Professional indemnity insurance is usually underwritten for professionals in their individual capacity or as members of a professional firm, either in the form of a partnership or as a company. Individuals or firms of similar professional discipline may however get to get her into a group with the objective of seeking professional indemnity insurance under one master policy or scheme. This latter method has many advantages, if it is correctly established and if an enthusiastic and competent insurance broker is found to put the threads together into a working cover. The advantages include the following:
Availability of cover
Professional indemnity insurance features as one type of insurance where a long term relationship between the insurer and the insured can be extremely important and beneficial to both. The time lag that usually occurs between insurance, claim notification and claim settlement obscures the usual interaction of the insurance market forces.21 These forces can be briefly identified as inflation, investment climate and competition. As inflation rises, the cost of claims when they mature into payments, after many years, increases, thus resulting in higher premium rates. Investment climate is a cyclic force, which affects insurance in general, but professional indemnity in particular through the high premiums generated. The third force is competition, which can cause deterioration in the quality of service performed if that quality cannot be easily measured and assessed. The quality of insurance, in terms of the promise made to pay in case of a loss, cannot be easily measured or ascertained if the promise is not put to the test, an event that does not often happen until a long time has elapsed. These forces combined with the claims-made nature of this insurance produce a volatile market which may withdraw from providing cover to an individual professional or a firm of professionals, a situation which can be at best inconvenient but at worst may be disastrous for that firm.22 However, in the case of a group scheme, the availability of insurance cover would be more certain even in years of high loss ratios, low investment incomes and low inflation.
Bargaining power
By uniting, the group stands a better chance than an individual can of achieving a better policy wording, wider insurance cover, more just and equitable settlement of claims, and above all a more dependable insurance promise. Under this heading, one can include as an advantage the possibility of attracting a better quality insurance broking service, which can improve the quality of other insurances required by the design professional. One of these insurance covers needed is a specially worded publicli ability insurance policy to protect the design professional in his activities on site which might cause a claim not covered under the professional indemnity insurance policy. Such claims might arise in respect of any physical act by the professional person; so for example if, instead of instructing the contractor to carry out a certain function, the design professional performs that act personally and if the act were to result in damage or injury, the appropriatec over under which indemnity is provided is the public liability and not the professional liability cover. The public liability insurance policy issued for a design professional must therefore be worded in such a way that it matches the Professional Indemnity insurance and complements its cover. The standard public liability insurance policy covers the professional usually in his normal day-to-day activities.
Group schemes with retention of control: ‘Funded Group Scheme
A group of professionals of the same discipline might go one step further than the ordinary professional indemnity insurance scheme by retaining some control over its handling and administration. This control can only be exercised if the members of the group, collectively, retain a share of the risk, which is otherwise offered to the insurer. The share of the risk retained by the group is usually in respect of a layer of indemnity of a specific sum above the excess applied by the insured in the policy. In view of this risk-sharing arrangement, the premium charged to the insured is reduced by a certain amount or percentage depending on the size of the share of the risk allocated to him. The resultant reduction in premium (i.e. the difference between what is normally charged for the professional indemnity insurance with the excess applied by the insured and that charged for the higher excess) might be viewed as a premium for the group scheme, hereinafter referred to as the Funded Group Scheme. A design professional may look upon such a scheme as providing an insurance cover with higher imposed excess than that he would usually apply in the case of an ordinary professional indemnity insurance policy, but with a difference. The difference being that in the case of the usual insurance policy, the insured bears the excess in respect of claims made against him whereas in the case of the Funded Group Scheme the insured is asked to bear two excesses, a first-layer excess in respect of a claim made against him and a second-layer excess, above the first, in respect of claims made against other participants in the group. The first-layer excess means a reduction in the premium he is charged by the insurers whereas the second-layer excess means a shared premium he obtains with other participants against the shared risk of paying that excess if and when a claim is made against other professionals in the group. Besides the two advantages mentioned above for group schemes (i.e. availability of cover and bargaining power), the Funded Group Scheme has also the following advantages:
Knowledge
It has been said that ‘Doctors bury their mistakes, architects cover them with ivy, and engineers write long reports which never see the light of day’.23 The 1983 Report of FIDIC’s Standing Committee on Professional Liability states:24One of the recognised basic methods of acquiring knowledge is by learning to avoid mistakes, made by others. Therefore, the problems which result from mistakes should not be covered by a cloak of secrecy but brought out into the open, provided that complete confidentiality of such matters which may cause harm to others can bemaintained.23 ‘Lessons from Failures of Concrete Structures’, by Jacob Feld, American Concrete Institute Monographs No. 1, Detroit, Michigan, 1964, page 1.24 ‘Lessons to be Learnt’, Report of the Standing Committee on Professional Liability of the International Federation of Consulting Engineers, 1983, Lausanne, Switzerland, at page 11. 368 PROFESSIONAL INDEMNITY INSURANCE
It is unfortunate that when a failure occurs, there is no mechanism by which lessons can be drawn and distributed through the profession so that others do not repeat the mistakes made. Of course, confidentiality must be preserved together with a scientific approach beyond any motive other than the acquisition of knowledge. This is only possible in the case of a Funded Group Scheme. Loss prevention programmes When professionals are organised into such a group, then funds become available to the group through premiums received in respect of the second-layer excess and knowledge accumulates through alerts from the group members; it is possible then to organise loss prevention programmes. These programmes are extremely valuable in reducing the risks of error and omission to which the design professional is exposed, as experienced by the Association of Soil and Foundation Engineers in the United States25 and the Association of Consulting Engineers of New Zealand,26 two pioneers in this field. An interesting analysis from the experience of the latter organisation is given in Table 13.4, which illustrates the important areas of failure in performance. Information such as this can be obtained, disseminated and distributed through loss prevention studies organised by the profession. Source number 2 in Table 13.4 was further analysed and the results are shown in Table 13.5.Through loss prevention programmes and other efforts made by the Association of Soil and Foundation Engineers in the United States, it was possible to reduce the number of claims made against their members from being the worst amongst other engineers in 1968 to the be stin 1982.Assessment of premium With the information available to the managers of the Funded Group Scheme, it is possible to establish the appropriate level that should apply in any particular year to the design Table 13.4 Distribution of claims and alerts as analysed by the New Zealand Architects Co-operative Society Ltd. and the Consulting Engineers Advancement Society Inc.
It is unfortunate that when a failure occurs, there is no mechanism by which lessons can be drawn and distributed through the profession so that others do not repeat the mistakes made. Of course, confidentiality must be preserved together with a scientific approach beyond any motive other than the acquisition of knowledge. This is only possible in the case of a Funded Group Scheme.
Loss prevention programmes
When professionals are organised into such a group, then funds become available to the group through premiums received in respect of the second-layer excess and knowledge accumulates through alerts from the group members; it is possible then to organise loss prevention programmes. These programmes are extremely valuable in reducing the risks of error an domission to which the design professional is exposed, as experienced by the Association of Soil and Foundation Engineers in the United States25 and the Association of Consulting Engineers of New Zealand,26 two pioneers in this field. An interesting analysis from the experience of the latter organisation is given in Table 13.4, which illustrates the important areas of failure in performance. Information such as this can be obtained, disseminated and distributed through loss prevention studies organised by the profession. Source number 2 in Table 13.4 was further analysed and the results are shown in Table 13.5.Through loss prevention programmes and other efforts made by the Association of Soil and Foundation Engineers in the United States, it was possible to reduce the number of claims made against their members from being the worst amongst other engineers in 1968 to the be in 1982.
Assessment of premium
With the information available to the managers of the Funded Group Scheme, it is possible to establish the appropriate level that should apply in any particular year to the design
professional and also to the different disciplines within the profession. The purpose of this benefit is to establish stability of the insurance transaction for the design professional, the fund and the insurer. It is of course important in this respect to establish correctly the level of premium required for each layer of the three-layered insurance transaction as detailed in it.
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