Professional Indemnity Insurance Explained
If you have questions about Professional Indemnity Insurance our FAQ section here will help to provide you with the answers. Professional indemnity insurance explained in simple to understand language. We’ve compiled answers to the most often asked questions but if you have a query that isn’t covered here, please let us know and we’ll answer you directly.
If you need a quote for professional indemnity insurance, you can quote online or call us and we’d be happy to provide a no-obligation quote or to help with any queries that you may have.
Frequently Asked Questions
- How much cover do I need?
- What is the limit of indemnity?
- What is in the ‘aggregate’ or ‘any one claim’ basis?
- What is costs and expenses in addition?
- What is the retroactive date?
- How do I determine the relevant retroactive date?
- What is the policy excess?
- What is a professional?
- What is breach of duty?
- What is civil liability?
- What is contractual liability?
- What is contractual liability that is not caused by negligence?
- Are legal costs covered?
- What are my obligations as a policyholder?
- What cover is usually provided?
- What cover is usually excluded?
- What are the usual policy extensions?
- What is ‘claims made’ basis?
- Can I cover previous business activity?
- What do I do in the event of a claim?
- How do I get a quote?
Only you can assess the amount of cover (limit of indemnity) appropriate for your business. In determining how much cover you need, it is important that a realistic view is taken of the potential damages and legal costs for which your business could become liable. Being under-insured can be almost as financially disastrous as being without insurance at all.
Often the level of cover that you require is determined by contractual obligations. You may have a contract with a client/customer or a new employer that states the minimum cover required. It would be prudent to check your contracts to see whether they contain clauses that dictate the level of professional indemnity insurance that you need. These limits should still be considered carefully however. Your contract may state a minimum of say £250,000 but that doesn’t necessarily mean that £250,000 of cover is appropriate for your business. It could be that you would be better protected with a limit of £1,000,000.
In addition, many professional bodies specify minimum cover limits. For example, Architects and Accountants are required to maintain professional indemnity to certain levels. We would recommend that you check with your regulatory or governing body as to whether they have any prescribled limits for this type of cover.
If you are in any doubt, always insure for higher than you think you may need and if you still have con cerns, we recommend that you consult a solicitor for legal advice as to the likely extent of your legal liabilities.
This is the maximum amount of money that a Professional Indemnity policy will pay out. It is often expressed as either ‘in the aggregate’ or ‘any one claim’. Please see below (What is in the ‘aggregate’ or ‘any one claim’ basis?) for further information on the basis of cover.
When arranging your Professional Indemnity Insurance it is important to understand that there are two fundamental ways in which the cover can be arranged. This can be crucial when you are faced with a large or multiple claims. The two ways of arranging the cover are; Aggregate basis and Any One Claim basis. As you can see from the diagrams below, with Aggregate basis your claims are all paid out of the indemnity limit whereas with Any one Claim you are entitled to the full indemnity limit for each and every claim.
Each claim is paid out of the specified Indemnity limit and reduces the amount available for subsequent claims.
|Any One Claim
Every single claim you make during the insurance year is entitled to the FULL indemnity limit.
If you have a number of claims in a year, the Aggregate basis could mean that you run out of cover or that you do not have enough cover left in order to meet a claim in full. However, with the Any one Claim basis you do not have this issue as all claims would be met up to the indemnity limit.
This simply means that any costs and expenses incurred in investigating or representing you would be paid in addition to the amount of damages (if any) awarded to a third party, and further that the costs and expenses will not be counted towards the limit of indemnity.
A Retroactive date means that a Professional Indemnity policy can provide cover for work you have done in the past.
There are two dates that are relevant for a Professional Indemnity policy. The first is the inception date (or renewal date) of the policy. This is the start date of the policy period. The second is the Retroactive date, being the date that cover operates back to.
To explain how the cover operates, it is important to understand that Professional Indemnity policies are written on what is called a ‘claims made’ basis. This means that they provide cover for claims made against you during the policy period (ie after the inception or renewal date) that relate to work that you have done at any time after the Retroactive date.
For example; A company has a professional indemnity policy that they renew on the 1st January 2010. The policy has a Retroactive date of 1st January 2002. They would be covered for claims made against them after 1st January 2010 for any work that they have done since 1st January 2002.
Normally the Retroactive date is set to correspond with the date that the business was established, to provide cover for work done since the company began trading. In the case of a new startup business, the date is often set to be the same as the inception date of the first policy that is purchased. So, a business starting on 1st Jan 2010 and buying a policy 1st Feb 2010 would generally have a retroactive date of 1st February. This matching of dates is referred to as ‘retro inception’, ie the retroactive date is set to be the same as the inception date of the policy.
However the advent of online systems (such as ours) allow a business (including new startups) to select and purchase a policy where the retroacive date is shown as ‘none’. Where the retroactive date is shown as such this means that there is no prior time limit for work undertaken in the past. Therefore, the policyholder would be covered for all claims made against them during their policy period that related to work undertaken by them at any time in the past (for the business shown on the schedule). Accordingly, where the schedule shows ‘none’ against the retroactive date section, this provides the widest cover in this respect.
You should therefore ensure that your professional indemnity policy accuratley specifies the relevant retroactive date for your business. Without a date being specified (or ‘none’) you will only be covered for claims made during the policy period and relating to work that occurs after the inception date of the policy.
This is the first amount of every claim that is uninsured. It generally applies to each and every claim, but it can occasionally be aggregated or deleted entirely.
Previously clearly defined and distinct, the responsibilities of the professional have changed. Traditionally, people like Accountants, Surveyors, Engineers, Solicitors and Architects, the mainstream professions, 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’.
A typical Professional Indemnity 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 insured’s professional business…’ Some policies are more tightly worded.
Some Professional Indemnity policies go further than the standard cover and provide indemnity to the insured “for any civil liability whatsoever…”. This covers such areas as breach of contract, libel and slander (some standard policies may include libel and slander as extensions to the policy wordings).
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. Some inexperienced Professional Indemnity insurers have got this very wrong in the past and inadvertently picked up EL cover under a PI policy.
This is an important issue in highly competitive professions or during times of recession when the insured’s client holds all the cards in terms of negotiation – a case of “just sign here and you’ve got the job”. But the professional can pay for it later. In some professions, it becomes a way of life to the extent that Professional Indemnity insurers must offer to cover an element of contractual exposure (such as collateral warranties) in order to meet the insured’s basic professional needs.
This is often excluded from Professional Indemnity policies and occurs when a professional signs up to a contract which might impose a liability that goes beyond what one would normally expect in law. Examples include liquidated damages, e.g. late delivery penalties – or accepting liability for otherwise unforeseeable economic loss, e.g. business interruption.
These are normally covered by Professional Indemnity policies, subject to the insurers’ prior consent. They cover the costs of investigation, defence and settlement of claims. These costs might embrace lawyers for investigation and defence, loss adjusters, experts and court costs. The costs are sometimes included within the limit of indemnity (in which case they erode the cover for damages) and sometimes the excess applies to the costs; this is often the case for hazardous risks or where foreign, particularly North American, jurisdiction is involved.
If the excess applies to legal costs there can be policy disputes where an insured disagrees with the expenses being incurred by an insurer, particularly in the event of a successful defence of a spurious claim. Many insurers want the insured to retain a real stake in the successful defence of claims and want to avoid financial involvement in regular small nuisance claims – so they impose the costs inclusive excess. Claimant’s legal costs normally form part of the claim against the insured professional.
The professional person must exercise whatever degree of care and skill is reasonably expected of any competent practitioner in that profession at that time. If a person provides advice or a service to another and carries that work out negligently, he/she can be held legally liable for the consequences. Normally, such advice or services are provided under the terms of a contract. Liability can arise because there has been a breach of duty of care or a breach of contract (the latter normally only covered by a Professional Indemnity policy where there has also been a breach of duty of care).
Other than in breach of contract, for legal liability to be established, the professional must be shown to be in breach of his duty of care – but there is an alarming move towards liability just because things have gone wrong.
In addition to the obvious cover, Professional Indemnity policies often include:
- Libel and slander
- Loss of documents
- Dishonesty of employees
- Unintentional breach of confidence
- Infringement of copyright and intellectual property rights
- Previous firms or previous partners
Typically, professional indemnity policies will exclude things that should have more specific insurance, such as:
- Public Liability – excludes Bodily injury/property damage, except where caused by a breach of professional duty
- Employer’s Liability
- Product Liability
There are also ‘boiler plate’ exclusions:
- 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.
- Seepage and pollution – many insurers maintain this exclusion even where there is a clear and insurable environmental exposure
- Date recognition
Certain professions need special cover. These are dealt with under the appropriate heading. Some highly dangerous extensions are sometimes offered in soft markets but they often disappear as soon as conditions harden; these include things like extended reporting periods.
Some “throw away” frills are often added to make a policy look good. Some policyholders like them but they are not really essential. They include things like a small daily allowance for the insured’s court attendance.
Professional indemnity, directors & officers, medical malpractice and libel insurance are nearly unique in operating generally 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, Professional Indemnity has historically been written on a “losses occurring” basis – but the trend worldwide is towards “claims made”. It is almost impossible to get anything else in the UK.
A claim is generally notifiable under a Professional Indemnity policy 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.
Notable features on a claims made policy are:
- 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.
- It protects the insurer against the effects of legislative changes, inflationary awards and claims made with new knowledge. It was not so long ago that the market was predicting the disappearance of “losses occurring” policies altogether following the wake of losses arising from US asbestos and environmental claims under policies written decades previously, on terms and conditions prevalent at the time which could not possibly have anticipated the losses to hand.
- 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.
In simple terms, yes. You need to ensure that, because of the claims made nature of professional indemnity policies, the cover includes predecessor practices or partners’ liabilities arising out of former partnerships elsewhere, at least to the extent that you want the cover. This means that you have to include the names of those previous businesses on your policy.
Furthermore, make sure you arrange the policy to include cover (ie cover for work undertaken prior to the start date of your policy) so that the previous work you have undertaken is covered.