|What is Professional Indemnity?|
What is a Professional?
Previously clearly defined and distinct, the responsibilities of the professional have changed. Traditionally, people like accountants, surveyors, engineers, solicitors and architects, were regarded as 'professionals'. Modern reliance upon services provided by others and the increased use by business of outside consultants has increased the scope of this term and a professional is now often regarded as any person who offers specialist advice or services.
What is professional indemnity insurance?
There are three types of PI wording:
1. Negligent act, error or omission
This indemnifies the policyholder against loss/circumstances incurred only as a result of their negligent act, error or omission in carrying out the policyholders business. This is the narrowest form of cover.
2. Breach of duty
A typical PI policy will provide indemnity to the insured against loss arising from any claim or claims for breach of duty which may be made and reported to the insurers during the policy period by reason of any neglect, error or omissions committed in the conduct of the insureds professional business. Some policies are more tightly worded than others and whilst a number of policy wordings are designed to satisfy a stated minimum approved wording, which makes them easier to compare, others differ dramatically in the cover they provide.
Some PI policies go further than the standard cover and provide indemnity 'for any civil liability'. This covers such areas as breach of contract, libel and slander. (Some standard cover policies may also include libel and slander as extensions to the policy wordings if required.) Because the operative clause of a 'civil liability' policy is so wide, there is normally a long list of exclusions in order to exclude liabilities that should be covered elsewhere - otherwise things like Employers Liability (EL) and Public Liability (PL) might be covered.
• Contractual liability that is not caused by negligence
This is often excluded from PI policies and occurs when a professional signs up to a contract which might impose a liability going beyond that normally expected in law. Examples include liquidated damages e.g. late delivery penalties, or accepting liability for otherwise unforeseeable economic loss e.g. business interruption.
• Legal costs
These are normally covered by PI policies, subject to the insurers' prior consent. They cover the costs of investigation and defence. Assuming the insured (and the insurers) wish to repudiate the claim, it may be necessary to employ legal professionals and expert witnesses. Usually the PI insurers will have arrangements to appoint the necessary representation on the clients behalf. The costs are sometimes included within the limit of indemnity ('cost inclusive'), or they may be in addition ('cost in addition').
Pay attention also to the policy excess which may or may not apply to the costs and expenses.
In addition to the obvious cover, PI policies may often include:
Typically, PI policies will exclude things that should have more specific insurance:
PI policies often (but not always), carry some or all of the following extensions which do not require the test of negligence. If they are not automatically included, it is important to request the ones pertinent to your business. It is key however, to consider the policy wording applied, as this may make some or all of the extensions redundant. Some extensions are subject to inner limits and differing excesses to main policy.
• Loss of documents
• Libel and slander
• Dishonesty of employees
• Breach of copyright and unintentional breach of confidentiality
• Innocent non-disclosure
'Claims made' policy
A claim is generally notifiable under a PI policy (a notification) when the insured first becomes aware of circumstances that could lead to a claim. This could be anything from a verbal criticism to receipt of a statement of claim. The interpretation of when this situation occurs is the source of frequent policy disputes between the insurer and insured so you should be on your guard. It would be good business practice to regularly check with staff and partners if there are any problems that should be notified. This is particularly important prior to a policy renewal, as a change of insurers may occur which could subsequently result in a potential non-disclose of a notifiable event.
It is not uncommon for businesses to change insurers and then receive notice from a complainant of an intention to take action, and the new insurers to find that the insured first became aware of the problem six months earlier, in which case they could reserve their rights under the policy on the grounds the insured should have notified the event to the previous insurer.
• Retroactive date
It is normal for an insurer to apply a retroactive date on inception of the policy if there has been no prior cover. Continuity of cover is imperative with professional indemnity insurance if a break in cover occurs. This is because there is not only a loss of cover, but when cover is re-instated it may not be possible to establish cover with the original retroactive date.
• Previous business activity
The presentation of your business to insurers is very important both in respect of the facts i.e. the things for which cover is required, and the way in which you do your business, both of which influence an insurer's perception of your business and the risk it poses to them.
We would always recommend that in addition to the proposal form you are asked to complete, you provide supporting documents with your proposal such as:
Don't forget to include the names of any businesses with which you have merged, or any that you have acquired, as these will need historic cover. Likewise you may have ceased to offer certain services for which cover is still required.
Keep a written record of all requests for cover to be extended and any historic or material changes to your business. This information can be updated each year and provided as an addendum to the proposal. Any certification the business may have i.e. accreditation by a governing or standards council, is also well worth disclosing.
Keep your presentation neat and tidy. Bear in mind that an untidy presentation may be construed as an untidy business. Allow yourself time to complete the presentation and remember that a hard copy always look better that a faxed one sent in at the last minute.
The Professional Indemnity Insurance market is relatively small so at the point of renewal, concentrate on asking only one or two specialist brokers to quote. Bombarding the market with requests can result in your proposal being locked out of some markets.
Renewal is an ideal time to review your insurance requirements. As your business grows and your contract values increase, it is wise to consider what could go wrong and how much it may cost to settle a claim - and also cover the attendant legal costs. Some policy wordings provide a limit of indemnity with legal costs in addition to the limit. Others provide limits of indemnity which include the legal cost. However, the cost of litigation is high and can eat into the limit of indemnity provided if costs are inclusive.
Many professionals are obliged to carry PI by their professional bodies. Many of these bodies not only have specific requirements in respect of policy wording but also on the limits a professional must carry and the excesses they are allowed. Renewal is an opportune time to check your cover both in respect of your own requirements and those of your professional bodies.
To find out more about the PI rules set by your professional bodies, simply go to the relevant profession pages on this website, or alternatively click on our links section to go directly to the relevant body website.
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