Professional indemnity insurance (PI insurance or PII) covers you or your business against claims relating to, errors, negligence, mistakes and breach of professional duty. But how much cover do I need? What is the policy excess? There’s still a lot of questions about this type of insurance. We are going to answer some of frequently asked questions to give the basis infomation you need to know.
How much cover do I need?
Only you can assess the amount of cover
(limit of indemnity) appropriate for your business. In determining how
much cover you need, it is important that a realistic view is taken of
the potential damages and legal costs for which your business could
become liable. Being under-insured can be almost as financially
disastrous as being without insurance at all.
Often the level of cover that you
require is determined by contractual obligations. You may have a
contract with a client/customer or a new employer that states the
minimum cover required. It would be prudent to check your contracts to
see whether they contain clauses that dictate the level of professional
indemnity insurance that you need. These limits should still be
considered carefully however. Your contract may state a minimum of say
£250,000 but that doesn’t necessarily mean that £250,000 of cover is
appropriate for your business. It could be that you would be better
protected with a limit of £1,000,000.
In addition, many professional bodies
specify minimum cover limits. For example, Architects and Accountants
are required to maintain professional indemnity to certain levels. We
would recommend that you check with your regulatory or governing body as
to whether they have any prescribled limits for this type of cover.
If you are in any doubt, always insure
for higher than you think you may need and if you still have con cerns,
we recommend that you consult a solicitor for legal advice as to the
likely extent of your legal liabilities.
What is the limit of indemnity?
This is the maximum amount of money that
a Professional Indemnity policy will pay out. It is often expressed as
either ‘in the aggregate’ or ‘any one claim’.
What is in the ‘aggregate’ or ‘any one claim’ basis?
When arranging your Professional
Indemnity Insurance it is important to understand that there are two
fundamental ways in which the cover can be arranged. This can be crucial
when you are faced with a large or multiple claims. The two ways of
arranging the cover are; Aggregate basis and Any One Claim
basis. As you can see from the diagrams below, with Aggregate basis
your claims are all paid out of the indemnity limit whereas with Any one
Claim you are entitled to the full indemnity limit for each and every
claim.
| Aggregate Each claim is paid out of the specified Indemnity limit and reduces the amount available for subsequent claims. |
|
| Any One Claim Every single claim you make during the insurance year is entitled to the FULL indemnity limit. |
If you have a number of claims in a
year, the Aggregate basis could mean that you run out of cover or that
you do not have enough cover left in order to meet a claim in full.
However, with the Any one Claim basis you do not have this issue as all
claims would be met up to the indemnity limit.
What is costs and expenses in addition?
This simply means that any costs and
expenses incurred in investigating or representing you would be paid in
addition to the amount of damages (if any) awarded to a third party, and
further that the costs and expenses will not be counted towards the
limit of indemnity.
What is the retroactive date?
A Retroactive date means that a Professional Indemnity policy can provide cover for work you have done in the past.
There are two dates that are relevant
for a Professional Indemnity policy. The first is the inception date (or
renewal date) of the policy. This is the start date of the policy
period. The second is the Retroactive date, being the date that cover
operates back to.
To explain how the cover operates, it is
important to understand that Professional Indemnity policies are
written on what is called a ‘claims made’ basis. This means that they
provide cover for claims made against you during the policy period (ie after the inception or renewal date) that relate to work that you have done at any time after the Retroactive date.
For example; A company has a
professional indemnity policy that they renew on the 1st January 2010.
The policy has a Retroactive date of 1st January 2002. They would be
covered for claims made against them after 1st January 2010 for any work
that they have done since 1st January 2002.
How do I determine the relevant retroactive date?
Normally the Retroactive date is set to
correspond with the date that the business was established, to provide
cover for work done since the company began trading. In the case of a
new startup business, the date is often set to be the same as the
inception date of the first policy that is purchased. So, a business
starting on 1st Jan 2010 and buying a policy 1st Feb 2010 would
generally have a retroactive date of 1st February. This matching of
dates is referred to as ‘retro inception’, ie the retroactive date is
set to be the same as the inception date of the policy.
However the advent of online
systems allow a business (including new startups) to select and purchase
a policy where the retroacive date is shown as ‘none’. Where the
retroactive date is shown as such this means that there is no prior time
limit for work undertaken in the past. Therefore, the policyholder
would be covered for all claims made against them during their policy
period that related to work undertaken by them at any time in
the past (for the business shown on the schedule). Accordingly, where
the schedule shows ‘none’ against the retroactive date section, this
provides the widest cover in this respect.
You should therefore ensure that your
professional indemnity policy accuratley specifies the relevant
retroactive date for your business. Without a date being specified (or
‘none’) you will only be covered for claims made during the policy
period and relating to work that occurs after the inception date of the
policy.
What is the policy excess?
This is the first amount of every claim
that is uninsured. It generally applies to each and every claim, but it
can occasionally be aggregated or deleted entirely.
What is a professional?
Previously clearly defined and distinct,
the responsibilities of the professional have changed. Traditionally,
people like Accountants, Surveyors, Engineers, Solicitors
and Architects, the mainstream professions, were regarded as
‘professionals’. Modern reliance upon services provided by others and
the increased use by business of outside consultants has increased the
scope of this term and a professional is now often regarded as any
person who offers ‘specialist advice or services’.
What is breach of duty?
A typical Professional Indemnity policy
will provide indemnity to the insured’, against loss arising from any
claim or claims for breach of duty which may be made and reported to the
insurers during the policy period by reason of any neglect, error or
omissions committed in the conduct of the insured’s professional
business…’ Some policies are more tightly worded.
What is civil liability?
Some Professional Indemnity policies go
further than the standard cover and provide indemnity to the insured
“for any civil liability whatsoever…”. This covers such areas as breach
of contract, libel and slander (some standard policies may include libel
and slander as extensions to the policy wordings).
Because the operative clause of a “civil
liability” policy is so wide, there is normally a long list of
exclusions in order to exclude liabilities that should be covered
elsewhere – otherwise things like Employers Liability (EL) and Public
Liability (PL) might be covered. Some inexperienced Professional
Indemnity insurers have got this very wrong in the past and
inadvertently picked up EL cover under a PI policy.
