliers, it is often the Products Liability insurance which is prioritised and Professional Indemnity overlooked - even though many manufacturers and suppliers provide advice to customers as an “add-on” to selling their product. Providing advice can often make you responsible for the end result.
Any business or professional individual who provides their knowledge, skills, expertise, consultancy or advice to others should consider taking out Professional Indemnity insurance.
When considering manufacturing, suppliers or engineering firms, it is the engineering firms who are more commonly connected with providing professional services to customers – particularly when you think of the potential for design errors, misunderstanding specifications or just making an error. However, a manufacturer is also exposed to Professional Indemnity claims if a product fails because of a flaw in the design or an error in the manufacturing process due to altering the customer’s specifications. If a component part incorporated into a customer’s “end product” failed and did not perform its intended purpose (e.g. due to an error) but did not damage the third party’s “end product” , it would not be a Product Liability claim (because there was no third party property damage or third party bodily injury) but the customer still suffered wasted production costs and a negative impact on their sales revenues or worse, the customer may not have enough time to rectify the issue and loses the key contract and a key buyer– this is likely to result in a Professional Indemnity claim, which your Product Liability insurer would not cover.
Packaging and labelling responsibilities throw up different issues – consider an incorrectly worded warning label on a batch of products, meaning that a customer has to remove the products from circulation by taking them off shelves. This may not have caused any third party bodily injury or property damage a tall but the packaging company is still sued by their customer for their increased costs and lost revenue. The bigger the batch, the bigger the potential claim.
Manufacturers and suppliers conducting business overseas, selling goods and services crossing borders, brings additional risks, so companies need to understand local laws, standards and regulations. Ensuring well documented quality control procedures, record keeping and implementing a risk management policy across your business will help you manage disputes, litigation and maintaining good relations with your customers.
Manufacturing companies work closely and in partnership with their clients and suppliers, going backwards and forwards exchanging specifications, plans and data which can be confidential. Digital industrial technologies (often associated with smart Internet of Things, or “IoT” devices/sensors, and associated with the “4th Industrial Revolution”) are helping companies monitor performance, bring products to market faster, reduce waste and improve insights not previously possible. These digital “tools” are being used to integrate supply chain logistics across different customer operations, combine data, produce predictive analysis, transfer knowledge, automate actions and create better solutions.
The world of IT and the physical world are merging in front of our eyes and this is expected to accelerate, as is the combination of selling physical products with advice in order to compete.
Professional Indemnity insurance is nearly always provided on a “Claims Made” basis which means it is the policy in force at the time, when the claim is made in writing against your business , which would respond and not when the error or mistake happened. This is important to know, because “Claims Made” policies contain what is called a “Retroactive date” which is the date you first purchased Professional Indemnity insurance. The relevance of this “Retroactive date” is critical because any claims that arise from events (e.g. the error or mistake) that happened prior to this “Retroactive date” is not covered.
If you started providing professional services (advice, design, specification, inspection or certification services etc to others) before you purchased Professional Indemnity insurance or before you realised the benefits, then it may not be too late but you will need to specifically ask your insurer to “backdate” the insurance to cover work previously done. Insurers will not want to cover known losses but if they agree to “backdate”, they will request various assurances and charge an additional premium for this additional risk.
Professional Indemnity insurance will not cover you for deliberate acts such as a deliberate breach of confidentiality or a deliberate infringement of someone else's intellectual property rights. Some policies may specifically exclude a breach of confidentiality relating to trade secrets or an infringement of intellectual property involving patents. Fines, penalties and liquidated damages are standard exclusions.
Lastly, as always, be mindful to comply with conditions or warranties contained in insurance policies. For example, there may be a contractual condition ensuring that equipment is calibrated and maintained according to the manufacturer’s recommendations when carrying out professional services.
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