Professional Indemnity Claims: Real Examples and What They Cost

Professional indemnity claims are often abstract until you face one. This article presents realistic examples of PI claims that affect NZ sole traders, the financial consequences, and what insurance does (and doesn't) cover.

These examples are representative composites based on common claim types, not identified individuals.

Example 1: The IT Consultant and the Failed Migration

Situation: A sole trader IT consultant is engaged to migrate a Wellington-based accounting firm's data from an on-premise server to a cloud system. During the migration, a critical database is corrupted. The firm cannot access 18 months of client records for 6 days while the consultant attempts recovery. Recovery is only partial — approximately 3 months of records cannot be recovered.

Claim: The firm claims for: - Staff time spent on recovery attempts: $28,000 - Revenue lost during the 6-day system outage: $65,000 - Client relationship damage and expedited recovery costs: $35,000 - Total claim: $128,000

Without PI insurance: The consultant faces a $128,000 claim personally. Defending the claim (even to demonstrate partial fault) costs another $30,000–$60,000 in legal fees.

With PI insurance: The insurer handles the legal defence, negotiates the claim, and settles at $95,000. The consultant pays the $2,500 excess.

Example 2: The Marketing Consultant and the IP Claim

Situation: A Christchurch-based marketing consultant develops a brand identity and tagline for a retail client. Six months after launch, the client receives a cease-and-desist letter from an Australian company claiming the tagline infringes their registered trademark (which the consultant did not search). The client must rebrand entirely.

Claim: The retail client claims: - Rebranding costs (signage, collateral, website): $45,000 - Legal costs to respond to the Australian company: $22,000 - Total claim: $67,000

Without PI insurance: The consultant is personally liable for $67,000 plus their own legal defence costs.

With PI insurance: The insurer defends the claim, demonstrates partial contributory fault by the client (who approved the brand without their own IP searches), and settles at $42,000. Consultant pays $2,000 excess.

Example 3: The Accountant and the Late Filing

Situation: A sole trader accountant in Auckland is engaged by a small business to manage their GST returns. Due to a scheduling oversight, one GST return is filed 18 days late. IRD assesses a late filing penalty of $250, but more significantly, assesses shortfall penalties of $12,000 alleging the return was incorrect when filed (a separate issue identified during the late filing audit). The client holds the accountant responsible for the shortfall penalties.

Claim: Client claims $12,000 in IRD shortfall penalties plus $3,500 in their legal costs to dispute the IRD assessment.

Without PI insurance: $15,500 out of pocket.

With PI insurance: Insurer assesses that the shortfall penalty arose from the IRD audit triggered by late filing — a direct consequence of the accountant's error. Settles at $13,000 inclusive of client legal costs. Accountant pays $1,500 excess.

Example 4: The Building Designer and the Consent Rejection

Situation: A sole trader building designer submits plans for a residential addition in Tauranga. Council rejects the consent on three grounds, two of which the designer claims are unreasonable but one of which reflects a clear error in the plans (insufficient setback from the boundary). The client must pay for revised plans and a new consent application, and loses their building slot with the contractor.

Claim: Client claims: - Revised design costs: $4,500 - New consent fee: $2,800 - Contractor delay costs (slot loss): $8,000 - Total: $15,300

Without PI insurance: The designer faces a $15,300 claim plus the cost of defending the "unreasonable grounds" allegation.

With PI insurance: Insurer defends, establishes the boundary error contributed to the consent rejection, and settles the design and consent fee components ($7,300). The contractor delay costs are disputed as not directly caused by the design error. Architect pays $1,500 excess.

What These Examples Tell Us

Claims are often much larger than the original fee: The IT consultant's project fee was $18,000. The claim was $128,000 — seven times the fee. This disproportionality is typical of professional liability claims.

Legal costs compound the problem: Even if you defend successfully, the legal costs can be $30,000–$100,000. PI insurance covers these regardless of outcome.

Partial fault is common: In many PI claims, both parties have contributed to the outcome. Insurance allows you to negotiate from a position of strength rather than personal financial desperation.

The excess is the real cost to you: With good PI insurance, the out-of-pocket cost in these examples ranged from $1,500 to $2,500 — versus uninsured costs of $15,000 to $128,000+.

Claims-Made Basis: A Critical Point

All PI claims in these examples were notifiable under the policy in force when the claim was made — not when the error occurred. This is why continuous PI cover and run-off cover on retirement are essential. An accountant who retires without run-off cover and gets a claim 3 years later for work they did during their practice years has no coverage.

The standard advice is to take run-off cover for at least 6 years after ceasing professional practice. This is typically available at a fraction of the in-practice premium.

Getting the Right Cover

PI insurance is available from a range of NZ insurers including NZI, QBE, Delta Insurance, and specialist professional indemnity providers. Limits, excesses, and specific wording vary considerably between policies. An adviser can help you:

- Select a policy with appropriate wording for your profession - Choose the right limit based on your contract values and client types - Understand any exclusions that might affect your cover - Structure run-off cover when you eventually wind down your practice