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                     Limit of indemnity in Professional Liability policies

All of us have filed our IT returns and some of us have engaged the services of a CA due to our various sources of income .One fine day we receive a notice from the Income Tax department that we have not paid our taxes correctly and default notice is served on us. This is an example of a small occurrence. In large businesses Income Tax default has greater repercussions.

The CA who has filed on our behalf is liable for such financial loss as it has resulted due to negligent acts, inaccurate advice, errors or omissions.

Liability means owning responsibility either implicitly or by Statute .Professional indemnity insurance covers compensation payable for the financial consequences of neglect, error or omission by the professional or firm taking out the policy.

How to decide on limit of indemnity or the liable costs.?

The Limit of Indemnity is the maximum amount the insurer will pay under a policy during the policy period and it is  a policyholder’s responsibility to decide the amount which is adequate to fully protect his/their business. Legal costs may be included within the Limit of Indemnity or may be covered as an additional amount, depending on the policy purchased.

How do you calculate limit of indemnity?

To determine if an indemnity limit will be sufficient to cover a future claim, the following points need to be reckoned

  1. Claims that may arise today or in the future in the discharge of  professional services .To arrive at the approximate  indemnity limit previous data/claims may be analyzed.
  2. Claims that may not be finalized during the current policy period or may be accrued later.
  3. Deciding the right Limit of Indemnity is significant to avoid the disastrous consequences of being under-insured. 

 

How much is enough?

 

Listed below are points for general awareness and risk management purposes which shall help as a guide to decide an adequate level of cover . 

Risk Exposure: The Insured is in the best position to assess the risks to which they are exposed. Analysis of risks must be done considering factors such as catastrophes ,frequent occurrences previous data on such claims etc.

The size of a firm also matters when assessing the compensation as the larger the firm greater is the compensation; as is dealt by the Courts. If it is under-insured at this juncture, the damages to the business are huge. The claim will eat away the profits of the Insured if not properly/adequately insured.

Inbuilt Controls: Provisioning, Welfare Fund etc. act as a stabilizer in such situations

Claimant's legal costs: Legal costs can increase the amount of the Professional Indemnity claim. So sufficient cover must be available to cover the Legal costs in addition to the damages claimed.

Regulatory Requirements: As mandated by the regulator which is specific to each business.

Inflation: Claim settlement in Professional indemnity policies is a long drawn process and can take years to reach settlement. Limit of Indemnity should cover the inflation factor.

Claims made cover: Limit of Indemnity chosen in the policy will be available for claims that are brought against the policyholder during the term of your policy. Further renewal with higher limits will not be available for the present claim as the Sum Insured reckoned will be the claims made policy.

Liability policies to cover Professional liability of a Firm ,Individual are important for the smooth functioning of the Professionals. Adequate cover will enhance the decisive skills as the risk aspect is taken care of by Insurance.

We at Zen Insurance assist in choosing the right Limit of Indemnity. Plan your Insurance Program wisely and contact us for assistance.

 Disclaimer:   

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products

 

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