An important Australian Company owned by locals



GEOFF FERNS, ACII, Chartered Insurance Broker




Benjamin Disraeli talked about "lies, damned lies & statistics" & some think that applies to Insurance. 

Lies – the "material facts" disclosed by the proposer on the proposal form.

Damned lies - being the policy wording &

Statistics - being a basis for arriving at premiums that had no relevance to the real cost of losses.

Insurance has a long history & the current thinking is that the Chinese are to blame.

About 3000BC, 20 families harvested their crop of rice, put their future income into the family boat & attempted to make it down the flooding Yangtze River to the rich markets in the capital. Each year one of the 20 families lost their boat and crop in the dangerous river journey.

Being civilized people the other 19 families helped the unfortunate one through their destitute year, but it was quickly realised that reliance on the charity of the other families produced an uncertain future, as some found it very hard to match the generosity of others. It was always an uneven effort likely to break down due to perceptions that some families were avoiding their responsibility.  It was soon accepted that if a boat was lost each of the successful families would donate 1/20th of their crop to the unfortunate family to make up for their loss.

No doubt ‘Risk Management’ is far older & must have been understood when the first farmers formed cities 20,000 years ago. The planting, growing, cropping, storage & distribution of food, has many risks that require planning & disaster recovery plans.

Local insurance began in Hobart when whale oil lit the lamps of Europe. Insurer’s still collect premiums into risk pools, add investment income & from each pool of money pay claims, administration costs & provide a return to those owner / investors who will supply the additional risk capital that is required to back up the insurance pool if losses exceed the expected amounts.

Insurance has tended to focus on replacement of assets lost through some fortuitous event such as fire or other peril specified in the policy wordings.

It is unfortunate that normal "package" insurance covers perhaps less than 50% of risk faced by business.

Insurance Brokers will always work to design wider protection for clients by adding to traditional insurance packages, but the need & cost must be understood & accepted by clients. The rule is that you get what you pay for in most instances of solutions offered by best in class insurers. More covered risks costs more.

There are now capital & profit "bottom line" risk management instruments in capital markets. While these are large risk pools with specific ‘put & call’ triggers, these may one day be accessible to smaller risk units that are combined to form a marketable pool of business for investors.

Alternative risk transfer; Securitisation; Guarantee Bonds, Performance Bonds & Trade Indemnity & "Bad Debt" type covers are developing in the far larger capital markets as opposed to the insurance market investors. These capital markets are better able to cope with large catastrophes like flood & the expected challenges of future climate change risks.

You may take a look at this developing area at a number of web sites that show this emerging new ‘insurance’ market.

Just like a person, a "Business Career" is born, grows up, achieves maturity & ultimately, we retire or leave our business lives.

In life we have parents & peers to teach us the basics necessary to become "good" human beings, in control of our lives.

In our business life we are mostly left to our own devices. It is assumed that as we are educated professionals; we will create a professional business structure & be able to run our business machine as required.

In spite of the wealth of specialist knowledge we carry, some of us have had lean years setting up a business.

We are aware that the specialist knowledge we worked so hard to gain is valuable & needs to be protected & endorsed by a body of "peers", but selling it, producing & keeping the necessary records & getting paid for our work, is a time consuming & demanding task.


To my mind, risk is a function of benefit & danger. I have heard it said that risk should be viewed like salt in your food. It is best to have not too little & not too much.

I think that it is important to avoid perceptions and tackle reality, before making judgements.

It is a reality that in UK each year:

*Over 4000 people die & over 3 million are taken to hospital following accidents in their homes.

But the greatest fears are still "MAD COW" disease & "Terrorism".

For the nervous poms…the past statistics being that perhaps 3 people died in each 10 year period from "Mad Cow" disease.

While several hundred die each year, getting out of bed.

What people are afraid of is not necessary the real & present danger.

Business requires tailored "Risk Management" for critical issues such as:

  • Tasks – your ability to run business marketing & office systems.
  • Performance Standards to "contracted" requirements.
  • Compliance with current "corporate business legislation" & keeping up with changes.
  • Human Resources management for people inside the business structure
  • Human Resources from outside - Joint Venture &/or Contracted Services Management
  • Outsourced elements like IT Software / hardware; office & financial resources
  • Dispute Resolution systems.

A useful "hierarchy of risk controls" concentrates on:

( a) "outsourcing" of risk by insurance indemnity eg Public, Products, Statutory & Management Liability policies.

( b) insuring "parts" of a total risk eg a "Legal Fees" policy.

( c) carry the first loss ($ Excess) part of a risk to get reduced premium for insurable risks.

( d) carry risk and hold a "contingency reserve" to fund uninsured losses.

( e) transfer risk to another business (Contractors / Outsource).

( f) develop Management Procedures to avoid risk.

( g) exclude risk from your business by Contractual Agreement.

While we are aware of our legal obligation to insure Compulsory Third Party & Workers Compensation Liability, it is clear that business is also faced with the Consumer / Client Liability exposures arising from legislation such as Privacy, OH&S & Trade Practices Acts.

A defined potential risk may be outsourced to insurers at a known cost.

Are these tested in Australia?

In April 2009 the "Chief of Army" avoided "civil proceedings against the Chief of Army", by signing a "Court-enforceable Undertaking" that was accepted by Comcare, following failure to observe its duties under the OH&S Act 1991 for a "lost patrol".

In "Lee v Smith & Ors [2007] FMCA 59)" Cassandra Lee, a civilian administration clerk at a naval base, was raped at a private party. Federal Magistrate Connolly found that the Employer (Commonwealth via their agent the Department of Defence) was vicariously liable for the actions of Australian Defence Force "employees", under the vicarious liability provisions of the Sex Discrimination Act 1984 (Cth)

It would seem that even the armed forces cannot escape from the rule of law and there are costs involved.



Professional Indemnity Insurance covers Claims for Civil Liability (including Contractual liability) arising from an Act; Error or Omission in the conduct of the Insured Business Practice. Extensions to protections are available for Statutory Liability & for issues such as Employers liability for employment & OH&S breaches.

In the past insurers collected a Premium Pool to pay Claims & costs that "occurred" in a policy year.

It was expected that the Claims Contingency Reserves for 7 years, (exceeding a "tail" created by the Statute of Limitations) would be sufficient.

That proved to be a mistake & produced an unfunded liability for Insurers.

Dust Diseases Claims such as Asbestosis are identified by Courts, to have OCCURRED from mistakes made in the 1950’s & 1960’s & are claimed for at current court compensation values.

Today’s insurers were deemed to have inherited the old "Occurrence Policy" liability if they had written the risk or had purchased an Insurer that had written the risk. This extra cost had not been expected & had not been funded.

Many insurers withdrew from this class of risk insurance.

Insurers changed their Policy Wording from an "Occurrence" wording to a "Claims Made" wording to help them quantify the required Risk Pool & "closed period" Contingency Reserves needed to fund a more certain & closed liability.

Now Insurers pay for claims made & circumstances notified to them during the policy period.

 Recent concessions in new policy wordings allow "Retroactive" cover. This allows protection for unknown past circumstances that become known during the current policy year. Some insurers allow unlimited retroactive cover for the past, while others nominated a past date from which Retroactive Cover will be allowed.

The concept of "Continuous Cover" has been adopted by some insurers. This allows later notification of "claims circumstances" from past years, if there had been continuous insurance in force.

There are also improved "run off" covers for the period after you stop working. Extensions are now allowed for Employment Practice breaches & some aspects of Statutory Liability that will be driven by Workers Compensation insurer’s recovery actions.

The number of insurers writing Professional Indemnity reduced in early 2000 due to:

  • Poor underwriting results in the past.
  • Uncertainty of potential "long tail" liability in new policy wordings.
  • The liability implications of legislation such as the Trade Practices Act.
  • Reduced investment in Risk Markets resulted in fewer Re-insurers.
  • Re-insurers reduced their terms & conditions & increased their Premiums.
  • The wider covers being demanded by Principals; State & Federal Government were unreasonable.
  • Investment Returns for Risk Pools was low due to bad Invest Market performance.
  • Administration Costs continued to rise.
  • APRA added to costs by introducing new Capital Requirements for insurers.
  • Insurance Shareholders expected a return that matched other investment opportunities.

By 2002, QBE was the last major Australian Insurer for this class of business. Most Professional Indemnity was written by Lloyds & UK & US insurer branches in Australia & their pricing decisions were greatly influenced by global issues & factors.

Premium increases helped to encourage insurers to continue in Australia, but many professionals such as Medical Practitioners became ‘uninsurable’ & had to make their own private insurance funding arrangements.

The recent Australian experience has not been better than expected, but the "investment return" boom since 2002 caused many insurers to return to this class of insurance.

The sub-prime "bust" did not deter the involvement of over 50 insurers in the current market, but we experienced increased premium rates in 2012, until investment returns & market share considerations encouraged lower premium rates in Professional Indemnity Contracts. The market finally seems to be reviewing unprofitable risk areas & reverting to increased premiums for this class of business.


Who Needs Professional Risks Cover?

The Law requires a Professional to exercise their skill at an appropriate level expected of that Profession. A mistake may lead to liability if it is a Breach of the Trade Practices Act or equivalent State Legislations for "Fair Trade".

While Business & Personal assets are at risk, the greatest damage may be to the reputation of the professional, with possible resultant loss of future earnings.

Covers have been arranged for a wide combination of insureds:

 A person, Firm or Company & past or future Principal of the insured business.

  • Interim cover for Mergers & Acquisitions during the policy period.
  • An active Subsidiary Company created during the Policy Period
  • Past, current & future Employees
  • Estates or Legal Representatives
  • Prior Companies operated by the Insured
  • Vicarious liability for the business contractors.

What does a Professional Indemnity Insurance Policy cover?

Civil Liability (including Contractual Liability) exclusive of Legal Costs.


Claim Investigation Costs Continuous Cover

Disciplinary Proceedings Joint Venture

Auto Sum Insured Reinstatement (Usually ONE) Employees Cover

Previous Business Defamation

Prior Incorporated Body Loss of Documents

Mergers & Acquisitions Fraud/Dishonesty

Estates/Legal Representatives Worldwide Cover

Infringement of Intellectual Property Trade Practices Act

Breach of Duty/Confidentiality

What does a current "standard" Professional Indemnity Policy not cover?

  • Asbestos - No cover is usually offered for asbestos related risks, but we have negotiated a Lloyds of London facility for "high risk" covers including asbestos, hazardous materials & environmental consulting risks.
  • Any nuclear radiation exposure is an automatic exclusion in standard policy covers.
  • "Hazardous and dangerous goods" exposures are difficult to cover. Pollution exclusions & "bodily injury" & "property damage" exclusions apply in standard policy covers.
  • If more than about 30% of work is being conducted overseas (other than NZ) cover will need to be specifically negotiated with the insurer.
  • Overseas contracts should specify Australian or NZ jurisdiction for Claims actions.
  • Claims events that happened before the Retroactive Date are excluded.
  • Management Liability, Employment Practices & Statutory Liability, unless endorsed.

How much is Adequate Cover?

  • Estimate the worst outcome that could result from negligent services or wrong advice
  • Allow for inflation increases to the cost as claims may take several years to settle
  • Add the increased cost of future Legal Fees; Court Awards & legislation like GST.

What important issues must I be aware of?

  • Do not sign Principal Contracts without checking if they will void your insurances.
  • Correctly disclose all "Material Facts" to the insurer
  • Correctly describe each activity & associated Fees for the Risk Premium to be calculated
  • Immediately advise any changes in activity or business structure
  • Immediately notify any CIRCUMSTANCES that may lead to a CLAIM
  • Do not leave any GAP in cover from one period to the next
  • Assess the need for "Run Off" cover once you stop working
  • Assess the need for extensions of cover for issues like Statutory & Management Liability.

Professional Indemnity issues:

  • Legal fees & settlements may need to be paid, even if your advice was correct.
  • Use or reliance on your work by other than the intended recipient.
  • Period of Responsibility following completion of work – even if you have retired.

Management Liability & Statutory Liability issues:

Recent actions have highlighted that the Employer & Employee, have a duty of care under Section 19 & 21 of the OHS&W Act for example. There are fines & legal costs for "Officers" & employees.

Contract Dangers:

Contract Clauses that void insurances:

"Hold Harmless" & "Subrogation Waiver" clauses may prejudice an insurer’s right of recovery from others & may allow them to void the insurance contract.

A Consultants Contractual Liability should be reduced to the extent that the loss suffered or incurred by the Principal or its Associates, was caused or contributed to by:

(a) the negligent or fraudulent act, omission or material breach by the Principal or its Associates;

(b) the actions of any third parties over which the Consultant had no reasonable control; and

(c) external circumstances outside the reasonable control of the Consultant.

Indemnity clauses may make you pay for other entities mistakes, if not correctly drafted.

Contracts Clauses that raise uninsured risks:

  • "unlimited liability" wordings.
  • A Clause that bring exposure to liability greater than standard proportionate legal liability.
  • Contract Penalty clause for delay in completion of Work or a "responsibility period".

Having a Workers Compensation Act indemnity for your home State Act but working in a different State may raise exposure to uninsured "deemed employees" under the uninsured Act.

Your "sub-contractors" must carry their own appropriate insurances to match your obligations.

Your insurances must cover your "vicarious liability" for your contractor’s actions.



I believe that the current legal and insurance environment will make it more difficult and more expensive to properly insure Professional Indemnity risks in the future.

Properly tailored insurance will become an important issue for all Professionals.

While these issues are making Insurance decisions difficult, it is vitally important for a Professional Practice to be able to identify areas of Professional Risk & outsource them.

A valid alternative to insurance is to Fund sufficient contingency reserves to pay for Legal Representation & any amount awarded against the Business. This may put the Business Assets at risk and may also result in the loss of personal assets such as the family home.

A claim may be successfully defended, and yet cost the business thousands of dollars.

The majority of Insurance claims paid are actually the cost of legal fees for a successful defence. There is also the loss of valuable working hours for Principals who are distracted from their daily productive routines & potential for a bad reputation to destroy the business.

Insurance is becoming an issue that is central to successfully operating some business models. For example, ASIC Licenced Insurance Brokers are required to carry insurance by Law.

This has benefited the Insurance Industry as a Body as the ability to defend & test matters before making a payment, has deterred many spurious claims that damaged reputations.

Settlements following failures have given clients confidence in the insurance industry.

Consultants must consider that how they run their business will reflect on their reputation. A bad reputation gained by being unable to defend & test facts, may destroy a business.

Most business is won by referrals & the quality of the business risk management will reflect in the business reputation.

A "Select Group" insurance scheme supported by a Group of Member’s will provide the best opportunity to deliver excellent value terms, conditions & keen insurer support at claim time.


*ROSPA database.

CGU Professional Risks. "CGU Professional Risks Roadshow"

Insurance Council of Australia. 2002. "PI – Why It’s In Trouble"

Insurance & Risk Professional. Volume 25, No 5: pp 62-65.

Zurich Financial Services. "Zurich Z-Stream Roadshow"


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