What is contractual liability?
This is an important issue in highly
competitive professions or during times of recession when the insured’s
client holds all the cards in terms of negotiation – a case of “just
sign here and you’ve got the job”. But the professional can pay for it
later. In some professions, it becomes a way of life to the extent that
Professional Indemnity insurers must offer to cover an element of
contractual exposure (such as collateral warranties) in order to meet
the insured’s basic professional needs.
What is contractual liability that is not caused by negligence?
This is often excluded from Professional
Indemnity policies and occurs when a professional signs up to a
contract which might impose a liability that goes beyond what one would
normally expect in law. Examples include liquidated damages, e.g. late
delivery penalties – or accepting liability for otherwise unforeseeable
economic loss, e.g. business interruption.
Are legal costs covered?
These are normally covered by
Professional Indemnity policies, subject to the insurers’ prior consent.
They cover the costs of investigation, defence and settlement of
claims. These costs might embrace lawyers for investigation and defence,
loss adjusters, experts and court costs. The costs are sometimes
included within the limit of indemnity (in which case they erode the
cover for damages) and sometimes the excess applies to the costs; this
is often the case for hazardous risks or where foreign, particularly
North American, jurisdiction is involved.
If the excess applies to legal costs
there can be policy disputes where an insured disagrees with the
expenses being incurred by an insurer, particularly in the event of a
successful defence of a spurious claim. Many insurers want the insured
to retain a real stake in the successful defence of claims and want to
avoid financial involvement in regular small nuisance claims – so they
impose the costs inclusive excess. Claimant’s legal costs normally form
part of the claim against the insured professional.
What are my obligations as a policyholder?
The professional person must exercise
whatever degree of care and skill is reasonably expected of any
competent practitioner in that profession at that time. If a person
provides advice or a service to another and carries that work out
negligently, he/she can be held legally liable for the consequences.
Normally, such advice or services are provided under the terms of a
contract. Liability can arise because there has been a breach of duty of
care or a breach of contract (the latter normally only covered by a
Professional Indemnity policy where there has also been a breach of duty
of care).
Other than in breach of contract, for
legal liability to be established, the professional must be shown to be
in breach of his duty of care – but there is an alarming move towards
liability just because things have gone wrong.
What cover is usually provided?
In addition to the obvious cover, Professional Indemnity policies often include:
- Libel and slander
- Loss of documents
- Dishonesty of employees
- Fidelity
- Unintentional breach of confidence
- Infringement of copyright and intellectual property rights
- Previous firms or previous partners
What cover is usually excluded?
Typically, professional indemnity policies will exclude things that should have more specific insurance, such as:
- Public Liability – excludes Bodily injury/property damage, except where caused by a breach of professional duty
- Employer’s Liability
- Product Liability
- Property
- Vehicles
There are also ‘boiler plate’ exclusions:
- Contractual liability – this is liability assumed under any express warranty, agreement, guarantee or the like unless such liability would have attached anyway.
- Insolvency/bankruptcy of insured
- Circumstances known at inception
- Fines and penalties
- Claims by financially associated parties – some insurers will cover these claims if they emanate from a third party
- Radioactive contamination, etc.
- War
- Seepage and pollution – many insurers maintain this exclusion even where there is a clear and insurable environmental exposure
- Date recognition
What are the usual policy extensions?
Certain professions need special cover.
These are dealt with under the appropriate heading. Some highly
dangerous extensions are sometimes offered in soft markets but they
often disappear as soon as conditions harden; these include things like
extended reporting periods.
Some “throw away” frills are often added
to make a policy look good. Some policyholders like them but they are
not really essential. They include things like a small daily allowance
for the insured’s court attendance.
What is ‘claims made’ basis?
Professional indemnity, directors &
officers, medical malpractice and libel insurance are nearly unique in
operating generally on a “claims made” basis. This provides cover for
claims made (and reported to the insurer) during the period of insurance
only. In contrast, other liability covers normally provide indemnity
for “losses occurring” during the policy period. This is not the same
across the world – for example in Europe, Professional Indemnity has
historically been written on a “losses occurring” basis – but the trend
worldwide is towards “claims made”. It is almost impossible to get
anything else in the UK.
A claim is generally notifiable under a
Professional Indemnity policy when the insured first becomes aware of
circumstances that could lead to a claim – this could be anything from a
verbal criticism to receipt of a statement of claim. The interpretation
of when this situation occurs is the source of frequent policy disputes
between the insurer and insured.
Notable features on a claims made policy are:
- A claim might be made against a policy written now but the act of neglect might have occurred many years previously.
- It protects the insured 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 crucial in times of only modest (let alone high) inflation.
- It protects the insurer against the effects of legislative changes, inflationary awards and claims made with new knowledge. It was not so long ago that the 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.
Can I cover previous business activity?
In simple terms, yes. You need to ensure
that, because of the claims made nature of professional indemnity
policies, the cover includes predecessor practices or partners’
liabilities arising out of former partnerships elsewhere, at least to
the extent that you want the cover. This means that you have to include
the names of those previous businesses on your policy.
Furthermore, make sure you arrange the
policy to include cover (ie cover for work undertaken prior to the start
date of your policy) so that the previous work you have undertaken is
covered.
