Professional indemnity plan

A doctor, a lawyer or an Investment Adviser can be sued for a mistake at work. Maybe a wrong diagnosis. Maybe bad legal advice. Maybe advice that did not suit the client. Professional indemnity insurance is the cover built for exactly this risk.

The workbook places it under a wider heading: liability insurance. Liability insurance pays the damages a person owes under law for injuring someone else, or for damaging their property. A professional indemnity plan is the workbook's own most common example of liability insurance at work.

Liability can arise in 2 ways under the workbook's framing: under common law, on the basis of negligence, or under statutory law, on a no-fault basis — meaning liability can attach even where there was no negligence, simply because a statute imposes it.

What the cover pays for: legal expenses incurred in defending suits, and payment of damages to third parties for which the insured professional is found liable.

What it will not pay for: the workbook is explicit that liability insurance, and so professional indemnity cover within it, will not cover intentional damage or damages caused due to criminal activities. The cover is for honest professional error, not wrongdoing.

Illustrative figures. Dr. Sinha, a practising physician, is sued by a patient for Rs 25,00,000 after an alleged misdiagnosis that delayed treatment.

Under his professional indemnity plan, the insurer covers his legal defence costs, which run to Rs 4,00,000, and, once the claim is settled, the Rs 25,00,000 damages awarded to the patient — provided the claim arises from an honest error of professional judgment.

Had the same claim arisen because Dr. Sinha had deliberately falsified the patient's records — a criminal act — the professional indemnity plan would not respond at all, since the workbook excludes damage caused by criminal activity from liability cover altogether.

Chapter 3 (Features of non-Life Insurance Products), section 3.1.2(g), "Liability Insurance," names professional indemnity plans for doctors, lawyers and Investment Advisers as its leading example. Expect a question distinguishing what liability insurance covers (negligence-based or statutory no-fault damages to third parties, plus legal defence costs) from what it excludes (intentional or criminal acts).

• Professional indemnity is a form of liability insurance, not a separate category — the workbook introduces it as the example, not as a standalone product type.
• Statutory liability can arise without negligence. A no-fault statutory liability is still liability insurance's concern, not just negligence claims.
• Intentional or criminal acts are excluded outright. A deliberate wrong is never converted into an insured loss by holding a professional indemnity plan.
• The cover pays two distinct things — defence costs and damages — a question may ask for one component without the other.