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This article was first published in the first-quarter 2015 edition of Personal Finance magazine.

You’re a beauty therapist who uses skin creams that you believe to be completely safe. Nevertheless, one of your clients suffers an extreme allergic reaction and spends days in intensive care before recovering. The client sues you for R300 000 for medical expenses and emotional stress.

Or perhaps you’re a consulting civil engineer and you worked on an office-park development. When a retaining wall collapses, resulting in the partial collapse of a building, you are faced with a number of lawsuits amounting to millions of rands.

Some professions are more vulnerable to lawsuits than others and some are forced to insure themselves against risk, but, increasingly, people in all walks of life who offer a professional service to the public are seeing the need for professional indemnity (PI) cover or a related type of liability insurance (see “Forms of liability cover”, below).

Melita Thurling, of Hollard Liability Specialists, says: “In some cases, the professional body concerned strongly recommends such cover, or legislation dictates that PI cover must be in place. Insurance intermediaries, for example, are required to have such cover. Professional bodies often source or arrange the insurance for their members, either as a requirement of membership or as a benefit. The other driver is commercial – most large commercial and industrial transactions require that the contracting professional has PI cover in place.

“In other cases, professionals seek the cover themselves, rather than face the disastrous financial consequences of negligence, or even an allegation of negligence. A professional can exercise all due vigilance and care, but mistakes do happen. PI cover creates the freedom to exercise a profession with less risk.”

Lawyers are seeing an increase in cases against professionals. Kim Rew, a liability specialist and director at the Cape Town office of law firm Norton Rose Fulbright South Africa, says: “We are seeing a wider range of professionals being sued for malpractice than in the past, and the types of allegations leading to claims are broadening.”

Rew says she believes the trend has been influenced by:

* A tighter economy, which “makes people more inclined to look for money”.

* Exposure, through the media, to the litigious culture that prevails in the United States.

* The abolition of the right of road accident victims to sue guilty parties for damages. In terms of a change to the Road Accident Fund Act in 2008, their only recourse now is through the Road Accident Fund (RAF), which has forced lawyers who once depended on this work to look for new sources of income. (You may still use a lawyer, though, to claim from the RAF.)

* The relaxation of the constraints on advertising in the legal profession, which has made the public aware of their rights.

* The willingness of the legal profession to take cases on a contingency (no-win, no-fee) basis.

* A society that believes that, as Rew puts it, “any injury or damage must always be someone else’s fault”.

Legislation boosting the rights of the consumer, such as the Financial Advisory and Intermediary Services Act of 2002, which regulates the activities of professionals who provide financial advice and services, and the more recent Consumer Protection Act of 2008, which applies to consumers of all goods and services, has also driven professionals to protect themselves with insurance.

Thurling says: “A raft of consumer-friendly legislation has meant that providers of professional services now need to be on their toes to ensure that those toes don’t get stood on by an increasingly aware and powerful consumer. This legislation highlights the right and the need to seek remedy and redress where appropriate. Clients are less likely to simply move on if they feel aggrieved.”

Like Rew, she is concerned about an emerging culture of blame but believes that, “on the whole, our society – and certainly our courts – recognise that, just because something has gone wrong, it does not necessarily mean that someone is to blame”.

Liability: the basics

So when is someone justified in blaming – and claiming – when something goes wrong involving your professional services? In other words, what are the legal conditions under which you could be held liable for a loss?

On its website, Camargue, a liability specialist underwriter based in Johannesburg, explains that, in a liability case, the plaintiff (the person or entity that brings the complaint) needs to prove four key points:

1. Delict (see “Definitions”, below). The plaintiff needs to show that your conduct was wrong. It is possible for a business to harm others without it being wrong. For example, notes Camargue, an effective advertising campaign might put competitors out of business, but that would not normally be a wrongful act.

2. Fault. Fault can arise either through intent (you intended to cause harm) or through negligence. If the plaintiff argues that your negligence caused the loss, he or she must prove three points:

* Foreseeability. A reasonable person would have foreseen the possibility of harm arising from the action (or lack thereof).

* You had a duty of care (see “Definitions”). A reasonable person (in that position) would have taken steps to prevent the harm.

* You failed to take reasonable action to prevent the harm.

3. Causation. The connection between the action and the damage caused must not be too remote.

4. Harm. It must be established that the plaintiff suffered harm, for which he or she could be reasonably compensated financially. The intention is to restore the plaintiff to the same financial position that he or she was in before the damage was done, not to put the plaintiff in a better financial position.

An important judgment, in which there was tragic loss, but in which negligence on the part of a professional could not be established, was handed down in 2011 by the Supreme Court of Appeal in the case of Charter Hi (Pty) Ltd and Another v Minister of Transport.

An aircraft crashed while being piloted by a student pilot, Jonathan Grant, who was being tested by Ray Grinstead, a flight examiner appointed by the Commissioner for Civil Aviation. Grant and Grinstead were killed in the crash, and the aircraft was destroyed.

The owners of the aircraft sued the state on the basis that the accident had been caused by Grinstead’s negligence. Apparently, on the fatal flight, Grinstead had carried out a routine test of the pilot’s ability to deal with the failure of one of the aircraft’s two engines at low altitude, by altering the pitch of the engine’s propeller blades, simulating engine failure. It was established in court that the student pilot probably took the wrong steps to correct the failure, with the result that the aircraft lost power and went into an uncontrollable spin.

The court accepted that Grinstead was in overall command of the flight and was responsible for its safety. However, the judgment pointed out that, just because there had been an accident while Grinstead was in command, this did not automatically lead to the conclusion that he had been negligent.

The case revolved around what a “reasonable” person with the same level of professional expertise would have done. The appellants argued that a reasonable flight examiner, particularly having jeopardised the flight by simulating the engine failure, would have intervened to ensure that the situation did not progress to the point of endangering the aircraft. The court said the question was not whether, in hindsight, a person with Grinstead’s expertise could have prevented the aircraft from crashing, but whether, in the circumstances, Grinstead’s response to the sudden emergency had been that of a reasonable flight examiner.

It argued: “In cases in which specialised skill is involved, the person [with the] specialised skills is required to display not the ‘highest possible degree of professional skill’ but ‘the general level of skill and diligence possessed and exercised at the time by the members … of the profession to which the practitioner belongs’.

“The law does not call for perfection – not even on the part of official flight examiners. What it calls for is reasonable conduct. It has been famously said: ‘The concept of [a reasonable person] is not that of a timorous faint-heart always in trepidation lest he or others suffer some injury; on the contrary, he ventures out into the world, engages in affairs and takes reasonable chances.’”

The court granted the appellants the fact that, in responding to the emergency, Grinstead might have erred in his judgment, but this did not amount to negligence in the legal sense.

Rew says the fact that a professional makes a mistake should not, in every situation, amount to a lawsuit. “Very often, professionals have to make judgment calls to which there is no definite right or wrong answer – the correct decision is only known after the fact. But the burden on professionals to prove that they were not negligent is ever-increasing,” she says.

Payouts and premiums

A key aspect of PI cover is that it does more than pay out the damages and legal costs in the case of a successful claim; it will also compensate you for legal costs where you are found to be innocent of wrongdoing – in other words, although something went wrong and a loss was suffered, your liability could not be established.

Thurling says: “PI insurance covers not only negligence itself, but also the cost of a legal defence against an allegation of negligence. Legal costs can come close to the value of the actual awards for damages and use up the indemnity provided by the insurance policy. Unlike asset insurance, legal costs form part of the indemnity limit in most liability insurance policies, and this needs to be taken into account when deciding how much cover to secure. Where there is an allegation of negligence and the claimant proceeds to litigation, legal costs are incurred regardless of whether there was negligence or not.”

Criminal wrongdoing, such as theft or fraud, is excluded in liability policies. However, says John Stebbing, underwriting manager at Camargue, “sometimes innocent people are charged and are subsequently cleared of wrongdoing by a court of law. In order to ensure that an innocent insured gets adequate legal defence, a policy would pay those legal costs until the insured admits guilt or is found guilty. If the insured is found guilty after having the defence paid for, some policies would require that [he or she] refunds the legal costs to the insurer.”

Thurling says that competition in the insurance market ensures that, for most professionals, cover is relatively affordable and accessible. “At the moment, the pricing is reasonable, so extensive cover can be secured at a relatively low cost. There really is no excuse not to have cover,” Thurling says.

However, in the professions that are prone to lawsuits, cover is not cheap, and in some areas it may even become unaffordable. Auditors, financial intermediaries offering investment advice and medical professionals are in this high-risk category.

Thurling says: “Doctors and health professionals are under more scrutiny than other professions, and this can have the undesired effect of driving up premiums, especially where claims are unreasonable or unwarranted. This makes it economically burdensome for doctors to purchase cover and can result in young medical graduates staying away from certain high-risk specialisations.”

Rew says that, among medical professionals, people dealing with babies or children are particularly vulnerable. “We see obstetricians and gynaecologists as at high risk,” she says.

The Medical Protection Society (MPS) is a mutual, non-profit provider of medical liability protection and advice, and its annual subscription rates for 2014 give a good indication of how liability risk within the medical profession varies according to the area of specialisation:

* General practitioner in private practice (non-procedural, meaning only minor procedures are carried out in the doctor’s consulting room): R8 680;

* Low-risk specialist in private practice (including pathology, dermatology, ophthalmology, and psychiatry): R16 080;

* Very-high-risk specialist or surgeon in private practice (including gynaecology, orthopaedic surgery, plastic and recontructive surgery, and fertility medicine): R131 080; and

* Obstetrician in private practice: R330 000.

In a 2012 article in the newspaper City Press, a gynaecologist is reported to have remarked: “I have to do several Caesarean sections at the beginning of every month just to pay my malpractice premiums; this is before I can start covering my practice overheads and taking something home to the family.”

How PI claims work

Unlike motor vehicle insurance, for example, where you would submit a claim immediately after an accident, liability insurance claims can stretch far into the future.

The Camargue website explains that, although someone who has suffered a loss has a limited period (usually three years) in which to initiate legal action, this period (known as the prescription period) starts only once the plaintiff is aware that he or she has been wronged. This could happen many years after the completion of the operation or project in which you were involved. For example, the adverse effects of a routine medical operation on a baby, such as permanent brain damage, may become apparent only several years later.

PI policies take the form of either losses-occurring policies or claims-made policies:

* Losses-occurring policy. On its website, Camargue explains that this type of policy will cover you only if the event that gives rise to a claim occurred while you were insured. The claim can be made at any time during or after the period of insurance. In the case of the brain-damaged child, the doctor would have to have been covered when he performed the operation. If the claim were to arise five years later, when he is no longer insured – or even working as a doctor – he would still be covered. A disadvantage is that, by then, the indemnity amount may not be enough to cover the claim.

* Claims-made policy. With this kind of policy, you have to be covered when the claim is made. The event that gives rise to the claim may occur outside the insurance period, but it must occur after a “retroactive date”: a specific date in the past agreed on between you and the insurer. In the case of the doctor in the example above, he would have to be insured when the claim was made, and it would not matter that he was not insured at the time of the operation, as long as it happened after the retroactive date.

Normally, in the case of an injured party instituting a civil claim against you, you would immediately contact your insurance company. The insurer would take charge of the case and, if it found you liable, would try to reach a settlement with the injured party. If that was unsuccessful, the case would proceed to court. Stebbing says insurers have a good sense of the best attorneys to use in such cases, and they would tend to use them repeatedly. He says that, in his experience, about seven out of 10 cases are settled out of court, with claims for larger amounts more often ending up in court.

If your insurer determined that you were not liable for the claim against you, it would be up to the injured party to proceed with the action, and the insurer would cover your defence costs.

FORMS OF LIABILITY COVER

Professional indemnity cover is just one form of liability cover for businesses. It is directed at individuals in private practice, partnerships and companies offering a professional service, including but extending beyond the traditional degreed professions.

A “professional service” is defined in our common law as a service that requires special skill or knowledge and that is predominantly mental or intellectual, as opposed to physical or manual.

In many cases, the cover is tailored for a specific profession. Melita Thurling of Hollard Liability Specialists says Hollard, for example, offers bespoke products for the built environment (contractors, architects, engineers and surveyors) and for accountants, healthcare professionals, technology experts, trustees, auctioneers, valuers, veterinarians, financial intermediaries, asset managers and natural scientists.

Related types of insurance are:

* General (broad form) liability cover for most types of businesses, to cover legal costs, damages and/or settlements following injury, death, property damage and/or consequential loss suffered by any third party allegedly/actually caused by the insured. It may include product liability and advice liability cover.

* Directors and officers’ (D&O) liability cover for directors and high-ranking officers of companies and non-profit organisations, who may be held personally liable for a loss.

* Retirement fund trustees’ liability cover for trustees of retirement funds.

* Medical malpractice cover for medical professionals, which may include cover for medical equipment and the medicines they prescribe.

* Product liability cover for defective products, which is intended for the manufacturers and marketers of commercial goods.

DEFINITIONS

Delict: A wrongful act for which the person injured has the right to a civil remedy. (Delict is known as “tort” in American and English law.)

Duty of care: The legal obligation to safeguard others from harm while they are in your care, using your services, or exposed to your activities. – Collins Dictionary

COVER FOR FINANCIAL ADVISERS

The case of Deeb Risk, a financial adviser from Edenvale, Gauteng, has become a pivotal one regarding the liabilities of financial advisers and intermediaries who make bad investment decisions on behalf of their clients. Former Personal Finance editor Bruce Cameron reported extensively on the case.

In November 2011, the financial advice ombud, Noluntu Bam, ordered Risk to repay R800 000 of the R1.4 million that a pensioner, Elise Barnes of Parkhurst, had invested in a high-risk property syndication scheme on his advice. Bam issued several additional determinations on similar grounds against Risk and his company, D Risk Insurance Consultants.

Risk had professional indemnity (PI) cover, which is mandatory for all financial intermediaries. In 2012, backed by his insurer, Stalker Hutchison Admiral (SHA), a subsidiary of Santam, Risk went to the High Court, questioning Bam’s authority to issue the determinations. In September 2012, Judge Selby Baqwa of the Pretoria High Court rejected Risk’s case. SHA then withdrew its support for Risk.

Risk then applied to the Appeal Board of the Financial Services Board (FSB) for leave to appeal against Bam’s determinations. The board refused to hear new evidence. Risk then reached a settlement with five of the complainants, but two remaining cases are the subject of another application by Risk to the High Court.

Cameron reported that, after the initial High Court ruling, Ian Kirk, the chief executive of Santam, said the judgment made it clear that financial advisers must subject themselves to the authority of the financial advice ombud, and that if they disagreed with her determinations, they could approach the FSB Appeal Board. He said that if financial advisers were to be fully covered against potential determinations and orders for compensation from the ombud, the cost of the insurance would have to be increased significantly.

SHA continues to be a PI underwriter, but, according to Santam spokesperson Donald Kau, “its participation with financial advisers has reduced significantly due to other markets being more price competitive”.

The Financial Planning Institute (FPI), a leading professional body for advisers, has arranged voluntary group cover with insurance company AIG, through Southern Cross Risk Management, for members who are accredited Certified Financial Planners (CFPs).

David Kop, the FPI’s head of member and corporate relations, says the FPI believes that, because CFP-accredited members have undergone additional education and are subject to the FPI’s ethical code and its disciplinary process, they are a lower risk to insure for PI cover. He says the need to create the group scheme and FPI risk pool was driven by members complaining of high increases in their PI cover.

Michael Saltant of Southern Cross Risk Management says: “The generic risk of breach of professional duty by financial intermediaries is indeed high. Substantial awards against reckless and negligent advice of this group have cost the industry significant losses, yet the market remains relatively soft due to abundant industry capacity within a competitive environment.”

Saltant says he doesn’t see any big rise in rates in the future, but claims will be scrutinised in terms of restrictive policy conditions.

MEDICAL MALPRACTICE CASE STUDY

In 2013, a R25-million payout, the highest to date in South Africa, was awarded to an 11-year-old girl who suffered permanent brain damage after a series of failed operations. The Medical Protection Society (MPS) paid the amount to Kerri Mel O’Loughlin, the Sunday Times reported at the time.

Originally from Ireland, Kerri Mel was born with a bleed on the brain. When she was five, she underwent surgery in which a shunt was inserted to drain excess cerebrospinal fluid. In 2009, after the family moved to South Africa, Kerri Mel began to complain of headaches. A neurosurgeon at a private hospital in Mossel Bay told the girl’s parents that she needed a new shunt. The operation was unsuccessful. A further three operations to try to put the shunt in the correct position followed. It was later discovered that the first two operations had caused brain damage. Kerri Mel was discharged from hospital in April 2010. She subsequently suffered from cognitive, speech, visual and mobility problems.

The girl’s family instituted a damages claim against the surgeon and MPS. The matter was settled out of court. Her father, Declan O’Loughlin, told the Sunday Times that his daughter would go blind in future. “I would give it all, and everything else I own, to have our lives back to March 25, 2010, the day before this doctor altered our lives forever,” he said.

CHECK THAT COVER IS IN PLACE

When you, as a consumer, engage the services of a professional individual or organisation – such as a structural engineer to assess a property you want to buy, a medical doctor, a school for your children or a financial adviser – it is in your interests to find out whether the individual or organisation has liability cover.

You always have the choice to sue in the event of injury or financial loss, whether or not cover is in place, but if there is cover, there is a greater chance of you being reasonably compensated within a reasonable time. And if the organisation has cover, it also shows that it takes seriously its responsibilities to the public.

Some professions and services with which you may engage as a consumer are:

* Architects. Members of the South African Institute of Architects are eligible to take out professional indemnity insurance at competitive rates through the Architects Professional Indemnity Group Insurance Scheme.

* Attorneys. Attorneys must contribute to the Attorneys Fidelity Fund (which covers the theft of money held in trust), which, in turn, pays an annual premium to the Attorneys Insurance Indemnity Fund for indemnity cover. They are therefore automatically insured.

* Beauty therapists. The South African Association of Health and Skincare Professionals is the professional body for the beauty industry. Currently, it does not have an arrangement to offer liability cover to members.

* Building contractors. The construction of new homes is regulated by a statutory body, the National Home Builders Registration Council (NHBRC), and home builders are required by law to be registered with the council. The NHBRC has a complaints process and supporting fund for defective workmanship.

* Estate agents. The Estate Agency Affairs Board of South Africa regulates estate agents and has a fidelity fund, to which its members contribute, to reimburse consumers for financial loss due to theft or fraud by estate agents. However, the fund does not cover estate agents for negligence, errors or omissions in their day-to-day dealings with the public.

* Health professionals. A 2010 amendment to the regulations under the Health Professions Act of 1974 stipulates that practitioners registered with the Health Professions Council of South Africa who are in “independent practice” (meaning in private practice, a partnership or a private company) must obtain and maintain professional indemnity or malpractice cover from a recognised short-term insurer. Most liability insurers offer cover for health professionals, although some stop short of insuring very high-risk categories, such as obstetricians. An alternative is the Medical Protection Society.

* Independent schools. The Independent Schools Association of Southern Africa has most of the country’s top independent schools as members. Member schools can take out liability cover through an arrangement with Marsh Africa.

* Exercise instructors and personal trainers. The Register of Exercise Professionals SA is the official professional body of the fitness industry in South Africa. It offers members discounts on liability cover.

As discussed in the article “No blame, no shame?” on the legitimacy of disclaimer notices (Personal Finance, 2nd quarter 2014), you should be particularly wary of any attempt to limit liability when it comes to services for children, because the expected level of care is much higher than it is where adults are concerned.

In some areas, including those related to financial services and products, you have recourse to an ombudsman service or a consumer protection body, thereby circumventing legal action. This applies, too, to cases of negligence that cause harm.