Let’s say a client raises concerns about work you completed months ago. At first, it seems manageable. There’s no solicitor involved, no formal demand for compensation and perhaps not even an allegation that you have done anything wrong.
So, do you need to tell your insurer?
When it comes to Professional Indemnity Insurance, waiting until an issue becomes a full-blown claim can create problems.
This is because many PI policies operate on a “claims-made basis”, meaning the timing of the claim and when your insurer is notified can play an important role in determining whether cover is available.
For Australian businesses providing professional advice or services, understanding this distinction can help prevent a relatively small issue from turning into an expensive gap in cover.
What does “claims made and notified” mean?
Unlike other types of insurance, Professional Indemnity Insurance does not necessarily respond according to the date the work was originally performed.
Instead, subject to the terms of your policy, cover could generally depend on factors such as:
- when the claim was first made against you
- when you became aware of circumstances that could potentially lead to a claim
- when the claim or circumstances were reported
- whether the relevant work falls within the policy’s retroactive cover
- whether any exclusions or other policy conditions apply
However, this can feel counterintuitive. For example, imagine your business provided professional advice in 2024, but a client does not complain until 2026, when you have a different Professional Indemnity policy in place.
What happens then?
It may be the policy operating in 2026 that becomes relevant, rather than the policy you held when you originally provided the advice, subject to its retroactive date and other terms. That is why keeping continuous Professional Indemnity Insurance and understanding your notification obligations can be so important.
A claim does not always begin with a letter from a lawyer
One of the easiest mistakes for a business to make is assuming there is nothing to report until somebody formally demands money. In reality, Professional Indemnity issues can often begin much more quietly.
For example, you may receive:
- a complaint about your work
- an allegation that you made a mistake
- a request for documents or an explanation
- an unhappy client questioning the advice they received
- an indication that a client has suffered a financial loss
- a threat that the matter may be taken further
Depending on your policy wording and the circumstances, these could potentially constitute situations that may give rise to a future claim.
Australian law also provides an important protection in some circumstances. Under section 40(3) of the Insurance Contracts Act 1984, where an insured gives written notice to their insurer of facts that might give rise to a claim as soon as reasonably practicable after becoming aware of them, and before the policy expires, an insurer cannot avoid liability simply because the eventual claim is made after that policy period has ended.
Exactly how this applies will depend on your unique situation, so we recommend early discussion with your broker can be valuable.
Why waiting can create problems
It is understandable that businesses do not want to report every unhappy customer or minor disagreement. But the problem is that an issue which appears to have disappeared can occasionally return months later in a much more serious form.
Consider a client who complains about advice your business provided: you speak with them, resolve the immediate concern and hear nothing further. Then, your Professional Indemnity Insurance subsequently renews and six months later, the client alleges that your original advice caused them a substantial financial loss and formally seeks compensation.
If the earlier circumstances should have been disclosed or notified under the previous policy, questions may arise about which insurer or policy should respond.
This is why notification should not necessarily be viewed as admitting that you have done something wrong. In many cases, it is simply a risk-management step designed to protect your position if the situation later escalates.
Four common Professional Indemnity timing mistakes
1. “It isn’t serious enough yet”
Businesses sometimes wait for a formal demand before contacting their broker.
By that point, however, there may have been several earlier warning signs that could have been relevant to the policy.
If you are unsure whether something needs to be reported, it is generally better to discuss it with your insurance broker rather than make that assessment alone.
2. “The problem went away”
A client withdrawing a complaint does not necessarily mean the issue can never return. Professional disputes can resurface after additional losses are discovered, another adviser becomes involved or the client obtains legal advice.
Keeping records of complaints and raising potentially significant circumstances with your broker can help protect your business if the situation changes.
3. “We were changing insurers anyway”
Changing insurer at renewal can make notification timing particularly important: imagine becoming aware of a potential issue shortly before your existing policy expires but deciding to wait.
If the matter is raised under the new policy, the new insurer may consider whether it was a previously known circumstance. Meanwhile, the previous insurer may not have received notification during its policy period.
This could create an unnecessarily complicated situation at exactly the moment you want your insurance arrangements to be straightforward.
4. “Reporting it might affect our renewal”
Some businesses may hesitate to mention a potential problem because they are worried about premiums or renewal terms.
However, deliberately delaying notification can create a considerably bigger problem if the matter eventually becomes a substantial claim.
The purpose of Professional Indemnity Insurance is to help protect your business from professional risks. Keeping your broker informed allows them to advise you on how the policy requirements apply rather than leaving you to make that judgement after the fact.
Don’t forget your retroactive date
Correct timing alone does not automatically mean a Professional Indemnity claim will be covered.
Your retroactive date can also matter. A retroactive date generally determines how far back the policy will cover professional acts, errors or omissions that later result in a claim.
For example, if your policy has a retroactive date of 1 July 2022, work performed before that date may not be covered, even if the resulting claim is first made against you during the current policy period.
You should therefore pay particular attention to your retroactive cover when:
- changing insurers
- purchasing Professional Indemnity Insurance for the first time
- restructuring a business
- acquiring another professional practice
- reviewing long-term insurance arrangements.
Maintaining continuity can be particularly important for professions where an alleged error may not be discovered until several years after the work was completed.
Why Professional Indemnity Insurance matters
Professional Indemnity Insurance can help cover legal costs and claims arising from professional advice or services. The Australian Government notes that it can respond to claims involving matters such as mistakes, neglect or breaches of contract that cause a client loss. Depending on your industry, Professional Indemnity Insurance may also be required by legislation, your professional association, licensing arrangements or contracts with customers.
However, purchasing a policy is only one part of managing the risk. Businesses also need to understand how that policy operates, because even a policy with suitable limits and cover can become difficult to rely upon if important circumstances are not identified, communicated or handled correctly.
What should you do if a client raises an issue?
If something happens that you think could potentially develop into a Professional Indemnity claim, avoid trying to decide whether it is “serious enough” based purely on the size of the complaint.
Instead:
1. Document what happened: Keep emails, correspondence, contracts, notes and other relevant records.
2. Avoid admitting liability without advice: Your policy may contain conditions governing admissions, settlements and how claims are handled.
3. Contact your insurance broker promptly: Explain what has happened and provide the relevant information.
4. Review your policy requirements: Your broker can help determine whether formal notification may be appropriate.
5. Keep your broker updated: If circumstances change, new correspondence arrives or the client escalates the matter, pass that information on.
The earlier your broker understands what is happening, the easier it can be to navigate the notification process before deadlines or renewal dates become an issue.
How an insurance broker can help
Professional Indemnity Insurance can become complicated because the risk is not limited to choosing an insurer and paying the premium. Having an experienced insurance broker can be especially valuable when issues arise, as the right advice at the right time may help you avoid misunderstandings, missed notifications or gaps in cover.
Your broker can help you understand:
- what your policy requires you to report
- whether an issue may constitute a claim or notifiable circumstance
- your retroactive date
- the implications of changing insurers
- continuity of cover
- notification requirements around renewal
- how your Professional Indemnity cover fits the risks associated with your profession
For businesses where professional advice, designs, recommendations or services form an important part of what you provide, these details can matter enormously when something goes wrong. Working with an experienced broker (like us!) who understands both your industry and the finer points of Professional Indemnity Insurance can make it easier to identify potential issues early and make informed decisions about your cover.
Review your Professional Indemnity Insurance before you need it
The worst time to discover how your Professional Indemnity Insurance works is after a significant claim has already landed on your desk. Understanding your notification obligations, retroactive cover and policy periods beforehand can put your business in a much stronger position if a client raises a concern.
At Crucial Insurance, we help Australian businesses assess their Professional Indemnity risks, compare suitable insurance options and understand the practical details that can affect their cover. If you are unsure whether your current Professional Indemnity Insurance remains appropriate for your business, or you have become aware of an issue that may need to be reported, contact us to discuss your options with an experienced insurance broker.
References
- Insurance Contracts Act 1984 (Cth), Section 40 – Certain contracts of liability insurance
- Australian Government – business.gov.au, Liability Insurance and Professional Indemnity
This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
For further information or comment please email info@crucialinsurance.com.au.
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