Professional Indemnity Insurance in Indonesia – Are we there yet?
The mining industry has recently been confronted with the coal export cargo insurance regulations that are designed to promote the development of the Indonesian insurance industry. The Mining industry already carries many forms of insurance, including building & equipment insurance, public liability insurance along with director liability insurance etc. Mine staff are often covered with health and retirement insurance schemes. This article looks briefly at the little known, or used, Professional Indemnity insurance.
The legal definition of a professional is somewhat varied. One such definition is that a Professional is a term for someone who offers services, or services in accordance with protocols and regulations, in the field they work in and receive salaries as wages for their services. The Professional is typically a member of an entity or organization established in accordance with the law in a country or region.
As a Professional you must be responsible for errors, omissions or breach of professional duty which can result in huge financial losses therefore Professionals need a “Professional Indemnity Insurance (PI)”. Therein professional indemnity insurance may be undertaken to protect the geologist or miner against claims by their client, employer or third parties against claimed losses due to negligence. Community legal awareness is increasing, so the aggrieved party tends to use their rights to sue in court. Professionals also must maintain their reputation, integrity and protect their assets from lawsuits by parties who may wish to sue.
No matter how experienced you are or how long your company has been around, errors can still occur during regular operations. One claim can damage the business financially because litigation can be expensive, time consuming and involve many parties. You may end up in litigation even if you don’t do something wrong, this is where the function of professional liability insurance may provide protection when facing these demands.
Professional Indemnity Insurance in Indonesia today.
It is becoming more common for large international tenders for the development of Indonesian reserve statements, or undertake mining activity etc, to require Public Liability and Professional Indemnity insurance.
According to discussions with the General Insurance Association of Indonesia (Asosiasi Asuransi Umun Indonesia = aaui) there are some 77 general insurance companies registered with their association, with the top 10 players having about 55% of the insurance market. Most general insurance is concentrated in the motor vehicle and property market, where some miners hold insurance over selected assets. Insurance brokers form a significant role for the market, including using their large data base to help determine the nature of insurance policies and premiums.
It is presently very difficult to obtain professional indemnity insurance in Indonesia for the mining sector. Indeed the mining sector is seen as a small part of the overall market, usually allocated a sub sector status under energy and construction. In general discussions with one large Indonesian insurance company it seems only the top 5 Indonesian insurance firms are offering professional indemnity insurance, but only to the medical doctors, architects, lawyers and insurance brokers (as required by regulation). This company holds less than 50 professional indemnity policies with a combined annual premium of around Rp 150 million per year. This is insignificant compared to that companies Rp 6 trillion target for premiums in 2019. When undertaking a new professional indemnity client, the nature of the risk needs to be well understood by the insurance company and the reinsurers. Simple policies can take a day or two to develop, but more complex, or larger insured sums, may take a week or longer, and the risk may need to be spread through other parties. Part of the issue is getting sufficient numbers of policy holders to further spread the cost of developing the new product, and the risk.
There are perhaps 5 top Indonesian insurance companies capable of providing professional indemnity insurance. There are also a number of large foreign insurance companies entering Indonesia through joint ventures etc. These insurance firms do not see meaningful growth potential with professional indemnity, and prefer to focus their resources in other sectors.
In one example for compliance with an international tender, a public liability insurance limit of US$ 8 million sought a premium of $50,000/year, while the professional indemnity insurance with a limit of US$ 5 million sought a premium of $250,000/year. In practice, many firms have joint ventures with international insurance partners, wherein policy approval (and determination of premiums) is usually referred to the regional centre (Singapore), and in turn they may refer to head office (London / New York etc). In most cases the Indonesian insurance firms will decline to complete the processing procedure to undertake such professional indemnity insurance – being a polite way of saying ‘no-thanks’. Some Indonesian companies can comply with international contracts by having the public liability and professional indemnity requirements included as a “pass through” cost items. In some cases, international contractors may find it easier to comply with the tender insurance requirements based on their overseas head office – and “adjust” the insurance policy to seem to be aplicable for the Indonesian project. Thus, compliance with professional liability insurance requirements may make some Indonesian consultants less competitive than overseas consultants.
International Insurance outlook.
Recent correspondence with one Australian insurance broker indicates they, and similar Australian insurance brokers, typically do not have insurance packages for permanent foreign residents or companies. Many Asian countries are considered as “non-admitted jurisdictions” which is industry jargon for you cannot have foreign insurance in that country and must purchase it locally. Perhaps the reason behind such an international outlook may be because of the intricate and unique nature of the Indonesian court system. Perhaps another reason is that the Insurance law 40 / 2014 chapter on protection of policy holders, insured or participants directs disputes to mediation (Article 54). Even some local big insurance companies find that getting settlements paid out of the UK, Australia or other countries with a strong civil law is simpler, faster and more predictable than Indonesia.
Indonesia is not the only country to appear to be a less desirable country for foreign insurance. Some big Indonesian insurance companies will not take insurance related to India or other countries, due to the drawn out, complex and unreliable history of some past insurance claims.
The insurance business law 2 of 1992 was replaced with the insurance law 40 of 2014 from the ministry of finance. This law sets out commercial and sharia insurance business, along with reinsurance and other matters. Insurance is broadly divided into Life insurance and General Insurance. Some concepts include (Google translate);
* Insurance is an agreement between two parties, namely insurance companies and policy holders, who become the basis for premium receipts by insurance companies in return for a. provide reimbursement to the insured or policy holders due to loss, damage, costs that arises, loses profits, or takes legal liability responsibility to possible third parties suffered by the insured or policy holder because of the occurrence of an uncertain event; or
* Insurance business is all business concerning insurance or risk management services, risk coverage, marketing and distribution insurance products or Islamic insurance products, insurance consulting and intermediation, insurance sharia, reinsurance, or sharia reinsurance, or assessment of insurance or Islamic insurance losses.
* General Insurance Business is a business risks insurance service that provides compensation to the insured or policy holders due to loss, damage, costs that arises, loses profits, or takes responsibility for legal liability to third parties that may be suffered by the insured or policy holder due to an uncertain event occurrence.
The Engineer Law.
The Law 11 of 2004 about Engineering is introduced with the assertion that statutory regulation is required to provide legal certainty to protect engineers and users of engineers. The law spends much effort in setting out an Indonesian Engineer Council and Engineer Association (PII) to manage engineers in Indonesia. Article 5 includes “earth and energy” as technical disciplines of engineers, and their work includes “exploration and exploitation of mineral resources”. Under this law all such engineers should be registered with PII. Foreign engineers should be certified by appropriate institutions in their country, or by PII. The law also requires continuous further professional development. Engineer activities that cause material losses shall be subject to fines and sanctions. Engineers are to conduct their activity within a code of ethics. Users of engineers have the right to obtain legal protection as consumers for services and results of engineering activities, including legal protection against engineering malpractice.
The Professional Indemnity Policy.
There is no standard insurance policy for professional indemnity. Policies vary from one insurance company to another, and differ from one profession to another.
The operative clause listed in the policy generally mentions: “To indemnify the insured against any claim for damages for breach of professional duty which may be made against them during the period of insurance due to any negative act, error or omission whenever or wherever the person is accused of having been committed by the insured predecessor in business or any employee of the insured. ” Like other liability insurance, compensation is based on the amount demanded or compensation with a maximum limit of the limit of liability. Claims that occur must arise as a result of breach of professional duty.
Extracts from an article from the AusIMM Consultants society include such points as; –
- Often the value in a professional indemnity policy is the legal defence costs.
- It is common for Professional Insurance policies to cover the principals and the employees of the company against third party claims. However, one potential exposure is that the employing company insurer may sue you (the engaged engineer) if they feel in any way that you contributed to an alleged loss through a subrogation action.
- Signing contracts can have the potential to impact upon your insurance cover. If you enter into a contract and hold a third party harmless (ie carry their loss or agree to not be able to pursue them for contributory negligence) then you may have just prejudiced your insurer as they will not be able to take action against this party. This clause allows the insurer to reduce the cover under your policy by the amount they have been prejudiced by you signing up to these contractual warranties, guarantees or indemnities.
Further reading on selecting risk coverage may be found in the on line AusIMM Bulletin [https://www.ausimmbulletin.com/ ] These references include hints on selecting the range of insurance coverage. Also note. 1) The concept of civil liability claims to cover certain risk areas outside the negligent breach in duty of care. 2) The role of the contractor and the subcontractor, and importance of disclosure factors with regards to professional indemnity insurance. 3) “Run-off” insurance is designed to provide ongoing professional indemnity insurance once the job has been finished, or once the professional retires.
There are many terms associated with this article, and when developing a professional indemnity insurance policy, such as- breach of professional duty, professional negligence, malpractice, gross negligence etc, that should be carefully defined for the policy holder.
There is a trend for successful Indonesian mining companies to follow international trends. Project insurance is becoming more important to attract new finances and to demonstrate a sounder financial position, along with more control over project risk. Requiring contractors to include insurances for Public Liability and Professional Indemnity may be one way to demonstrate a more professional and responsible management profile.
Smaller Indonesian exploration, mining, service companies or individual professionals operating in Indonesia simply do not carry professional indemnity insurance. This would seem to be because such insurance is difficult to obtain, expensive and mostly deemed not essential. But times are a changing!
Where is Professional Indemnity heading in Indonesia?
During the construction of Pacific Place mall (around 2006-7) there was a scaffold accident causing some deaths. The project owner disowned any responsibility, and said it was the developer, who also disowned any responsibility and said it was the sub-contractor, who further disowned responsibility saying it was the shift foreman. The foreman had limited site operational control, no political connections, nor funds and was convicted. These days the mining industry places legal responsibility for accidents on the directors. Often such directors are “well connected” and seem to minimize any direct responsibility for mining accidents, though the company may receive warnings or administrative sanctions from the ESDM etc. More recently there has been an increase in boldness by local communities and NGO’s to complain about accidental drowning deaths, or road collapse etc. Again, the companies / directors seem to be “well connected” and may be administratively punished with ESDM warnings, sanctions etc. It seems likely that the communities or NGO’s may not be satisfied with the outcome from such incidents, and seek a softer target in accusing the mine engineer of professional neglect. Typically, there are no legal assurances the mining company will support the mining engineer – leaving the engineer to be the “sacrificial lamb”. We might expect NGO’s or community groups to focus their anguish against the mining companies, as such companies are perceived to have a big pay out potential. But some NGO’s may seek to sue the engineer, in order to build up that particular NGO’s public profile, or satisfy retribution by a local community.
Investors may acquire shares via the stock exchange (IDX), based on the mining companies published reports that include statements on the nature of reserves and mining operations. Should the company fail to produce an expected outcome, or there be a sudden negative change of outlook for that company, then some investors may be determined to blame the directors (as legally responsible). However, the directors may claim in their defence, as being reliant upon some professional reserve or mining report (in house or contractor). Therein the engineer (geologist / modelling expert/ miner / cost accountant etc) may be dragged into a complex court case. Professional Indemnity insurance may be expected to be increasingly important with the number, growth in size, and diversity of shareholders in mining companies listed on the IDX.
What can be done for the exposed engineer?
It would seem the present high cost and general unavailability of professional liability insurance, plus the intricate nature of policy components, would make it impracticable for most Indonesian engineers (including geologists and others) to independently take on professional liability insurance. Perhaps the engineers may approach this global trend of the increasing professional risk profile, through updating their engagement / employment contract with a form of “pass through” acknowledgement and acceptance of company responsibility for professional indemnity. The companies may also work into the employment contracts wording to better protect themselves against their employee’s gross negligence etc.
It is herein suggested that the various industry associations (PERHAPI, IAGI, IMA etc) may form a committee with some insurance experts and lawyers, to develop a recommended set of basic / standard clauses to be inserted into employment / engagement contracts, and selected company insurance policies. Perhaps the right wording in the employment / engagement contract (related to insurance and risk) may further empower the engineer to have more influence concerning company reports and work practices. Or perhaps a basic Professional Indemnity policy can be developed targeting reasonable risk and modest premiums.
It is hoped that the overall impact of developing a workable professional indemnity program will be that the mining industry will continue to be a national leader in the development of a more advanced Indonesia, and set the stage to export Indonesian professionals and mining companies.
Are we there yet? – clearly not, but the path to be travelled is appearing on the horizon.