In a professional indemnity policy and indeed now some Management Liability covers you will see either a Reinstatement Clause or an aggregate limit of the limit of liability.
Is there a difference? Yes there is and it is a trap that could catch you out!
If a policy contains a reinstatement clause then in the event of the Insured having more than one Claim in a period of insurance, the policy provides an automatic reinstatement of the limit of indemnity. This makes sure that if there is an exhaustion or partial exhaustion of the limit of indemnity, because of the notification of a claim during the period of insurance, the Insurer will reinstate the limit of indemnity for the period of insurance back to the full amount. Insurers will generally provide just one reinstatements but some policies may have two or three reinstatements. Some Accountant’s policies have unlimited reinstatements.
But how does this differ from an aggregate limit?
An aggregate limit can be double the amount of the limit of liability and can appear therefore to be one reinstatement, but in actual fact, you can have a multitude of reinstatements until the aggregate limit is exhausted. The limit of liability given is the maximum you can claim for any one matter.
So as an example, if an Accountant has a $5,000,000 limit of liability with a $10,000,000 aggregate and he misinterprets a section of the Tax Act on 30 separate occasions over a period to his clients and as a result they all incur fines and additional costs as a result of the Accountants negligence, they would all be covered until the aggregate limit is exhausted of all the claims were under the limit of liability. The claims would all be for variable amounts but if they all averaged $250,000 with an aggregate limit, they would all be covered by insurance.
If on the other hand they had one reinstatement, one claim of $250,000 would see the sum insured return to the limit of liability of $5,000,000 but after that, the policy will only cover another 19 claims for $250,000 each. 10 claimants would miss out or need to be paid out directly by the Accountant because his sum insured was now exhausted.
If the Accountant had two reinstatements, only one more claimant would be covered and so on. Depending on your occupation, making the same mistake with many clients on separate occasions is possible. Some professions it would not be so easy but how the sum insured or limit of liability is set up could foreseeably count. Financial Planners, Insurance Brokers, OHS and Human Resource Consultants are other examples.
It is also just plain wrong to assume that with one reinstatement on a limit of liability, the aggregate of liability is automatically doubled, Technically yes if there are two claims for the maximum sum insured, but more often than not they will be smaller amounts and once one reinstatement has applied, it is certainly not the Aggregate is adjusted by the amount of the first claim, and you have in this example $9,750,000 left. It is potentially misleading to state both.
The other issue is some insurers show “Reinstatements” as an extension. Others show it in the Insuring Clause or the Conditions of the policy. I have even found the Reinstatement Clause in the Exclusions from one insurer. Make sure you know where it is and how it operates within the policy.
So make sure it is either clearly an aggregate amount or the required number of reinstatements are listed.