Understanding Claims-Made Policies
If you provide advice, design services, or professional expertise, professional indemnity insurance is one of the most important covers your business can hold.
Yet many business owners aren’t clear on what it actually protects — and even fewer understand how claims-made policies work.
Because professional indemnity doesn’t operate like most other insurance policies, misunderstanding it can leave serious gaps in protection. Here’s what you need to know.
What Is Professional Indemnity Insurance?
Professional indemnity insurance protects businesses and individuals who provide professional services or advice against claims of:
- Negligence
- Errors or omissions
- Breach of professional duty
- Misrepresentation
- Defamation
- In some cases, breaches of confidentiality
Unlike public liability insurance, which responds to physical injury or property damage, professional indemnity insurance covers financial loss suffered by a third party due to your professional service or advice.
For example:
- A consultant provides advice that results in a client suffering financial loss.
- An engineer’s design contains an error requiring costly rectification.
- A marketing agency is accused of breaching intellectual property.
Even if the claim lacks merit, the cost of legal defence alone can be significant.
How Professional Indemnity Insurance Works
Most professional indemnity insurance policies in Australia operate on a claims made basis.
This is where confusion often arises.
What Is a Claims-Made Policy?
A claims made policy responds based on when the claim is made, not when the work was performed.
This means:
- The policy in place when the claim is first made and notified is the one that responds.
- It does not matter when the professional service occurred — provided it falls after your policy’s retroactive date.
This differs from policies such as public liability, which generally operate on an “occurrence” basis (responding to when the event happened).
Why the Retroactive Date Matters
When arranging professional indemnity insurance, your policy will include a retroactive date.
The retroactive date is the earliest point in time from which your past work is covered.
For example:
- You take out professional indemnity insurance in 2026.
- Your retroactive date is 1 January 2020.
- In 2027, a client makes a claim relating to work you completed in 2022.
Provided the policy is active when the claim is made, and the work was done after 1 January 2020, the policy can respond.
If there is a break in cover or the retroactive date changes, earlier work may not be insured.
This is why continuity of cover is critical with professional indemnity insurance.
The Importance of Continuous Cover
Because professional indemnity insurance is claims made, cancelling your policy or allowing it to lapse can create serious exposure.
Claims can arise years after services are delivered.
If you:
- Change insurers without maintaining your retroactive date
- Allow your policy to lapse
- Retire without arranging run-off cover
You may find yourself personally exposed to historical claims.
At Barrack, continuity and policy structure are a key part of our advice process — not just the premium.
What Is Run-Off Cover?
If you cease trading, sell your business, or retire, you may still face claims relating to past work.
Run-off cover extends your professional indemnity protection for a defined period after you stop operating.
Certain professions require mandatory run-off periods, but even where it isn’t compulsory, it should be considered carefully.
Understanding your future exposure is just as important as protecting today’s operations.
Common Misunderstandings About Professional Indemnity Insurance
“I’ve never had a claim, so I don’t need it.”
Claims can arise long after work is completed. Professional indemnity is about protecting your reputation and financial position if something goes wrong.
“If the work happened while I was insured, I’m covered.”
Not necessarily. If the policy is no longer active when the claim is made, it may not respond.
“All policies are the same.”
Professional indemnity policies vary significantly in wording, exclusions, sub-limits and notification requirements. The structure matters.
Who Needs Professional Indemnity Insurance?
Professional indemnity insurance is commonly required for:
- Consultants
- Engineers
- Architects and designers
- IT professionals
- Accountants and financial professionals
- Marketing and media agencies
- Recruitment firms
- Management consultants
In many industries, it is a contractual requirement before work can commence.
Even where not mandatory, any business providing advice or specialist services should assess its exposure.
Why Understanding Claims Made Policies Is Critical
The complexity of claims made policies is precisely why professional indemnity insurance should not be treated as a transactional purchase.
Key areas requiring attention include:
- Retroactive dates
- Prior known circumstances
- Notification obligations
- Policy exclusions
- Limit adequacy
- Subcontractor exposure
Missing a notification requirement or misunderstanding the policy trigger can affect your ability to claim.
Education and structure are just as important as price.
Professional Indemnity Insurance with Barrack
At Barrack, we take a structured approach to professional indemnity insurance.
Rather than simply arranging cover, we:
- Review contractual requirements
- Assess historical exposure
- Examine retroactive dates
- Explain claims made obligations clearly
- Compare policy wordings, not just premiums
Our focus is ensuring that when a claim arises — whether tomorrow or years from now — the policy responds as intended.
Final Thoughts
Professional indemnity insurance protects more than revenue. It protects reputation, relationships and long-term viability.
Understanding how claims made policies operate is fundamental to ensuring that protection works when it matters most.
If you would like a review of your current professional indemnity insurance or guidance on claims made obligations, speak with the Barrack team.
