Professional indemnity insurance explained

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. 

3. Civil liability

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.

Contractual liability is an important issue so take care when agreeing with clients the responsibilities you will and will not take on. Insurers recognise however, that some professions demand flexibility in that clients may insist on some contractual exposure. In these instances, insurers may offer to cover an element of contractual exposure such as collateral warranties. Always check your policy wording and advise insurers if you do agree to warranties.

• 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.

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The usual cover

In addition to the obvious cover, PI policies may often include:

• Libel and slander
• Loss of documents
• Dishonesty of employees
• Fidelity
• Unintentional breach of confidence
• Infringement of copyright and intellectual property rights
• Previous firms or previous partners

The usual exclusions

Typically, PI policies will exclude things that should have more specific insurance:

• Employers liability
• Bodily injury/property damage, except where caused by a breach of professional duty
• Property owners, etc
• Vehicles, etc.
• Products liability
• Contractual liability - this is liability assumed under any express warranty, agreement, guarantee or the like, unless such liability would have attached anyway.
• Insolvency/bankruptcy of insured
• Circumstances known at inception
• Fines and penalties
• Claims by financially associated parties. Some insurers will cover these claims if they emanate from a third party
• Radioactive contamination, etc.
• War
• Seepage and pollution. Many insurers maintain this exclusion even where there is a clear and insurable environmental exposure
• Date recognition
• Extensions to the policy

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.

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• Loss of documents
This provides cover to the policyholder for the costs of repairing or replacing documents damaged or destroyed whilst in their possession. This includes some circumstances in which computer documents are lost, but does not extend to covers provided under a computer policy. These can be the client's own documents or those of a third party.

• Libel and slander
This provides cover for actions brought against the policyholder for libel, slander or defamation.

• Dishonesty of employees
This provides cover for fraudulent acts by employees. It does not include acts by partners and directors.

• Breach of copyright and unintentional breach of confidentiality
Cover for infringement of design etc or disclosure of privileged information.

• Innocent non-disclosure
This clause states that where you are able to establish to the underwriter's satisfaction that any non-disclosure or misrepresentation of material facts was innocent, underwriters will not avoid liability under the policy. In practice this can be difficult to achieve as itwill undoubtedly involve asking the underwriter to admit a claim he might otherwise avoid.

The features of PI

'Claims made' policy
Professional indemnity, directors & officers, medical malpractice and libel insurances are nearly unique in generally operating on a 'claims made' basis. This provides cover for claims made (and reported to the insurer) during the period of insurance only. In contrast, other liability covers normally provide indemnity for 'losses occurring' during the policy period. This is not the same across the world. For example in Europe, PI has historically been written on a 'losses occurring' basis, but the trend worldwide is towards 'claims made'. It is almost impossible to obtain anything else in the UK.

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.

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Notable features on a claims made policy:
• A claim might be made against a policy written now but the act of neglect might have occurred many years previously. It protects the insured against the erosion of the value of cover by inflation. Where latent defects might lead to claims many years after an act of neglect, such as in the construction industry, this can be crucial in times of only modest (let alone high) inflation. If the policy lapses for any reason, there is normally no cover thereafter for any claims that might arise, regardless of when the alleged neglect might have occurred.

• Retroactive date
Many 'claims made' policies incorporate a retroactive date, either as part of the wording or by endorsement. This effectively excludes claims arising from things done or that ought to have been done before the retroactive date, or often claims arising out of contracts entered into before the retroactive date. If there is no retroactive date, cover is fully retroactive for all work since commencement of the business.

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
Because of the claims made nature of PI policies, special care needs to be taken to ensure that cover includes predecessor practices or partners' liabilities arising out of former partnerships elsewhere, if required. Many insurers now issue short form proposals that only ask for a minimum of information, and whilst they are convenient, they omit to ask questions which may be crucial to your business and its principals. Although you may have advised your insurer of your requirements in the past, if you change insurer and neglect to inform them of your requirements cover may be compromised.

Remember PI is a claims made insurance. If the cover stops, so does the cover. For this reason 'run off' cover should be purchased when a business ceases to trade, either due to the closure of a limited company, a partnership dissolution or retirement. This can be done by a new business’s PI insurance picking up the liability or the purchase of run off cover over the following six years or more. Hammond PI has a facility to purchase six year run off via a single one off premium.

• Limit of indemnity
This is the maximum amount of money that a PI policy will pay out. Cover can be offered on an annual aggregate limit for all claims (but often comes with reinstatements), or it can be applicable to each and every claim or any one claim without aggregate limit. Where the limit is not aggregated, careful attention needs to be paid to the definition of a 'claim'. For example, a series of linked claims is normally deemed to be one claim for policy purposes. Also look out for any one claim and in all aggregate cover.

• Excess
This is also referred to as the deductible, and is the first amount of every claim that is uninsured. It generally applies to each and every claim, but it can occasionally be aggregated. Again check on the definition of claim.

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Presenting your proposal for insurance

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:

• A CV showing the principals qualifications and experience in the areas of business to be covered
• Any Terms of Business or terms of engagement you use
• A copy of your corporate brochure
• Details of your website
• An insurance history listing all material changes to your business since you first had professional indemnity insurance. For example, mention any previous businesses for which you require cover. It is possible you may be asked for a claims history from the previous business or a copy of its last completed proposal form.

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.

Main bodies with PI rules

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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