Professional Indemnity FAQ
If you hold yourself out as giving advice and/or provide services of a skilful nature you may be regarded as a ‘professional’. That means persons other than those in ‘traditional’ professions, such as lawyers and accountants, are now considered to be professionals – e.g. fund managers, information technology consultants, graphic designers and financial planners.
It is required by law that the professional exercise the required skill to an appropriate level expected by that profession. Professionals are only human and mistakes do happen. Any financial loss, injury or damage arising from an act, error or omission by the professional to provide the required level of skill may mean that an award is made in favour of a person who suffers a loss, damage or injury. Of course you may also be required to hold a professional indemnity insurance policy by law, to be a member of a professional association or as a contractual requirement.
A PI policy safeguards a professionals personal and business assets in the event of a claim, therefore ensuring that he/she or the practice is able to carry on their business. A PI policy will fund the defence of a claim therefore protecting the cash flow and balance sheet of the professional business. Professional Indemnity policies vary in cover from insurer to insurer so you need to compare each policy carefully.
Professional Indemnity insurance is a ‘claims made and notified’ policy. This means that is a requirements of the policy that and any fact, situation or circumstance that may result in a claim, be notified to the insurer within the period of insurance. The actual error (or alleged error) could occur at any time if there is retroactive cover, or otherwise it must occur during the period of insurance. The insured must not have had any prior knowledge of the fact, situation or circumstance before the period of insurance. In an ‘occurrence’ wording such as Public Liability policies, the circumstance must occur during the period of insurance whilst the notification of this event can occur at any time subsequently.
It indemnifies the insured for claims arising from any civil award imposed by a civil court, as opposed to criminal liability or penalties enforced by a criminal court. A Civil Liability Professional Indemnity wording is broader than a ‘negligence wording’, as it will indemnify the insured for claims arising from strict liability where no negligence is involved.
To provide the insurer with the minimum level of information to adequately understand your business. You may also need to provide a corporate brochure, CV or capability statement to support your proposal form.
Costs inclusive excess means the insured must pay the amount of the excess towards the legal and defence costs. Costs exclusive excess means the insured does not pay any excess towards the legal and defence costs, but only pays the amount of the excess towards the settlement of any claim. A Costs Exclusive Excess is more favourable to the insured but will generally cost more, not all insurers provide a costs exclusive excesses.
Retroactive date is the date after which acts, errors or omissions of the insured are covered. That is, any act, error or omission arising from work done after the retroactive date will be covered under the policy.
Continuity of cover is essentially a loyalty bonus. It means that if someone who was insured with an insurer in unbroken successive periods notifies the insurer of a claim or circumstance in a subsequent period which should have been notified in an earlier period, then that claim will be covered under the latter policy, but subject to the smaller sum insured of the two applicable policies. ‘Non-disclosure’ issues and ‘known circumstances’ exclusions will not be raised. However, prejudice due to delayed notification may be taken into account in the adjustment of the claim.
Unlike other liability policies, the sum insured of the Professional Indemnity policy is limited so that the limit applies to the aggregate of all claims against the policy in the policy period. The automatic reinstatement allows this aggregate limit to be increased, while the limit for any one claim remains the limit of the sum insured. For example a policy with $1,000,000 Sum Insured with ONE automatic resentment allows the insured to have 2 claims for $1,000,000 each during the policy period but not one claim for $2,000,000.
The test of what is a ‘claim circumstance’ and whether it ought to be notified is an objective one. That is, would a reasonable person in the position of the insured have realized that the circumstances may give rise to a claim?
When in doubt, notify the insurer especially if the events in question give you cause to be concerned that a claim may arise. In circumstances where you are aware of your negligence, it is no excuse for the late notification of a claim circumstance simply to wait and see if a formal complaint is made.
These two terms are sometimes confused. Territorial limit refers to the place where the act, error or omission occurs. Jurisdiction limit refers to the fact that the policy will only cover claims brought within the court system of the nominated countries.