In today’s increasingly litigious society, businesses have a growing need for professional indemnity insurance.
This presents excellent opportunities for brokers, but it is important to understand the fundamentals of this complex insurance product.
This guide looks at who needs professional indemnity insurance, the approaches to cover and how to tailor solutions for your customers.
Professional indemnity (PI) insurance is becoming increasingly important for today’s professionals. It protects them against claims for financial loss arising out of negligent advice, designs, or specifications given in the course of their business.
From accountants and solicitors to dieticians and marketing experts – any professional who offers their knowledge, skills or advice as part of their work needs to consider PI cover.
Today’s PI policies also typically offer a suite of additional covers, such as loss of documents, cost of criminal proceedings and protection of intellectual property rights.
Here are 5 things brokers should consider when arranging PI cover.
1. Understanding the different approaches to cover
There can be significant differences between wordings; often this differential is the insuring clause itself. Some policies are written on a ‘negligence’ basis, starting with a defined peril, and then extending cover beyond that. Others are written on a ‘civil liability’ basis, starting with broad cover and then excluding certain perils.
There is a widely held misconception that civil liability wordings offer broader cover, but this is not always the case.
The challenge for brokers is that civil liability wordings can sometimes contain long lists of exclusions, actually making them more restrictive than a well-endorsed negligence wording.
2. Setting appropriate limits
If a minimum isn’t specified by a customer’s professional body, such as the Royal Institute of Chartered Surveyors (RICS), or in their contracts with customers, you will need to contemplate worst-case claim scenarios. This will be influenced by factors such as the type of work undertaken, potential legal costs, and how a business has limited its liability through contract.
Looking at a traditional profession, such as an engineer, you could easily be looking at limits of indemnity of £5 million or above, for example, if an engineer specifies a certain method to clad a building, and that cladding falls off and hits somebody, the personal injury aspect alone will add significantly to any claim.
3. Aggregate or any one claim?
Most policies are written on an ‘any one claim’ basis – meaning each claim takes advantage of the full limit of indemnity. However, policies can also be written on an ‘aggregate’ basis – where the limit of indemnity applies across all claims during the policy term, so each claim will gradually erode the annual aggregate limit.
For a construction firm or marketing agency that undertake high-value contracts, and have the potential for more than one claim in a year, an ‘any one claim basis’ may be most appropriate. Whereas a nutritionist who charges low fees and does not consider a claim to be likely, might opt for an aggregate basis.
4. Don’t forget run-off
PI policies are written on a ‘claims made’ basis, meaning they only cover claims notified during the policy period. This is unlike many liability policies, such as Employers’ and Public Liability, which are written on a ‘claims occurring’ basis, where the insurer at the time of the incident provides cover, irrespective of when the claim is made.
As claims can come in years after work is completed, should a customer cease trading or retire, they will need ‘run-off ‘cover. This simply entails adding a cut-off date to their current PI policy, so it only covers claims made while the business was still trading.
The recommended length of run-off cover will vary depending on the insured’s line of work. Six years is usually considered a minimum, however, certain businesses may be exposed for longer periods, such as 12 or even 15 years. This is often the case if any contracts were executed as deeds, which is becomingly increasingly common.”
5. Tailoring solutions Businesses’
PI needs can vary significantly, as can PI policy wordings, so sourcing cover that meets specific customer needs can be challenging. Brokers should therefore understand the risks involved in their customers’ business activities to ensure that the wording and limits are appropriate to their customers’ needs.
Negligence wording – starts with a limited insuring clause, covering claims alleging negligence, and will then often extend cover beyond this
Civil liability wording – starts with a broad insuring clause, offering cover for a wide range of liabilities unless specifically excluded
Any one claim – limit of indemnity applies separately to each and every claim
Aggregate – limit of indemnity applies across all claims during the policy period
Claims made – policy covers claims notified during the period, irrespective of when the incident occurred
Claims occurring – policy covers claims for incidents occurring during the policy period, irrespective of when the claim was notified
Run-off – maintains PI cover after a business has ceased trading to protect against future claims for previous work