Professional Indemnity insurance provides protection against claims made by third parties arising from professional services provided. The insurance pays the compensation or damages and costs incurred by a third party and the legal costs and expenses incurred in defending the claim. The common misconception is that cover is provided by Public Liability insurance, but a standard Public Liability policy will exclude liability arising from advice, design or specification for fee and in certain circumstances a separate ‘Professional Indemnity’ exclusion may apply. Hence the need for professional indemnity insurance.
Who needs professional indemnity insurance?
Professional indemnity insurance is required by businesses and organisations that derive income for the sale of its knowledge or skills and where a third party is likely to be affected by a deficiency or error. Historically, traditional professions have purchased the cover either to meet regulatory or other requirements, or because it is considered good business practice, e.g. solicitors, accountants, architects, surveyors, insurance brokers. However, today’s service based economy has produced a whole host of ‘Miscellaneous’ professions that also need the cover, e.g. health and safety consultant, feng shui consultant, education consultant. There is no definitive list of professions that can be covered, and insurers are willing to consider any risk on its merits.
Claims made v Claims Occurring
Professional indemnity differs from the more common Employers Liability and Public Liability insurances in many ways, and it is critical the extent of cover is understood prior to purchase. There is no standard limit of indemnity, cover can start at as little as £50,000 and can be inclusive or exclusive of defence costs, which compares to the usual minimum for Public Liability £1,000,000 with defence costs being paid in addition.
The major difference though is the ‘claims made’ basis of cover that exists for professional indemnity insurance as opposed to the ‘claims occurring’ basis of cover for Employers Liability and Public Liability. Under the ‘claims made’ basis the policy that pays a claim is the one in operation when the claim is made irrespective of when the loss was incurred subject to the policy retroactive date, whereas under a ‘claims occurring’ basis the policy that pays a claim is the one in operation when the claim occurs irrespective of when the claim is made.
The fundamental issue the ‘claims made’ basis causes is that there is no cover for any claims made after a policy is lapsed or cancelled as the policy is not in force when the claim is made, so any previously purchased cover is worthless. It is therefore essential that where a policy is replaced with another insurer, the retroactive date (the policy only covers work undertaken after this date) follows the date on the previous policy and insurers willingly do this. If cover is not required for future work, serious consideration should be given to the purchase of ‘run off’ cover which will cover work prior to inception of the ‘run off’ policy against claims made during the policy period. The cost of first year ‘run off’ cover is likely to be little different to the normal annual premium, but the cost should reduce over time as the likelihood of a claim reduces.
No claims declaration at inception
Another difference with Professional Indemnity insurance is the need to provide a no claims declaration at inception and each subsequent renewal. The declaration asks for a disclosure of claims or incidents that might give rise to a claim. This needs to be taken seriously due to the ‘claims made’ basis of the policy as failure to notify a claim in the policy period in which the claim is made can lead to a repudiation of the claim.
Where does cover apply?
Professional Indemnity has the geographical and jurisdiction issues that Employers Liability and Public Liability insurances, in particular with regard to USA and Canada. Any work overseas work needs to be disclosed to the insurer, and the extent of geographical and jurisdiction cover offered needs to a key factor in the selection of the most appropriate policy.