Professional indemnity and the evolution of professional services

The definition of what constitutes a professional service has evolved considerably with the progression of technology and an evolving risk landscape.

This change to the nature of professional services has impacted the professional indemnity market and the relevance of insurance for modern-day professionals.

The evolving professional

To understand the evolution of professional services, we need to examine the services traditionally considered “professional”, for example, in the 1970s.

At that time, the concept of professionalism was confined to a relatively limited number of fields, such as law, medicine and accounting.

Professionals in these fields were defined by the set of skills and knowledge they acquired to practice. They were expected to have undertaken extensive training and a high level of specialisation to qualify.

However, over the years, there has been a significant shift in the concept of professionalism, with an expansion beyond the traditional fields.

Some new professions, such as digital marketing, cybersecurity and software engineering have been driven by the development of technology.

Others have emerged due to changes to the legislative environment.

Overall, an accompanying growth in the use of standard form contracts has resulted in many services inadvertently being deemed “professional” when in fact, they only require practical knowledge and experience rather than formal qualifications.

Trades slip through the cracks

Many brokers attempting to source quotes for clients who are driven by contractual requirements have likely met with the unfavourable response that their client’s services are not suitable for professional indemnity, or that there is no professional service being offered.

In our business, the most common occupations in which we see this occur are tradespeople such as handymen, carpenters, plumbers and commercial cleaners.

It is important for brokers to ensure they understand how a policy is triggered, and if the wording pertaining to the services on the schedule doesn’t align with the services offered by the client, then the outcome might be a gap in cover.

In addition, the common use of standard-form contracts can sometimes mean clients are left struggling to source professional indemnity cover when they may not need it.

In these instances, it is worthwhile having a discussion with the third party to understand the requirement for professional indemnity, as they may agree to remove it from the contract.

At a minimum, a greater understanding of the services offered should be gained.

It is also important to make a distinction between fee income and revenue for the services the client provides.

This has implications for the coverage that may be available under other policies (general liability) but is also useful as a simple test for identifying if a service is professional in nature, as opposed to being part of a sales process or general advice in relation to a product or service.

While such a clarification might not always determine if a service is professional, it is often a good place to start.

Gig economy 

Another significant factor driving the evolution of professional services is the rise of the gig economy, which has created new opportunities for individuals to offer their services without the formal qualifications or extensive training.

For example, people businesses appoint as freelance writers, graphic designers or social media managers can offer their services without having formal qualifications (although most credible professionals in these fields do).

However, as the gig economy has grown, so have the risks associated with it. Freelancers and other independent contractors may face legal challenges if their work is deemed inadequate, if it breaches copyright or is defamatory, for example.

This highlights the need for professional indemnity insurance in these engagements.

E&O extensions may fit side-hustles

Many current contracted services that historically would have been provided in-house by larger businesses, are now provided by employees with side-hustles selling the same services as their day jobs.

As the economy continues to develop technology and opportunities, underwriters will need to be flexible in term of risk appetite to ensure new types of businesses are able to function with the confidence provided by suitable cover.

For some businesses, an Errors and Omissions (E&O) extension to a general liability policy may be an effective alternative to professional indemnity insurance.

E&O coverage protects businesses from claims of negligence, errors or omissions that result in financial losses for their clients.

While it is not a direct substitute for professional indemnity insurance, E&O coverage can provide some level of protection for businesses that operate in low-risk environments or do not require specialised knowledge or certification.

Some businesses that might benefit from an E&O policy rather than a full PI policy are structural steel fabricators, or civil contractors with no design services.

Flexible underwriting

While some traditional professions have become more accessible, the need for specialised knowledge and expertise is still vital in many fields.

Brokers and flexible underwriters are as essential as ever, in a world with developing technologies and legislative changes, to help ensure clients are suitably covered.

Australia continues to be a heavily litigious society and the contractual pressure for businesses to hold a range of insurance will only grow.

Working on a placement that allows for open discussions, and the ability to tailor a policy to the specific needs of a risk will continue to be at the heart of insurance for the foreseeable future.