Professional Indemnity: The fundamentals

There's a common misconception that Professional Indemnity (PI) Liability policies are standard and offer similar coverage. Unfortunately they're not; they need to be carefully selected or tailored to fit your individual needs.

Large companies frequently have a better knowledge of their exposures and policy differences and so are aware that not absolutely all policies will be the same. More often it is the little guy that faces challenges. Where do you start? Can you go surfing or approach a brokerage and get several quotes and can you opt for the expensive option? With a simple knowledge of how these policies may differ and what to consider you'd be in an improved position to learn which product and provider is most beneficial for you.

This article aims to supply an overview on the essential coverage variations to assist you make the best decision when purchasing PI insurance. This list is in no way exhaustive, but will provide you with some important elements for comparison.

Policy Language

Perhaps the main difference between PI policies may be the wording language. To learn on which basis cover has been provided, you will need to make reference to the insurance clause. Cover could be based on:

A negligent act, error or omission wording;
An act, error or omission wording;
A breach of professional duty wording; or
A civil liability wording.
So what will be the differences and which is best for you personally?

Following is really a brief outline of the coverage intention of every, however, please make reference to Liberty's Technical Update on Civil Liability for a far more comprehensive description of every.

Negligent Act, Error or Omission

PI policies were initially in line with the idea of negligence and made to cover the expenses incurred in defending and/or compensating an authorized for breaching your duty of care as a specialist. Claims usually do not always arise out of negligence and actions brought against you predicated on other legal grounds wouldn't normally be included in the policy. Such claims could derive from a breach of statutory duty, such as for example misleading or deceptive conduct, or breach of a contractual term, etc. Consequently a 'negligent acts only' insuring clause provides narrow coverage in comparison to other available wordings.

Act, Error or Omission

A broader insuring clause will be the one that responds to allegations of an act, error or omission in the performance of professional services (as defined). This removes the negligence requirement and, where not excluded, would react to contractual liabilities, statutory breaches, and equitable breaches (e.g. breach of trust) along with liability predicated on negligence.

Civil Liability

Civil liability wordings provide virtually identical cover to do something, error or omission wordings. Both wordings provide broad coverage, however, the focus differs. To quote the aforementioned paper, "Civil liability targets the type of the liability (civil v criminal) whereas the 'act, error or omission' wording targets the specific conduct of the insured. When you have incurred a civil liability, it’s likely that you'll have engaged in a few acts, errors or omissions that you are liable."

Breach of Professional Duty

A professional could possibly be thought of a person who possesses the required knowledge and skill to execute the work that they're engaged. Professional duty is that person's duty of care owed to litigant of alternative party in the performance of such work. The three wording types described above could be further restricted by requiring that it be proven there is a breach of professional duty which duty was owed to the 3rd party. This obligation could be onerous and really should ideally be avoided.

Professional Services Description

Whichever the policy type, civil liability or negligence, PI policies is only going to react to claims arising throughout or conduct of one's professional services. The description of services are either stated in the schedule or certainly are a defined term in the policy (typically industry specific wordings).

One common reason behind a claim to be declined is that the problem didn't arise in "reference to the Insured's Business", as defined in the policy. Therefore, it is very important to guarantee the description accurately and adequately captures all of the service you currently and can provide through the policy period.

Inclusive or Exclusive of Defence Costs

The Limit of Indemnity may be the maximum amount the insurer can pay in respect of anybody claim first made contrary to the insured and notified to the insurer over insurance. A costs inclusive limit of indemnity includes both legal costs and expenses incurred in defending a claim in addition to any settlement amount. On the other hand, a costs exclusive limit isn't eroded by defence costs and pertains to the best compensation amount only. Often insurers includes a limit on defence costs, for instance, they cannot exceed the limit of indemnity, however, a costs exclusive limit provides broader coverage.

Inclusive or Exclusive language may also be applied a surplus or deductible, and in this situation, relates to if you want to donate to the claim. If inclusive, you need to pay the surplus upfront in defending the claim, whereas a special excess means that you would just need to contribute towards any settlement or compensation awarded against you.

This can be a simple variation but one which can have a substantial effect on the cover provided.

Claims made or claims made and notified

Professional Indemnity policies can be found on a claims made basis. Which means that the policy only responds to claims first made contrary to the organisation through the policy period, regardless of once the act, error or omission giving rise to the claim was actually committed. Furthermore requirement, policies will oblige the insured to report the claim within the policy period. This can be a stringent condition, particularly what your location is notified of a claim near expiry. Failure to adhere to the condition you could end up a claim being denied or the insurer's liability reduced.

Often insurers provides a protracted reporting period beyond the expiry of the policy. The longer this extended period, the higher, however, the very best cover from the reporting stand-point is really a claims made policy only i.e. no reporting requirement.

Claims Trigger

The definition of claim is really a critical element of a PI policy since it determines a) so what can trigger policy and b) when policy is triggered. All policies respond once the claim is first made contrary to the insured. However, the precise time of when it's 'made' isn't always that simple. Both areas to check out for are:

Written demand or notice OR written or verbal demand or notice
Demand or notice for compensation or damages OR demand or notice seeking a legal remedy (including injunctions)
The sooner it is possible to move from the "circumstance that might bring about a claim" to a genuine claim to that your policy responds the higher. A written demand or notice seeking a legal remedy would supply the broadest definition of claim. Similarly, legal remedy language would respond when there's yet to be, or is not any claim for damages.

Each insurer's definition varies and that means you should browse the policy carefully. It really is imperative that you will be alert to the policy definition of claim to enable you to identify whenever a claim has been made against you. Because of the claims made and notified nature of PI policies highlighted above, failure to declare a claim or circumstance could jeopardise cover. Policies include a prior knowledge / prior circumstance exclusion, which remove cover for circumstances you're aware of ahead of inception of the policy. A lot of disputes and indemnification issues relate with such exclusions.

Reinstatement versus Aggregate Limit

On the facial skin of it, a limit of indemnity with a reinstatement and a limit of indemnity having an aggregate of double the limit can happen to function as same. Regarding a reinstatement, where there's been a loss and the limit has been exhausted or partially exhausted, the insurer will reinstate the entire limit of indemnity for the rest of the time. An aggregate limit alternatively you could end up multiple reinstatements of the limit before aggregate limit is exhausted.

The easiest way to show is with a good example. An insured includes a PI policy with a $1M limit of indemnity and something automatic reinstatement. Three separate claims are brought against them through the policy period with costs and compensation totalling $250K, $1M, and another for $250K (for the reason that order). Following the initial claim, the insurer would reinstate the entire $1M limit, despite the fact that there's only been a partial exhaustion. Another claim was a limit loss which may fully exhaust the available per claim limit and aggregate designed for the remainder of the time. The next claim of $250K would therefore be uninsured.

On the other hand, if the policy had aggregate limit of $2M the available limit for the policy period would only be reduced by the quantity of the claim/s. In the aforementioned example, all claims will be paid by the policy and there will be an additional $500K designed for the remainder of the time.

This can be a subtle variation but certainly important where there's the prospect of multiple claims. The wording of the reinstatement clause differs from insurer to insurer plus some effectively offer an aggregate limit. Much like every item discussed, you should browse the product carefully.

Every policy differs and the headings and words used usually do not always carry exactly the same meaning. You should browse the document carefully to comprehend the amount of cover provided. Probably the most comprehensive policy may possibly not be probably the most expensive and, even though it really is, the enhanced coverage afforded may warrant the excess expenditure.