A Guide to Professional Indemnity Insurance
In terms of PI cover, Who is a Professional?
Traditionally, people like Accountants, Surveyors, Engineers, Solicitors and IT Professionals are regarded as professionals. However, the list of people considered to in a profession has grown and changed over the decades and now includes businesses such as consultancies, media businessses, environmental and acoustic based business and so on. Essentially a professional in terms of PI is someone who generally offers advice or service, in the course of their business.
When does a liability occur?
Any professional is obliged to conduct their work with the degree of skill that could be reasonable expected of someone in their profession. If they fail in that obligation, they could be held liable for the consequences and the financial impact on their business, particularly if an SME, could be significant. The claim could arise beacuse the professional offering advice has been in breach of contract (needs to be covered with an indemnity policy where there has in addition been a breach of duty of care).
What is Professional Indemnity Cover?
PI cover can include a wide range of covers including from breach of duty, civil liability, breach of contractual liability, contractual liability and legal costs although each policy can be different.
The breach of liability provides protection from general neglect in the conduct of the professionals conduct. You need to check your insurers poliocy wording for the exact wording of this cover. Civil liability is normally included on a PI policy which goes much deeper than just breach of liability and will protect a business for any civil liability incurred.
A breach of contractual liaibility (non negligent) is normally excluded from a standard PI cover but it covers claims made against a business when they have signed into a contract that penalises them beyond the level that legaly would be normal or legitimate. As an example a business may have signed up to be liable for business interuption.
PI cover may include protection for contracted liability.
Legal costs are often included in PI contracts with the insurers agreement. The costs may include the costs of legal defence, loss adjusters, court costs and the claimans legal costs.
PI is a Claims Made Contract
Professional indemnity, is underwritten on a 'claims made' basis. This means that the cover provides protection for claims made during the policy term not losses incurred during the loss period.
A claim is officially notified at the point where a client of the insured receives a criticism for work completed or the insurer receives such notification. It is worth businesses notifying their insurer as soon as any issue could potentially escalate into a PI claim.
Claims Made Policy Features
A claim might be made against a policy written now but the act of neglect might have occurred many years previously.
It provides protection for the business 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 very important.
It protects the insurer against the effects of legislative changes, inflationary awards and claims made with new knowledge. If the policy is not renewed of 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
What do PI insurers look at?
Insurers use a proposal form to assess the risk. This allows the underwriter to build a risk profile of the work being undertaken by the business and so assess the risk and calculate the terms and premium for cover. The proposal form normally includes sections to build information on the proposers:
Experience
Often this is demonstrated by qualifications. Membership of professional bodies with governing bodies (who have set qaulifications). For example, accountants have the ICA.
Type of Business
What exactly does the professional do? A full and proper description of their activities along with supporting literature is important. This can help an underwriter understand the risk.
Risk factors and Contract Size
Each profession faces different risks and within each profession that risk will vary depending on the nature of the work being undertaken. At hcci we write over 300 different professions and so there is very little we haven’t seen before
Claims
The reaction of a client to a claim tells an underwriter a lot about a risk. If the claim is valid is a client willing to review their working practices to avoid a repeat. Claims often identify if a client’s working practices are effective or not, for example do they keep orderly documents detailing the project requirements and any changes made during the project?
It is true to say that the bigger the contract, threats tend to be more complex and more money is at stake. So when the claims do a arise, they are harder to resolve and cost more.
Overseas Exposure
Does the insured undertake work overseas. If so what is that work and on what legal basis was the contract signed. Underwriters would pay careful consideration to any us or canadian clients.
Retroactive Exposure
Pi is written on a claims made basis. A retroactive date is often applied stating the date from which previous work is covered. Insured’s need to understand that any claims arising out of work undertaken prior to that date will not be covered.
Environmental exposure
Certain professions specialise in this area but a number of other professions can easily get involved unknowingly.