The Author, Prince Chadak is 1st year student of National Law School of India University, Bangalore. He is Campus Ambassador of LatestLaws.com.

INTRODUCTION

The introduction of liberalization, privatization and globalization policy of 1991 opened new gates for professional fields in India as the world became a global village. With the inclusion of foreign players, every service transaction is worth large numbers. The risk associated with the liability for professional services has increased manifoldly and it opened the popular chapter of “Professional Indemnity Insurance” in India. According to E.R. Hardy Ivamy, insurance is a contract where one person takes the responsibility to pay an agreed sum in form of consideration known as premium on happening of any contingent or specific event[1]. It creates hedge against uncertain events related to huge transactional risks.

Professional indemnity insurance also known as errors and omissions (E&O) in US is type of liability insurance which protects individuals giving professional advice and service providers against any negligence claim by their clients and damages awarded in a civil lawsuit. It is generally a form of contract between professional as insured party and company providing insurance as insuring party. It acts as security for both professionals as well as their clients and protects them from a myriad of financial losses. It includes professions like lawyers, doctors, medical practitioners, accountants, management consultants, interior designers, architects and brokers.

In India, there are no specific statues or laws regulating the professional liability insurance (PLI) but the Indian Contract Act, 1872 defines indemnity contract as “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person[2]”. Similarly, the professionals exempt their liabilities through PLI when they fail to exercise reasonable care required by them while performing their services. The standard of care of a reasonably prudent person is required and varies depending upon the nature of the profession.

The “Companies (Indian Accounting Standards) Rules, 2015” deal with the term of professional liability insurance in India. The insurance broker is also mandatory to purchase policy for professional indemnity insurance as per “Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018[3]”. Professional Liability Insurance is not very popular in India and the concept has been developed mostly in United States. It has gained momentum after laws related to professional liability came into force in US which required them to subscribe to indemnity policies to escape liabilities.

Rationale

The remedy for compensation against any deficiency in services by professionals was only available in the contract law provided a valid contract was in place. In “Candler v. Crane Christmas & Co[4]” the plaintiff invested in equity shares of a company relying on accounts prepared by the Chartered Accountant of the company. Afterwards, the company went into liquidation and the plaintiff sued the chartered accountant for the same. The court ruled that in absence of any specific relationship, the accountant was not held liable. These types of cases signifies the importance of professional liability insurance in every field for service deficiency claims.

General liability insurance do not cover all forms of liabilities as they are mainly concerned with personal bodily injury, loss of goods and property, product liability, the liability towards employers etc. The professional services can lead to legal claims not covered by it in the form of negligence, unfair dealing, misrepresentation, inaccurate advice, violation of good faith etc. So in order to cover these legal claims, professional indemnity insurance is of paramount importance.

Coverage

The professional indemnity insurance covers legal liability due to financial loss suffered by the client resulting from breach of professional duty. The amount of insurance claim is inclusive of the costs and expenses incurred in defending the insured and damages which are awarded to the insured party. It majorly covers all forms of civil liability enumerated in the insurance policy. The coverage can extend upto group insurance like a law firm can take a group professional indemnity insurance against any claim for all employees. The loss or damage has to be occurred before claiming for the professional liability insurance.

Exclusions

The insuring party does not provide any claim aroused due to criminal act or liability related to violation of any criminal law. Third party public liability is also not covered under professional liability insurance policy. The insurance claim is not recovered when the professional duty has been breached under the influence of intoxicants and narcotics, willful non-compliance with any legal requirements which the professional is required to comply with, financial loss in terms of loss of goodwill or market reach claims arising out of violation of intellectual property rights of the client, in times of war and nuclear perils etc.

There is no liability and question of insurance claim does not arise unless there is deficiency in service provided by the professional. In “Walton v. National Employers' Mutual General Insurance Association Ltd.[5]” the stockbroker filed the claim for indemnity insurance when due to mistake of employee his client suffered loss. The court ruled that the broker was not entitled to the claim as there was no negligence in his services and the damage occurred due to mistake of employee only.

The liability claim in case of punitive damages is a concurring question to be decided by the various courts. In “Northwestern National Casualty Co. v. McNulty[6]” the court deciding upon insurance coverage related to liability of drunk drivers for punitive damages ruled that since punitive damages are awarded for punishment and deterrence, it would be of no purpose if the wrongdoing party can shift the burden to the insuring company. But later in “Lazenby v. Universal Underwriters Insurance Company[7]” the court overruled the popular decision of McNulty case and decided that it was purely conjectural that irresponsible drivers would be more deterred by not providing the insurance coverage. But due to courts’ popular opinion, McNulty reasoning is preferred in cases of punitive damages.

Origin and Importance

The Professional Liability Insurance has gained special significantly in the aftermath of landmark decision given in “Hedley Byrne & Co Ltd v Heller & Partners Ltd[8]”. It is related with economic loss suffered by the third party due to negligent misstatement made by a professional. Hedley was a firm of advertising agents and wanted to know the credit worthiness of their client- EasiPower Ltd. They contacted the bank of their client- Heller Ltd to get a report of their client’s financial position which appeared to be favorable. Subsequently, The Company went into liquidation and Hedley sued Heller Ltd for negligently providing misleading information. Heller Ltd defended that there was no duty of care owned to them and liability was excluded.

The court ruled that the relationship between them was sufficiently proximate and Heller Ltd owed a duty of care to exercise while providing information on which Hedley Ltd. relied. Therefore, Heller Ltd was held liable for its negligence. After this landmark decision, the third party could sue any person or organization for a breach of their duty of care for providing negligent advice and could recover damages even in absence of any contractual relationship between a third-party and any professional person.

This ruling has transformed the concept of professional liability in US and had widened market for professional liability insurance all over the world. This legal decision expanded scope for compulsory professional indemnity insurance across various countries. For example, in USA, Germany, Belgium, Denmark, England, Australia, Singapore, the lawyers are under compulsion for purchasing Lawyers Liability Insurance.

The word professional has not been defined in any statue but the Oxford Reference dictionary defines professional as “any person who is an expert or skilled in a field or practicing a certain profession[9]”. In “Marx v. Hartford Accident & Indemnity Company[10]” the Supreme Court of Nebraska defined the term professional as more than proficiency in performance and implied intellectual skill. Therefore, laws regarding the definition of professional need to be enacted and should be enforced.

Types Of Professional Liability Insurance

Claim Based: It covers the insured party for any event that occurred during the policy period and claim is also made when the insurance is in force. In this, the inception date of the insurance policy becomes its permanent date known as retroactive date. The date remains the same each year when the policy is renewed.
Occurrence based: It provides coverage for incidents happened during policy years regardless of when the claim is reported. It provides separate coverage for each year for whole insurance policy period. It does not matter whether policy was in force when the claim is made. It only requires that policy should be active when alleged events occurred. This signifies that occurrence based policies are generally expensive than claim based policies.

Lawyers Liability Insurance In India

In today’s modern world, lawyers impart skillful advice to their clients and can also be sued for negligence for hefty claims. In India, it is not a common practice for lawyers, counsels; notary, law firms and legal consultants to take out professional liability insurance and lack of awareness stand out as the prominent reason. As not all legal professionals or law firms are aware about the professional indemnity insurance as there is no compulsion under any law upon them. Sometimes, even the clients are not aware about their rights to claim for negligent advice or careless services by any law professional. For example when lawyer forgot to file an important document before the court, liability may arise under errors and omissions claim.

The clients are protected through the “The Advocates Act, 1961[11]”as any aggrieved person can file action against any advocate under this act. But it only governs their behavior and does not address the specific relationship with their client. The complainant can also approach the consumer forums under the “Consumer Protection Act, 1986[12]”. But the position is unclear whether services provide by lawyers comes within the ambit of “services” under the act. The only remedy left out for aggrieved clients is to rely on claims under professional liability insurance.

After the Satyam Computers Ltd scandal of 2009, the awareness for PLI has expanded widely in India[13]. The law firms dealing in large numbers are required to take professional liability insurance with mild pressure from foreign clients and without any coverage, neither the firms are financially strong nor do their clients have any assurance of recovering loss when the suit is filed. The firms also suffer risk of bankruptcy and loss of reputation and other clients. Therefore, in modern scenario every lawyer should purchase professional indemnity insurance as a safety measure against uncertain claims.

Medical Liability Insurance

This is a type of liability insurance provided to medical professionals, doctors, medical practitioners etc. Group indemnity insurance is also purchased by various hospitals. The medical professionals work under inconsiderable threat of facing suits due to medical malpractice, which can be defined as lack of standard duty of care while performing the service resulting in injury or death of the patient.

In “Spring Meadows hospital v. Harjol Ahuluwalia[14]” a child died due to medical negligence by the doctors and unqualified nurse. The hospital has taken professional liability cover but the insurance company denied the claim. The court ruled that the insurer was liable as dereliction of reasonable duty of care was covered under the insurance policy.

Therefore, as patients are becoming more aware to claim damages for faulty services, the doctors as well as hospitals need to take out the professional liability insurance to indemnify against medical negligence or accidents resulting into severe death.

Third Party Access To Professional Liability Insurance (PLI)

According to Indian Contract Act, the indemnity holder is entitled to all damages related to defending the suit or amount of any compromise or settlement with the other party[15]. So, the insurance company is required to pay the amount to insured when a valid claim arises. In India, the doctrine of privity of contract prevents third parties to enforce the contract but in other countries, third party can bring action against the insurer.

In United Kingdom, generally privity of contract was applied and third parties couldn’t claim any compensation. But after the “Contracts (Rights of Third Parties) 1999” was passed, it qualified the doctrine and thereafter, third parties can claim damages if contract expressively provides it or the contract is made for their benefit. But people generally exclude this provision to evade liability while formulating insurance contracts.

In Australia also, the third party can claim damages directly from the insurer through Insurance Contracts Act, 1984 when the insured is liable in person and he is not reasonably found or escaped from liability[16].

Therefore, separate legislation is required for third parties in India to directly claim the insurance amount so that the insured can’t forego his liability.

CONCLUSION

Professional indemnity insurance acts as a boon both for professionals and their clients as professionals can shift the liability to the insurer and can escape hefty claims. The client is also benefitted as in case when professionals declare themselves insolvent or forego their liability, the insurance acts as their only viable option.

In absence of any proper definition of the word ‘professional”, there exists ambiguity to restrict the scope of professional liability insurance. This proves to be detrimental to the persons who are not recognized as professionals. The proper meaning of term professional must be defined and added through amendment in India.

It is high time the laws related to compulsory professional liability insurance should be enacted in India in various fields with stricter rules and regulations to enforce them.

References:

[1] E.R, Hardy Ivamy, Dictionary of Insurance Law, (1981), p. 223.

[2] Section 124, Indian Contract Act, 1872.

[3] Section 24 (1), IRDAI (Insurance Brokers) Regulations, 2018.

[4] (1951) 2 KB 164.

[5] (1974) 2 Lloyd's Rep 385.

[6] 307 F.2d 432 (5th Cir. 1962).

[7] 383 S.W.2d 1 (Tenn. 1964).

[8] 2 All ER 575.

[9] Joyce M. Hawkins, The Oxford Reference Dictionary, p.745

[10] (1968) 157 N.W.2d 870

[11] Section 35, The Advocates Act, 1961.