Professional Indemnity Insurance Explained

A professional can be defined as any person, company or partnership providing:

• Financial Services/Advice
• Legal Services/Advice
• Consultancy Services/Advice
• Design/Construction Services
• I.T. Services
• Any Professional Trade providing Services/Advice

and it is irrelevant whether professional fees are charged for such services or not.  If you have given free advice or provided gratuitous services then you could still be liable if things go wrong.

• Traditional professions e.g. Medical and Legal firms
• Regulated Financial Services professions such as IFA’s, Mortgage & General Insurance intermediaries
• Accountants, Bookkeepers, Estate & Letting Agents, Will Writers & Estate Planners
• Architects, Archaeologists, Engineers
• Growing professions’ such as Advertising, Recruitment agencies & IT consultants
• Business Consultants, Lifestyle Coaches, Training & Compliance firms
• Complimentary Therapists
• In fact, any individual or organisation providing professional services either on a stand-alone basis or alongside other core services. 

It is important to understand that PI Polices will cover you for claims arising from any errors, omissions or negligence in the work that you have conducted in the past as well as work you will conduct in the future.  However this is always subject to the retroactive date noted on the policy (see note on retroactive dates below) and that there is a PI policy in force at the time the complaint is received by you.  In addition, in order for any notified claim to be ‘eligible’ for cover, insurers must be notified of the claim in accordance with the policy terms and conditions.

Most polices will provide a range of cover options and whilst the following is not an exhaustive list, these covers are typical of most policies:

• Negligence, errors and omissions in the course of your work
• Dishonesty of Employees
• Libel and Slander
• Infringement of copyright
• Loss of documents
• Unintentional breach of confidentiality
• Court costs

It is important that you purchase the correct levels of cover for your business which, in many cases, is dictated by regulators or by any trade association you belong to. If you are not regulated or a member of an association then you can choose the levels that you can practically afford and/or that will match the income and risk/exposure levels for your business.

A common level of cover purchased is £250,000 any one claim but this may not be an adequate amount for firms with large incomes, high value contracts or those firms in higher risk trades.

Your PI cover will normally:

• Meet your legal, regulatory or trade body/association requirements
• Help you comply with any contractual obligations
• Defend your business against costly claims brought about by allegations of your unprofessional conduct, poor service, negligence, errors and/or omissions (whether such allegations have any substance or not)
• Pay any compensation to your client that is awarded by the arbitrators or the courts, but only up to the level of indemnity you have chosen
• Pay for any legal costs incurred in defending a claim, even if the claim has no substance
• Support you with expert legal advice and representation where necessary
• Help minimise disruption to your business
• Give confidence to clients that you run your business professionally and that your professional standing and reputation is important to you

Clients will expect you to deliver your professional services to the highest standards at all times and will place their full trust in you when following your advice and/or accepting other services from you, but occasionally things may go wrong.

If you were to make a mistake in the course of your work, be it negligence, error, omission, breach your client confidentiality or infringe their copyright there is a significant possibility that the client would suffer a financial loss, reputational or other damage and would subsequently make a complaint or a claim for compensation or the reparation of such losses or damage.

Any allegations of poor conduct (however small) have to be taken seriously and dealt with quickly even if you believe the complaint has no foundation, is perhaps regarded as frivolous or you suspect a form of fishing exercise by your client or their representatives.

Don’t forget that you could receive a complaint today on work you conducted some years ago so it is important that you have the appropriate level of cover in place either on an Any One Claim or an Aggregate basis with the correct retroactive date noted on your policy.

Depending on the complexity of a case, PI cover can be arranged in a number of ways but generally and for the purpose of simplifying this article the two main types are described as ‘Any One Claim’ and ‘In the Aggregate’.

Let us say you have chosen the limit of indemnity of £250,000 for your policy.

Under the ‘Any One Claim’ level of cover you can claim an unlimited amount of times during the policy period, with each claim being limited to the level of indemnity (£250,000) you have chosen.  Therefore the maximum that can be paid out under this cover is £250,000 multiplied by the number of claims.

Under the ‘Aggregate’ level of cover you can claim an unlimited amount of times during the policy period, but the total value of all paid claims cannot exceed the limit of Indemnity (£250,000) you have chosen. Therefore the maximum that can be paid under this cover is £250,000 irrespective of the number of claims. 

So clearly the better cover available for any business is ‘Any One Claim’ but you should note that if you have a ‘Retroactive Date’ applied to your policy then only business written from the retroactive date will be covered.

Most PI policies will have a retroactive date and this date will be clearly shown on your schedule of insurance.

This date is applied by the insurer and is determined from the information provided on the proposal when you apply for your PI cover.  The retroactive date applied is normally the date that you first purchased your PI cover.  In subsequent years this date will be noted on your schedule every time you renew your insurance so it is important that if you change insurance companies you make the new insurer aware of your past retroactive date.  If you do not bring this to their attention you might lose very important cover for business you have conducted in the past.

If you have been trading for many years but have never held a PI policy then your new policy will be set up not from the date your business started trading but from the date you purchased your cover.  You should be aware that there will be no cover provided for any business conducted prior to the retroactive date noted on your schedule and that this is normal practice under most PI policies terms and conditions.

In some cases insurers may provide fully retroactive cover back to the inception date of your business even if you have not previously held a PI policy but you will have to answer a few more questions about your business, provide a detailed information on your past 5 years income, the type of work you conduct, and contract values as well as signing additional declarations.

Recognition and notification of a claim and/or a circumstance that could lead to a claim is extremely important to your business and will help to avoid the possibility of late notification.

All PI policies contain certain conditions requiring the Insured to notify the insurers immediately on receipt of any threat of a potential claim; but what constitutes a potential claim or what is a notifiable complaint/claim?

• A verbal or written expression of dissatisfaction with your work alleging a financial loss or damage
• A demand for money or services by way of compensation or an allegation of  poor conduct, negligence, breach of duty or breach of contract
• A claim served on an Insured
• A notice of an intention to serve a claim on an Insured
• A notice, whether orally or in writing, of an intention to commence legal proceedings against an Insured.

In addition to notifying the insurers of actual complaints/claims there is a requirement to notify them of any circumstances that could/may/might give rise to a claim.

The reason for this is that insurers may need to be able to take control of the Insured’s legal position to prevent it becoming prejudiced by incorrect actions or correspondence and which may weaken the Insured’s defence to the allegation.

This can easily happen if the Insured, being unfamiliar with the litigation process and procedure, acts in a way that is detrimental to their defence.

For example, admitting liability, offering to negotiate a settlement or even entering into discussions can prejudice the outcome.  Very often the Insured is, understandably, anxious and keen to remove the threat of litigation and it becomes very easy under such circumstances to inadvertently make admissions, offers or promises by implication that later prove to be damaging to their defence.

There is no definition of “a circumstance” but in general terms it means an incident, occurrence, fact, matter, act or omission which may give rise to a claim in respect of civil liability.

However if you are in doubt about the severity of any allegations made against your business you should notify insurers as soon as possible.  Notifying insurers of a potential claim will not automatically have an impact on the future insurance/renewal premium, but not notifying could affect your cover. If it is proved that you have breached the policy terms and conditions or withheld important information from insurers then they may be entitled to amend your cover or the policy could be cancelled from the inception date leaving you in a potentially serious position.

Examples of a “circumstance”

You receive a ‘Subject Access Request’ for a copy of your file by the client or their representatives under the Data Protection Act 1998 rules.  This is a notifiable “.circumstance”.

A fee recovery dispute, where the basis of your client’s intention is to withhold all or part of your fees or there is anticipation of your clients dissatisfaction with your service or spurious allegations are made about your poor conduct and the professional advice you have provided. This is a notifiable “circumstance”.

Any occurrence or identification of a problem or dispute which the Insured considers (or a reasonably competent person would consider) exposes the organisation to a threat of litigation. This is a notifiable “circumstance”.

Any internal memorandum or file note which relates to any conversations where oral allegations of neglect or misconduct have been made. The date of the conversation when the allegation is first made would most likely be regarded by insurers as the date the Insured first became aware of a potential claim. This could ultimately be a claim in itself but it is definitely a notifiable “circumstance”.

Examples of a “claim”

A written or oral demand for money or services by way of compensation or reparation for an alleged professional neglect or service deficiency. This is a “claim”.

A written or oral demand or request for the organisation to waive or reduce its service fee invoices because of alleged deficiencies in the provision of its services. This is a “claim”.

You should notify insurers of any complaint, claim, circumstance or any other matter considered to be potentially threatening to your business as soon as possible. All PI polices have a detailed reporting process including contact details and you should familiarise yourself and your staff with the process which will be detailed in the policy terms and conditions.

Sometimes complaints can linger around the office for many weeks without being reported as it is generally considered the matter will go nowhere and the complainant will go away.  However this could seriously prejudice the cover provided under your policy and any late claim could be declined.  If you are wondering whether the complaint or the circumstance is serious or not, then it is probably a good time to report it to Insurers for your own protection.

In view of this no one in your firm should apply their own assessment of the merits of reporting a circumstance and any personal interpretation of the seriousness of a matter or the claim reporting process should be disregarded for the purposes of notification.

There is never a case of the insured being ‘best judge’ in the assessment of a “circumstance” so react quickly and report anything you are not sure about.

Remember – insurers are on your side and are there to help you with all aspects of the complaint/claim so it is better to work closely with them from the outset in order to properly manage the eventual outcome.

You will have to pay the excess for each successful claim made against you.  The excess will be detailed on your policy schedule.

The size of the excess depends on your declared income and/or the type of business you conduct. For example the excess could be a low as £100 for a small sole trader or as high as £25,000 for larger income firm with higher risk activities.

The excess can be voluntarily increased by choice on some classes of business in order to lower the premium but generally insurers have a minimum excess based on specific occupation types and which cannot be reduced.

In any event information regarding the excess will be clearly identified to you on your quotation prior to you purchasing any PI cover and subsequently will be detailed on your policy schedule.

Adopting a common sense and risk reducing approach to your business means:

• Communicating with your clients to provide the best level of service
• Communicating with insurers in all aspects of your PI application and disclosing everything
• Purchasing the appropriate levels of cover relative to your business risk/exposure – the cheapest  premium available is not everything
• Building long term relationship with insurers to help manage premium expectations in difficult times
• Notifying circumstances/complaints/claims in accordance with the policy terms and conditions
• Renewing your policy in good time
• Keeping your monthly premiums up to date
• Purchase Run Off cover if you cease trading

If you are retiring, disposing of your business or simply ceasing to trade, you are not necessarily free from the exposure arising from potential claims made against you or your firm for work conducted in the past. You could receive a complaint or claim in respect of your past work at any time in the future, even though you may have ceased trading some time ago. Whilst the majority of claims are made within a few years of a contract completion, it is not unheard of where claims have been made against the principals of non-trading firms on work that was completed many years ago. So in order to continue to have the benefit of on-going Professional Indemnity Insurance and to protect yourself from future claims exposure, you can simply convert your PI policy to ‘Run Off Cover’ on the date you cease to trade. You can do this by informing your insurer and with effect from the date you cease to trade, your PI policy will only cover your past work.  It is likely that your insurer will apply an endorsement to the policy excluding any future work as there should be no future work conducted.

If you are paying your premium on a monthly basis you will have to maintain payments for the duration of the policy so that your policy remains in force.Remember that PI policies respond on a ‘claims made’ basis which means you can only notify a complaint/claim to your insurer if it is eligible and that there is a policy in force.

At the end of your policy period you can renew your PI insurance on a Run Off cover basis only and pay the relevant premium.  However in the first full year of ‘Run Off’ it is unlikely that you will see any reduction in premium but depending on your occupation you may benefit from reduced premiums at subsequent renewals but this will be subject to the insurers minimum premium level.

No, if your PI policy is cancelled through non-payment of premium or you lapse it at renewal, you will have a ‘gap’ in cover and it is unlikely that your insurer will allow you to purchase Run Off’ only cover in the future.  In view of this it is important to maintain continuity of cover at each future renewal and for the amount of years you require your PI cover to remain in force.

If you cease to trade you should consider maintaining cover for a number of years as most regulators suggest you hold cover for a minimum of 6 years from the date the firm ceases to trade. This may seem excessive but in view of the current claims climate, it will provide invaluable long term claims made protection.

All PI policies work on a ‘Claims Made’ basis which means that a policy must be in force at the time the complaint/claim is first notified to insurers and it is this policy that will respond to the complaint/claim, not the policy that was in force at the time the work was carried out.

So if you don’t have any PI cover in force at the time the claim is notified to you, there will be no PI policy in existence to respond to the allegations made against you or your firm and you will need to take legal advice at you own expense.