The purpose of Professional Indemnity is to protect the professional against a legal liability to compensate third parties which have sustained injury, loss or damage due to the professional’s negligence or breach of professional duty in the conduct of their profession/business/occupation, or that of their Employees caused by any act, error or omission.
Difference between “Claims Made” and a “Loss Occurring” policy
A very confusing area, but all Professional Indemnity policies are “Claims Made” wordings. This is a type of liability insurance policy in which the trigger of coverage is not the occurrence of a loss, but the actual making of a claim in respect of that loss by a third party, upon the insured. They were devised to provide cover against claims made on insureds during the currency of the policy, regardless of when the event giving rise to the claim occurred. Loss Occurring policies go by the date the loss occurred and the policy in force at that time. However, Professionals can perform work for a client over a period of time and the actual error or omission date may not be identified at all, so long as it occurred after the “Retroactive Date” set in the policy.
Trap – Setting or re-setting a retroactive date from inception may be disregarding work performed before the new policy has started. Though it may be cheaper.
Claims Made or Claims Made and NotifiedPolicies
Understanding the application of Professional Indemnity as a “Claims Made” policy is crucial.
However, now you will see Insurers refer to their policies being called “Claims Made and Notified” policies. The difference being that they now attach a notification requirement in the insuring clause of the claims made policy with the intention of confining coverage to claims that are both made and notified to the insurer during the policy period.
This is because of previous disputed claims that were tested with the rights under Section 40 of the Insurance Contracts Act. This provides that if an insured becomes aware of circumstances that might give rise to a claim and, during the period of insurance, notifies those circumstances to the insurer, the insurer is not relieved of its liability to pay the claim solely because it arose after the period of insurance. SeeFAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd.
Trap – Changing insurers will lose the benefit of the Section 40 Protection. It needs to be explained to the Insured that if a claim that should have been reported with the previous insurer
Most Insuring Clauses are Civil Liability (non-criminal Acts). There are some that are called Breach of Duty by any Act, Error, or Omission.
Originally Professional Indemnity policies were what we called a “Negligence” based wording. These days they should be avoided as they restricted to common law matters. With increased Government regulation including Australian Consumer Law and Strict Liability determinations, it became important to cater for this. Originally policies were just extended to include specific acts. With Civil Liability, they include both Common Law and Statute Law, except what they choose to exclude.
Trap – there are differences in a Civil Liability wording. You can compare how the Insuring Clauses are stated, but you also have to check the exclusions, definitions and extensions. Always view the whole policy in context to get an overall picture of how broad the cover really is.
It is critical that all activities of the Professional are disclosed in the proposal form and listed on the policy. The description needs to be broad but also specific and concise.
All activities, past and present need to remain on the policy.
Trap- If a previous activity is no longer declared, although it is not performed anymore or income generated from it, going forward will no longer be covered by a “Claims Made” policy. So should a new claim arise today from the work performed a few years ago but Insured has left that activity off, then there is no cover.
Limit of Liability
The sum insured can be either “inclusive of costs” or “exclusive of costs”.
This simply means that all the legal defence and investigations costs are contained within the limit of liability if it is costs inclusive. But all the legal and claims investigation costs are kept separate and outside the limit of liability with costs exclusive policies. These costs usually are limited to the same amount as the sum insured taken.
A ”Cost’s Exclusive” limit of liability is obviously the much broader cover.
Trap – many insurers do not indicate either on their quotes so you need to refer to the policy wording issued. This is not easy to decipher either. It therefore is likely to be inclusive of costs.
Excess – Inclusive or exclusive of costs
In the same way as the limit of liability can be exclusive of costs or inclusive of costs, so too can the excess (or deductible or retention) on the policy. With a Costs inclusive excess, the Insured must pay the excess as soon as the Insurer begins incurring costs in the defence of a claim. However with a Costs exclusive excess, the payment of the deductible occurs when the claim is being settled.
This means that a frivolous allegation against an Insured which is successfully defended, meaning no settlement, will not have to pay anything towards the claim if they are fortunate enough to have a costs exclusive excess or deductible.
Trap – Costs exclusive excesses are very popular to offer during “Soft Market” periods, but the “Costs inclusive” excesses replace them when the market starts to harden, or if the turnover increases substantially and excesses are increased accordingly. Make sure you check this each year.
The retroactive date is critical in determining what past work will be covered by the policy going forward. New policies are often set at the Inception of cover. This means the policy will only cover work performed after the start of the new policy. Yet policies with an Unlimited Retroactive date offer full retrospective cover. Also, many companies will only give inception as the retroactive date unless you can provide evidence of a current retroactive date from elsewhere.
Trap – If the Insured has performed similar work in their own name in the past, yet the policy has a retroactive date as inception on the new policy starting now, they will be uninsured for the previous work performed prior to the new policy. This needs to be discussed with the Insured, and the ramifications put in writing. It is better that an insurer is found who will provide a retroactive date set before the past work began or have an unlimited Retroactive date.
Trap – If an Insured decides to go without Professional Indemnity for three months or more as they have no work, not only are they exposed to claims arising from past work, their retroactive date can be set back to zero. Professional Indemnity cover needs to be maintained throughout to avoid this and this has to be explained to the Insured.
The definition of Insured usually includes a definition of an Insured person, and this may pick this up automatically any past, present or future Director, Partner, Principal but not always. Particularly of the Principal has joined with a separate legal entity as part of an acquisition. That entity may not be listed on the policy as they have absorbed the acquired company, and as a consequence any past, present or future Principals would not fall into the definition of Insured.
Trap- If a business changes their name or buys another company, the outgoing principal may be linked to a previous legal entity name and may therefore no longer have any retroactive cover. If the policy is not clear, leave all past and present legal entities on the policy so there are no gaps.
Cancellation of the Policy
Some policies are non-cancellable. It is important to check for the Cancellation Clause to see if a client can cancel, or if so what amount of premium can be retained. If no clause for a Cancellation, it may then be implied by the insurer that it cannot be cancelled. In this situation, check with the insurer on what would their position would be.
Without a cancellation clause, Premium Funders rely on the policy as security and they cannot obtain a refund following a default on non-cancellable covers.
Trap – We should discourage cancellation because our client often does not understand the “Claims Made” nature of the policy and the need to continue to have a reporting period even if their business has ceased. We should be encouraging them then to revert to “run-off”
Bodily Injury and Property Damage Exclusion
Professional Indemnity policies often contain a Bodily Injury and Property Damage exclusion but it may contain a provision “unless arising out of your Professional Services”. Ideally there should be no exclusion at all for Bodily Injury or Property Damage, however it is virtually impossible to negotiate this out for small to medium business risks.
Trap – Sometimes a Professional Indemnity policy contains a full Bodily Injury or Property Damage exclusion with no Professional Services write-back. Under no circumstances ever except such a comprehensive exclusion, especially for the construction related professions such as Engineers.
Consequential Loss Exclusion
This exclusion is also snuck in by underwriters, who if you ask them what it will mean will give you misleading answers. It basically will not cover any loss as a consequence of an error or omission. So, what is it covering? An example is an Engineer who miscalculates the weight bearing capacity of a structure. As a result, the structure itself collapses and causes property damage or even injury to those nearby. Insurers will immediately limit the claim to the actual loss relating to the error, but not any surrounding property or injury.
Trap – The way this worded, it could include any damage resulting from the error as it is all in consequence of an error made. Including the clause lowers the premium down. Yes, you got cheap cover and it means the Engineer will get the contract, as this proof is not disclosed on a certificate of currency. But if there is a claim, you will be sued automatically. Do not ever accept this exclusion on a Professional Indemnity policy.
There are many more tricks and traps to be aware of but the above I consider to be the majority. There are also tricks and traps in how claims and circumstances are handled. These may be worthy of further discussion at a later time.