This article is about indemnities and liabilities, why they are often confused and what you can do about it. I’ve lost count of the number of times people have contacted me, initially requesting an indemnity protection, and it transpired that it would never have done what they wanted it to.
NB: Since this article was posted in 2013 Cyber Indemnity and Cyber Liability have entered the language yet they are still jargon.
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What is an indemnity?
Rather than getting technical I am trying to put this in layman’s terms. I am giving advice to people on how to reduce risks, arrange insurance policies and get them to pay out when the business needs them to, or defend the business. So if someone asks me to arrange protection for a hotel which would costs £3.6 million to rebuild, they expect me to get the insurance company to pay out if a fire breaks out.
If I fail in my professional duty to provide the protection they requested, I have no doubt that they would take legal action against me, and rightly so. The cover I have is called an indemnity and it’s designed to maintain my financial position even if I do make an error and something terrible happens as an consequence. That is the principle, putting me back in the position I was in before the error occurred by covering the financial loss. Loss of reputation is another issue and there are many ways of handling that hot potato.
What is a liability?
A liability, in layman’s terms, is more of a legal responsibility rather than a professional one. Companies are liable for the cost of compensation for employees who are injured at work. Naturally, people that undertake construction projects (or other outdoor work) are liable to members of the public if they cause damage, an injury or an illness. Read about the Jaguar car that was melted by a new building in London.
Some miscreants think they can buy the cheapest liability protection on the market, rather than one that is fit for purpose, and if someone is injured or becomes unwell because of their negligence, they will simply close their businesses. One gentlemen told me he would “pack up and go home”. Little did they know that they are also liable as directors and I would certainly have no qualms about talking to the director of a company that hadn’t adequately protected loved ones in a working or public environment.
If they have not taking care of their own insurance, they might have to sell their own assets in order to pay for someone else’s long term care. It is enshrined in UK law that the person causing an injury or an illness is “liable” for the cost of compensating the injured party. This is an incredibly rare occurrence so rates are low.
With so many people doing research on Google its not surprising there are a trillion opinions about what is right for each business. The only real way to assess whether a liability cover should be preferred to an indemnity is by thinking about who is likely to take action against an entity and why would they even think about doing so. Think about near misses that have happened, check your accident book or your complaint register, or ask your customer service team what the closest calls were.
Once you have done that speak to a lawyer and find out how much it would cost to defend allegations because you will not want to pay out willy nilly and become a target for spurious claimant or professional claim management companies. They have no qualms about targeting a business that have been quick to make a settlement in the past. Once a lawyer has identified the possible defence cost and likely compensation awards based on recent “case history”, you’ll be in the position to assess whether you need protection and what type is going to be the best fit.
Wrap Up: Indemnities and liabilities are like widgets to the man in the street. How do you know the difference between the two until you have compared them? Professional indemnity is compulsory for some professions in the UK, including mine, tune in next time for some examples.
Do not rely on your terms and conditions to protect your cashflow. They will possibly reduce the amount you end up paying or losing to someone with limited legal resources. They are of little use when someone with unlimited legal funds has got really upset and is gunning for you or becomes insolvent and runs from you.