The Corporations Act 2001 (Cth) (Corporations Act) does not necessarily guarantee that a corporation will have adequate professional indemnity insurance (PI insurance) in place for its professional employees. The Corporations Act typically obliges a corporation holding a financial services licence to have adequate insurance protection. For example, section 912B requires that any corporation, such as a financial planning business (FPB), must have adequate arrangements in place to compensate its clients for loss or damage suffered because the FPB has breached provisions of the Corporations Act requiring it to act efficiently, honestly and fairly in their duties. However, it cannot simply be assumed that corporations, operating under the statute have necessarily put in place adequate protection to cover these losses, a result of which leaves the corporation and their clients exposed to liability and significant financial loss.
An example of this unfortunate circumstance has been recently illustrated when financial advisers working for Perth based financial planning firm, Chambers Investment Planners (Chambers), negligently provided advice and faulty products to their clients and their clients lost money. Chambers’ clients made claims against Chambers in the amount of several million dollars. Because Chambers did not have adequate PI insurance in place to cover a “reasonable estimate” of their clients’ potential losses, Chambers now faces likely liquidation, their clients are unable to recover their lost money and ASIC is taking steps to cancel Chambers’ financial services licence.
Professional indemnity insurance may be the only substantial assets available to a creditor in an insolvency scenario.
Corporations employing professionals, such as accountants, architects, engineers, lawyers and financial advisers, or anyone requiring the services of such a professional, should ensure that there is adequate PI Insurance to cover any potential loss suffered by a client relying on those services. PI insurance offers indemnity to professionals such as those mentioned above where the professional has acted negligently in performing their duties and, as a result of this negligence, their clients suffer loss and/or damages when relying on that negligent advice. PI insurance, if adequately structured, covers for the most part, the amount that the client seeks to recover from the insured professional. However, even where insurance is compulsory, the minimum level required may be inadequate.
Lavan Legal comment
Whether you are a corporation, professional working for a corporation or someone requiring the services of a professional, ensure the following before the provision of services is made:
There is adequate PI insurance to cover a reasonable estimate of the clients’ potential losses.
Ensure any limitation of liability clauses contained in any insurance contracts are set at reasonable limits.
Conversely, for professionals, holding an adequate policy may be the difference between solvency and insolvency if claims are made.
