It’s widely known that companies and professionals alike enjoy numerous benefits by purchasing professional indemnity insurance. Also called errors and omissions insurance, this type of policy offers financial assistance in the event that a lawsuit is brought against professionals or companies, and they are held responsible for professional negligence or error.
Key Takeaways
The Trigger Mechanism: Professionals must distinguish between “Claims-Made” (covers claims filed while the policy is active) and “Occurrence” (covers incidents that happened during the policy period, regardless of when filed). Mistaking these can lead to a total loss of protection.
The Danger of Underinsurance: It is a “disastrous” habit to curtail coverage to save on premiums. If a ₹50 Lakh claim hits a ₹20 Lakh policy, the insurer only pays the limit, leaving the professional’s personal assets vulnerable for the remaining ₹30 Lakh.
Beyond the Price Tag: A low premium often indicates a narrower scope of cover. Ensure your policy includes Legal Defense Support, as the cost of hiring specialist advocates can often exceed the actual compensation amount.
Insurer Credibility Matters: The Claim Settlement Ratio is a vital metric of an insurer’s reliability. A high ratio provides “peace of mind” that the company has a track record of honoring its commitments to policyholders.
The Deductible Balance: While a high deductible lowers your premium, it increases your “skin in the game.” Choose a limit that is high enough to save on costs but low enough that it won’t cause a financial crisis if you have to pay it during a claim.
However, when you decide to purchase professional indemnity insurance, it is essential to pay the utmost attention. To ensure you purchase the right professional indemnity insurance, here are some mistakes that you should completely avoid
1. Failure to understand the difference between available policies
When you go to buy professional indemnity insurance, you will be offered two types of coverages: “claims made” and “occurrence.”
In the case of a claims-made policy, the coverage is given only when the alleged incident and the resulting claim happen when the policy is active. Here the injury that results in a claim may occur during or before the claim, however, the claim must be made within the policy tenure.
On the other hand, occurrence policies offer protection against that negligence as well which took place when the coverage was active, even if the claim is filed when the policy has ceased to exist. Knowing the differences between both coverages is necessary at the time of purchasing the professional indemnity insurance policy to ensure you make the right selection.
2. Not buying sufficient insurance coverage
It is a human tendency to save the money as much as possible. However, this habit can prove disastrous in the case of insurance. A few bucks saved today can prove to be costly for you in the long run. Remember, you want to buy a professional indemnity insurance policy to get financial coverage for professional negligence or errors, etc.; but how would the insurer help you if your coverage is not sufficient? The purpose of insurance is to get complete financial protection but what if you would have to pay for losses from your pocket at the time of claim? So, while you have done right by thinking about buying professional liability insurance, however, make sure it is sufficient enough to give you complete coverage. Don’t curtail your cover to save premiums!
3. Choosing the policy on the basis of premium only
Taking the above discussion forward, if you decide to choose the errors and omissions insurance policy just because it has a low premium, think again! There are various factors which decide the premium and therefore, the chances are high that the insurer may cut your coverage on the basis of the premium that you intend to buy. For instance, does your professional indemnity insurance give legal support or not?
4. Not considering the claim settlement ratio of the insurer
Another major mistake that is made at the time of buying professional liability insurance is not knowing the claim settlement ratio of the insurer. It is essential to pay heed to the claim settlement ratio, which shows the number of claims settled by the insurer in the previous year. The higher the claim settlement ratio is, the higher are the chances of your claim to get settled. It is necessary to buy professional indemnity insurance from an insurer with a high claim settlement ratio to get peace of mind and surety that your claim will be settled, provided the other parameters are fine.
Read more: How a Professional Indemnity Insurance is Boon for Professionals and How to Buy it
5. Choosing the wrong deductible limit
In the insurance world, the deductible is the amount that you would have to pay at the time of claim before the insurer settles the remaining. A higher deductible deters the policyholder from approaching the insurer for every single claim, and therefore, the insurer rewards with low premium rates. However, increasing the deductible limit to lower premium rates can go against you when you would have to pay a substantial claim amount from your pocket. Similarly, if you opt for the too-low deductible, you are paying an additional amount which you could have easily saved. So, be prudent while deciding the deductible limit.
Summary Table: Mistakes to Avoid in PI Insurance
| Common Mistake | Potential Consequence | Best Practice |
| Ignoring Policy Type | Claims may be rejected if the “trigger” (Made vs. Occurrence) is misunderstood. | Choose “Claims-Made” for most professional services; understand the reporting window. |
| Insufficient Coverage | Massive out-of-pocket payments if the claim exceeds the Sum Insured. | Base coverage on your largest contract value, not your smallest. |
| Premium-Only Focus | Hidden exclusions or lack of legal defense support to save a few bucks. | Evaluate the “Scope of Cover” before comparing the price. |
| Ignoring Settlement Ratio | Difficulty or delays in getting valid claims paid by the insurer. | Select insurers with a high and consistent Claim Settlement Ratio. |
| Poor Deductible Choice | Paying too much for small claims or too much in premium. | Balance the deductible based on your firm’s cash flow and risk tolerance. |
Our Advice
The world of corporate insurance is tricky, and it is essential to have the complete understanding of the policy to make its optimum use. So, take the help of SecureNow, a leading corporate insurance advisor, and make the entire process of buying professional indemnity insurance hassle-free and easy. To find the right policy, it is imperative to ensure that you do not commit the above mistakes, and with the help of SecureNow, you can ensure it!
Frequently Asked Questions (FAQs)
1. Why is “Claims-Made” the most common type for Professional Indemnity?
A) Because professional errors (like a structural flaw or a tax mistake) often take years to surface. A “Claims-Made” policy allows you to be covered for work done in the past, provided you have an active policy on the day the client actually sues you.
2. Can I change my “Deductible” in the middle of the year if I feel it’s too high?
A) Generally, changes to the deductible can only be made at the time of policy renewal. It is important to assess your firm’s financial health at the start of the tenure to ensure you can afford the out-of-pocket portion of a claim.
3. Does a high “Claim Settlement Ratio” guarantee my claim will be paid?
A) Not guaranteed, but it is a strong indicator of the insurer’s intent and efficiency. A claim can still be rejected if it falls under an exclusion (like intentional fraud), but a high ratio means the insurer doesn’t typically look for “technicalities” to avoid paying valid claims.
4. What happens if I move from an “Occurrence” policy to a “Claims-Made” policy?
A) This can create a “coverage gap” if not handled correctly. You must ensure that your new “Claims-Made” policy has a Retroactive Date that goes back to the start of your previous coverage to ensure there is no period where you are unprotected.
5. How do I determine if my insurance coverage is “sufficient”?
A) A good rule of thumb is to look at your most expensive contract or your high-risk client. Your “Limit of Indemnity” should be at least equal to the maximum potential financial loss that specific client could suffer due to your error.
About The Author
Amit
MBA Finance
Amit is an experienced insurance professional with 7 years in the industry, specializing in Errors & Omissions Insurance. Writing for SecureNow, he provides clear and insightful blogs and articles to help professionals understand the importance and nuances of E&O coverage. His expertise ensures that readers receive practical advice on protecting themselves from potential liabilities and professional risks. Dedicated to making complex insurance topics accessible, Amit stays updated on industry developments, delivering valuable content that empowers professionals to make informed decisions about their E&O insurance needs.
