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What is Professional Indemnity Insurance?
Professional Indemnity Insurance, often known as PI insurance or professional liability cover, is about what happens next when you make a mistake or dish out duff advice. It’s a ‘distress purchase’, often compulsory, bought on the cheap and forgotten about until next year.
PI Claims are increasingly made against persons or firms engaged in professional duties or the provision of such services for alleged negligence, omission or error. Consequently insurance protection is sought by two groups:
Those exposed to the risk of causing bodily injury (doctors, surgeons, dentists, pharmacists, etc)
Those who may cause financial loss (architects, solicitors, IT professionals, etc)
The term Errors and Omissions (E & O) is sometimes used for policies issued to those who may not necessarily be qualified by a trade or recognized examination.
Professional Indemnity policy indemnifies you against claims for damages and claimants’ costs for breach of professional duty due to negligence, error or omissions made against the insured during the period of insurance.
Cover can be arranged in two ways:
Any One Claim: This is when Cover is limited per incident but you could find yourself subject to more than one claim in the period and this would be covered.
Aggregate: This is when Cover is limited for any one claim but also during the period of insurance. In the event of multiple incidents and the limit being reached, cover will cease. Excess Layers in the event that the limit of indemnity is insufficient, excess layer policies can be purchased. In these circumstances it is essential that all insurers follow the wording of the primary policy to facilitate smooth handling of claims.
The limit of indemnity expressed normally applies to damages and the claimants costs. Your costs, provided that they have been incurred with the insurers consent, are in addition.
Territorial limits vary but the policies generally apply on a worldwide basis although Insurers may insist on any action being brought to the UK courts.
Frequently Asked Questions
If you are giving out any kind of advice it is recommended to get professional indemnity insurance. The most common professions that are recommended this cover are:
- IT Professionals
- Fitness Professionals
- Recruitment Agencies and more…
Professional indemnity insurance covers against allegations of professional negligence – which means it would cover you if you were to make an error or mistake in a piece of work (such as a project or report) for a client.
Public liability insurance is different – it covers against allegations of injury or illness caused to third parties by your negligence. This includes many of the slips, trips and falls that are associated with personal injury claims. In addition, public liability insurance covers against damage to third party property – for example, if you were to damage a client-owned laptop or smartphone.
As they insure against different scenarios, it’s important you consider arranging both types of cover to ensure you are properly protected.
Retroactive cover means your insurance covers you from the date you first bought a professional indemnity policy, even if this policy was placed with another insurer. This is subject to the fact that you kept a record of your previous policies and maintained continuous cover from policy to policy.
The benefit of retroactive cover is that if you need to make a claim for an event that happened before the start of your current policy and the date of the alleged error or omission falls within the retroactive period, this will be covered subject to other policy terms and conditions.
In most cases, this will be the date you first purchased your Professional Indemnity Insurance policy. The purpose of a retroactive date is to confirm the date from which your past work is being covered.
Some occupations (e.g. insurance brokers, solicitors, chartered surveyors) are required by law to have this cover and over time leading insurers have developed specialist policies particular to certain trades.
A professional person owes a duty of care to clients, they will be liable for losses resulting from a breach of this duty or negligent misrepresentation. Following the introduction of the Misrepresentation Act 1967, courts also have the power to award damages in lieu of recession.
Where a business ceases trading or is sold, the outgoing owners still have a ‘run off’ liability and this type of cover can be purchased, usually at a reduced premium. In circumstances where new owners are accepting the run off liability, it is essential that their insurers are fully aware of the situation to maintain adequate cover.
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The policy contains familiar conditions such as claims notification etc but certain conditions call for a specific comment.
The Insurer retains the right to control all claims but undertakes not to exercise subrogation rights against employees unless the erring employee has been convicted for dishonest behaviour.
Policies provide a form of arbitration in the event of a dispute between the insured and the insurer as to whether the claim should be contested or disputed.
Discovery provisions vary but you will be required to notify insurers immediately of any claim, regardless of merit. Any subsequent development of a claim will then be deemed to have been within the period of insurance.
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A Fair Presentation of the Risk
At the heart of insurance contracts is an obvious truth: you have an enormous advantage over the insurer. You know all about your business, its history, processes, people and management, but the insurer knows nothing – other than what you tell them.
You have a statutory duty to make a fair presentation of the risk. You must tell the insurer:
• Every material circumstance which you know or ought to know and/or
• Sufficient information that would cause the insurer to make further enquiries, if neccessary, to review those material circumstances
• You are deemed to have the knowledge of the company’s senior management.
• You are deemed to have the knowledge of the person arranging the insurance (who is deemed to be a senior manager under statute).
• Anything that can be discovered by a reasonable search.
A failure to make a fair presentation of the risk gives the insurer various remedies, depending upon the nature of the failure, from avoiding the contract and not paying claims to modifying the basis of settlement.
Examples of Misrepresentation
It is often easier to demonstrate the consequences of risk presentation failure by example rather than theory. Here are some real life examples of typically forgotten or unrevealed material facts which later caused huge problems and repudiated claims:
A reprocessing plant did not reveal a series of small fires during their insurance year.
Following repeated false alarms, a retailer didn’t reveal that Police Response had been withdrawn.
A restaurant omitted to reveal repeated minor floods from an upstairs nightclub.
A construction company didn’t reveal potential employee claims recorded in their accident book.
A company failed to reveal written warnings to an employee over repeated dangerous driving.
A company failed to reveal that it had been ‘struck off’ by Companies House and was trading as a new legal entity under a different designation.
Compiling the Risk Presentation: an ongoing process
The compilation of risk information for presentation to an insurer might be thought to be simply contained in a proposal or risk presentation form, however, such forms are not exhaustive and cannot take account of circumstances which change beyond their
compilation. Moreover, merely referring insurers to your website or dumping data is not making a fair presentation of the risk. ’Fairness’ is a subjective test but it would certainly involve simplicity, clarity and relevant selection.
Ongoing communication is vital, because the duty to disclose material circumstances is ongoing throughout the insurance year and at renewal of the insurances.
It is not possible to overstate the importance of researched, adequate risk presentation – there have been countless legal disputes, repudiated claims, ruined businesses and lives arising from the simple failure to reveal all the facts to an insurer. A failure to present risk adequately is a bigger risk than the risk you present.
It doesn’t matter that the failure is innocent, something overlooked, forgotten or discounted as unimportant – it might be important to the insurer, in which case it must be revealed.
Should there be anything not yet disclosed, or that you are unsure would influence your insurers about this insurance tell your broker/insurer immediately.
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The Business Insurance Bureau is a niche specialist underwriter and commercial insurance broker, defying conventional categorisation, comprising of a small number of gifted individuals forming a collective intellectual giant.
We have developed our own unique range of quality insurance products, which has given the business a competitive advantage in several areas. Being in control of the entire process, from enquiry to policy issue, has allowed our business to deliver service levels hitherto unimaginable in this sector, or indeed for a business of its physical size.
We insure a spectacularly diverse clientele, similarly exclusive and excellent in their field, who rely on The Business Insurance Bureau to protect their assets, minimise their liabilities and secure their future.