Professional Indemnity – Claims and Circumstance

When it comes to a Professional Indemnity claim, you need to notify your Insurers of any claims or ‘circumstances’ that may develop into a claim against you within the timescale stated within your policy. It is usually easy to identify a claim as there will often be a clear indication from a claimant of their intention to claim compensation against you. This can be in the form of allegations of negligence conducted by you/your company and will establish some form of actual or potential loss. However, identifying a ‘circumstance’ can sometimes be difficult to define.

Defining A Claim

A claim is “a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages”.

Defining A Circumstance

A ‘circumstance’ is often not defined in the policy and is therefore not as easily recognised. Careful consideration of the policy wording in use is required, as terms and conditions vary and impact the required timing of a notification.

The following factors may assist in defining a circumstance, however, cannot be treated as a comprehensive list:

  • An intimation by a third party, whether expressed or implied, of an intention to claim against you. This may be a remark made in a telephone conversation or meeting for example.
  • Criticism of your performance where it may give rise to a financial loss.
  • Your discovery of a service or action provided by you which may fail to meet the standards required and could cause financial loss, even if your client is unaware of the shortcoming.

If you become aware of any of the above, then you must notify Insurers within the timescale stated in your policy. If you fail do so and the matter were to develop into a claim, then it may not be covered under the terms of your policy thereby leaving you uninsured.

Circumstances ‘Likely’ Or ‘That May Give Rise To’ A Claim

It is usual to find that professional indemnity policy wordings will either require the notification of circumstance ‘likely’ or ‘that may’ give rise to a claim and it is important to understand the difference between the two requirements. Your obligation to notify a circumstance is significantly different under each and we therefore recommend that you review this article in conjunction with your own policy wording.

Use of words ‘that may give rise to’ places a stronger emphasis on the obligation to notify compared to ‘likely’ and it is generally accepted as being any issue with more than a 20% risk of giving rise to a claim. This increases the notification obligation, and generally results in more matters being lodged but can sometimes help in identifying problems earlier.

‘Likely’ on the other hand, is accepted as being an issue with greater than a 50% chance of giving rise to a claim. Notification of matters ‘likely’ to give rise to claim is therefore less onerous for the Insured.

If changing Insurer, differences in the wording used can have significant impact. It is especially critical when considering a change of Insurer at renewal to review the notification obligations of each policy wording carefully as there is no cross-market approach to clauses. Forgetting to make the change to accommodate the new wording, however, could result in claims not being met.

What Not To Do If A Claim Or Circumstance Arises

If you become aware of a claim, or you identify a state of affairs that might develop into a claim (a ‘circumstance’), it is vital that you do not do any of the following as by doing so may affect your right to be indemnified under your policy as a result of prejudicing your insurers’ position:

  • Admit liability
  • Make any offer to settle the problem
  • Incur any costs or expenses without your insurers’ prior approval

If you receive any correspondence from your client, or a third party, suggesting that a claim may be made against you, do not:

  • Reply. Forward the correspondence to your insurer immediately so that they can discuss the appropriate response with your insurers, as all replies have to be authorised by your insurers.
  • Take any action which might prejudice your insurers position or their ability to examine the problem.
  • Disclose details of your professional indemnity policy, your insurers, or reveal to the claimant that the problem has been reported to your insurers.

When You Should Notify Your Insurer

There is no consistent approach among Insurers on the timing of notification provisions on policies. However, the wording is usually very strict, and this is often classed as a condition precedent or a warranty of the policy (these are ‘superior’ policy conditions, which if breach, can leave you uninsured). We strongly recommend that all notifications are made as soon as possible and certainly within a 14-day period of discovery. We advise that you should notify all issues that you become aware of, however small, and irrespective of whether you consider them to be justified or not.

If you are uncertain regarding whether a matter should be notified to your insurers, or what constitutes a ‘claim’ or ‘circumstance’, please contact a member of our team.