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Professional Indemnity Insurance for Project Managers

Why do project managers need Professional Indemnity Insurance?


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Project managing is service where errors or omissions could jeopardise the project’s success and result in negative financial implications. The project manager is ultimately responsible for the failure of the project and whether the problems were within their control or not, they can find themselves facing a lawsuit. This is where professional indemnity insurance comes in to play.

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How are project managers exposed to risk?

A project manager is someone who plans, coordinates and executes a project, according to strict deadlines and budgets.

The role of a project manager includes:

  • Defining the objectives of the project
  • Acquiring the resources needed to make it happen
  • Recruiting and coordinating the input of others such as third party contractors
  • Overseeing quality control during the life of the project.

These are responsibilities that can lead to mistakes, errors and financial costs for the client. This in turn can leave project managers at risk of being sued for negligence.

Construction project

A typical example is a builder undertaking a construction project. The weather, unforeseen obstacles such as employment issues or supply chain problems and if it is a large-scale construction project could all delay a projects completion time, leaving the developer facing financial losses. Having professional indemnity insurance means the builder can pay his legal costs and any damages awarded to the developer.

What is professional indemnity insurance cover?

Professional indemnity insurance is a form of liability insurance designed to protect professionals who give advice or provide a service to their clients. If they fail to perform in this capacity as a professional and it results in a client suffering a financial loss, professional indemnity insurance will cover them in the event of a claim of negligence. It covers the legal costs of defending the claim as well as any damages that may be awarded to the client.

Who else takes out this type cover?

Professionals of all kinds take out professional indemnity insurance including doctors, lawyers, accountants, consultants, builders, architects, financial advisers, engineers and IT professionals. Any independent professional whose failure to perform could result in loss or injury to a client needs to consider this kind of cover.

Crane on building site

How can professional indemnity cover project managers?

Professional indemnity insurance covers a wide range of potential risks that project managers may be exposed to. These can include:

  • Providing incorrect information and advice
  • Breaching privacy and confidentiality rules
  • Showing bias towards a particular party
  • Having a conflict of interest
  • Creating an ineffective strategy
  • Failing to properly manage a project
  • Failing to complete a project within an agreed time frame
  • Breaching a client’s confidentiality
  • Losing important documents
  • Failing to follow a client’s instructions
  • Unintentional defamation, slander or libel
  • Breaching fair trading laws
  • Breaching a contractual agreement
  • Infringing on intellectual property rights.

As well as covering the costs associated with negligence, professional indemnity insurance can also cover the cost of hiring public relations consultants to repair the damage caused to the project manager’s reputation as a result of a lawsuit.

The details of a professional liability insurance policy will vary depending on the type of project manager you are and it is always wise to find a broker or insurer who has expertise in your particular industry when seeking insurance cover.

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How to compare professional indemnity insurance policies

When comparing professional indemnity policies, you should use some or all of the following broad criteria. Ask yourself whether the policy provides indemnity for:

  • Civil liberties (i.e. strict liability where no negligence is involved)
  • Unintentional defamation
  • Breaches of the Trade Practices Act (i.e. misleading and deceptive conduct that results in a breach)
  • Unintentional infringements of intellectual property (i.e. trademarks, patents and copyright)
  • Fraudulent or criminal acts by employees
  • Acts, errors or omissions by subcontractors
  • Legal costs and expenses for attending an inquiry.
  • Price is obviously also an important consideration, but rather than looking for the cheapest available cover, price should be viewed in the context of benefits included.

You should also compare the insurers providing the policies. Ask yourself whether they have an A+ security rating, insurers are rated by Standard & Poor’s from C (highly vulnerable) to AAA (extremely strong), and whether they have expert knowledge of your industry risk profile.

Getting value out of your cover

To ensure your professional indemnity insurance provides you with the cover you need, take care when drawing up or signing service contracts with your clients. The wrong wording in a contract can trigger an exclusion clause in your professional indemnity policy, resulting in a lack of cover when you need it most.

Be ware of the following when entering a service agreement with clients

Example 1

The ‘good faith’ requirement that is included in many service contracts. If this is a general requirement for the service provider to act in good faith and is not tied to any specific rights and obligations, then if a civil dispute arises, the contractual or assumed liability exclusion found in most professional indemnity policies could be triggered. This is a clause that excuses the insurer from paying if the insured has a prior contractual obligation or responsibility.

Example 2

Be wary of wording in a service contract where clients require the inclusion of a commitment to work within a set budget. Budgets are notoriously unpredictable, so committing yourself in writing to a particular sum may cause the insurer to refuse payment if a dispute arises where the budget has been exceeded.

Example 3

Clauses requiring the service provider to pay ‘liquidated damages’ if the work is not completed to the required standard (these are excluded in most professional indemnity polices). Yet another example is clauses that make the service provider solely responsible for the project, despite decisions having also been made by the owner. The insurer may opt out of paying a claim because the service provider has assumed greater legal liability than would normally apply at law.

Professional indemnity insurance exclusions specific to project management

Common exclusions found in professional indemnity insurance for project managers include no liability for:

  • Claims arising after the policy has been cancelled - in project management, particularly construction, a claim may not arise for some time after the project has been completed, so the project manager needs to ensure there is a ‘run-off’ extension in their policy.
  • Claims related to events that occurred before the policy was taken out.
  • Claims related to professional fees being claimed by a project manager’s client for services provided.
  • Claims arising from the project manager intentionally engaging in fraudulent or criminal acts.
  • Claims to cover fines or penalties received by the project manager.
  • Claims where the project manager was acting as a director or officer of a company when the liability was alleged.
  • Claims where the project manager or their suppliers or contractors were insolvent.
  • Claims relating to the project manager operating without the appropriate licences or registration.
  • Claims relating to faulty workmanship by the project manager.
  • Claims arising from acts of cyber-crime, such as data loss from a computer virus.

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Professional indemnity insurance FAQs

Q: Who is classed as a professional?

  • A: Any person who gives advice or provides a service to people in a professional capacity.

Q: Is it compulsory to have professional indemnity insurance?

  • A: No. It is not legally required, but it is common practice for those hiring project managers to require them to have a professional indemnity insurance policy before commencing the project.

Q: What protection does professional indemnity insurance offer?

  • A: It protects your assets from liquidation if a professional indemnity claim is brought against you.

Q: What does negligence mean?

  • A: Negligence is where a client suffers a loss caused by a project manager not fulfilling their duty of care to that client.

Q: What is a retroactive date?

  • A: It is the day from which you are covered by your professional indemnity insurance policy.

Q: When should I inform my insurer of a situation that could lead to a claim?

  • A: As soon as you are aware of it. Failure to do so could mean your cover is denied by the insurer.

Q: I am a skilled professional. Why do I need professional indemnity insurance?

  • A: Because you may be sued. Even if something is not your fault and you will still have to pay legal fees to defend yourself.
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Clients who pay for professional advice or services rely on the provider to use their knowledge and expertise to benefit the client. If this does not happen and the client suffers a loss, they will be understandably upset and attempt to recover that loss. Because of the risk this exposes a professional to having professional indemnity insurance is essential to avoid financial ruin.

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