What is Professional Indemnity Insurance (PII)?
Breach of Duty- The purpose of a basic Professional Indemnity (PI) policy is to indemnify the insured in the instance when a loss arises from any claim of ‘breach of duty’ in the duration of their policy period due to their neglect, error or omission whilst carrying out their business activities.
Civil Liability- Specific PI policies will offer a wider wording to cover “civil liability”. Although some PI policies may include libel and slander as an extension to the normal wording, to be upon a civil liability wording means that the insured is covered for breach of contract, libel and slander as standard. Technically speaking, due to the operative clause of a “civil liability” policy being so wide, there is normally an extensive list of exclusions to exclude exposures that should be covered elsewhere, I.e Employers Liability (EL) and Public Liability (PL).
Breach of a contractual liability (that is not caused by negligence) – Is this covered? This nature of loss arises when a professional signs a contract to which might impose a liability upon themselves, that goes over and above what one would normally expect in law. This is often excluded from PI policies and covers losses such as liquidated damages (such as late delivery penalties) or accepting liability for unexpected economic (business interruption).
Contractual liability – This is an important issue in highly competitive professions or potentially in times of recession where the insured’s client holds all of the cards whereby the insured can “just sign here and you’ve got the job” however this encourages some risky exposures.
In some (particularly for design and construct) professions, this is considered the natural approach to take; PI insurers must therefore offer to cover an element of contractual exposure (such as collateral warranties) in order to meet the insured’s basic professional needs in these instances.
Legal costs – These are normally covered by PI policies (subject to the insurers’ prior consent) and will cover the costs of investigation, defence and settlement of claims. These costs might encompass: lawyers for investigation and defence; loss adjusters; expert witnesses and court costs however claimant’s legal costs normally form part of the claim against the insured professional.
‘CLAIMS MADE’ INSURANCE
Professional indemnity (as well as directors & officers, medical malpractice and libel insurance) is written on a “claims made” basis.
This means that the policy covers claims that are made (and reported to insurers) from when the incident supposedly occurred but using the current policy cover unlike most other liability policies which only cover the loss if notified at the time of occurrence.
A claim is generally notifiable under a PI policy when the insured first becomes aware of a circumstance that could lead to a claim; this could be anything ranging from a verbal criticism to the insured receiving a written statement of a claim.
The interpretation of when this situation occurs is the source of frequent policy disputes between the insurer and insured. If in doubt notify insurers and let them decide if the matter is a notifiable event.
Key features on a ‘claims made’ policy are:
- A claim might be made upon a current policy but in respect of a negligent act that might have historically occurred.
- Protects the insured against the loss of value due to fluctuating inflation rates. In respect of areas such as the construction industry, “latent defects”, might lead to claims many years after an act of neglect; this can be crucial in times of only modest (let alone high) inflation.
- It protects the insurer against the effects of legislative changes, claims made in line with newly acquired knowledge or inflationary awards. Even up until recently, the PI 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.