Common misconception is that Professional Indemnity Liability policies provide the same coverage as PI (Professional Indemnity) policies. They are not standard and should be tailored to your specific needs.
Larger companies are often better equipped to understand their policy differences and exposures. They also know that not all policies are created equal. Often, it is the little guy who faces difficulties. Where do you begin? Are you going to go online, or do you approach a broker? Do you choose the most expensive option? You will be better equipped to choose the right product and provider for you if you have a good understanding of how policies work and what to watch out for.
This article will provide a summary of the coverage options to help you make informed decisions when buying PI insurance. Although this list is not exhaustive, it will help you to compare key elements.
Policy Language
The most significant difference between PI policies and other insurance policies is their wording. You can refer to the insurance clause to find out what basis you are covered. You can choose to cover:
- A negligent act, error or omission wording;
- A wording that is used to describe an act, error, or omission.
- Brute of professional duty; or
- A wording describing civil liability
What are the differences? Which one is right for you?
Below is a summary of the coverage intent for each. Please refer to Liberty’s Technical update on Civil Liability (PDF) for a complete description.
Negligent Act, Error or Omission
Initially, PI policies were based on negligence. They are designed to pay the costs of defending or compensating a third person for breaching your professional duty of care. The policy does not cover actions against you that are not based on negligence. These claims can arise from a breach or omission of a statutory duty such as misleading or deceptive conduct or breach of contract terms, etc. A ‘negligent acts’ clause insuring clause has a narrow coverage, compared to other wordings.
Error, Omission, or Act
An expanded insuring clause would respond to claims of an act, error, or omission in professional services. This would remove the negligence requirement. It would also respond to contractual liabilities and statutory violations, as well as equitable breaches (e.g. This would remove the negligence requirement and, where applicable, would respond to contractual liabilities, statutory breaches and equitable breaches (e.g. breach of trust).
Civil Liability
The civil liability wordings offer very similar coverage to act, error and omission. While both wordings offer broad coverage, the focus of each is different. The above paper states that civil liability is about the nature of the liability (civil or criminal), while the “act, error, or omission” wording concentrates on the insured’s actual conduct. You are likely to have committed acts, errors, or omissions that could have resulted in a civil liability if you have been a victim of civil liability.
Breach Of Professional Duty
A professional is someone who has the knowledge and skills to do the job. Professional duty refers to the duty of care that a person owes to a client or third party when performing such work. These three types of wording can be further limited by requiring that the breach of professional duty be proved and that this duty was owed. This obligation can be burdensome and should be avoided.
Description
No matter what policy type you have, whether it is civil liability or negligence PI policies only cover claims that arise from the professional services provided. The schedule will either include a description of the services or it will be a term in the policy. Industry specific words are common.
A common reason a claim is declined is the fact that it did not arise in “connection to the Insured’s Business”, according to the policy. It is important to make sure that the description accurately and fully captures the services you provide and those you will provide during the policy period.
Exclusive or All-inclusive of Defence Costs
The Limit of Indemnity refers to the maximum amount that an insurer will pay for any claim made against an insured during their policy period. The costs inclusive limit of indemnity covers both legal costs and expenses that are incurred to defend a claim, as well as any settlement amount. A costs exclusive limit, on the other hand, is not affected by defense costs and only applies to the final compensation amount. Insurance companies will often include a limit on defense costs to ensure that they do not exceed the limit of indemnity. However, a cost exclusive limit gives greater coverage.
An excess or deductible can also be applied to inclusive or exclusive language. This refers to the amount you have to contribute to the claim. An inclusive excess means that you must pay the excess upfront to defend the claim. A exclusive excess means that you only have to contribute to any settlement or compensation.
Although it is a simple variant, this can make a big impact on the cover.
Claims or claims made and notified
Professional Indemnity policies can be purchased on a claims-made basis. The policy will only pay claims that were made against an organisation within the policy period. This applies regardless of the date the act, error, or omission gave rise to the claim. Policies will also require the insured to report any claim within the policy period. This is a strict condition, especially if you are notified about a claim that is close to expiry. In the event that you fail to adhere to the condition, your claim could be denied or the insurer may reduce its liability.
Insurers will often extend the reporting period beyond the expiration of a policy. An extended reporting period is better than a shorter one. However, a claims made policy, i.e., a policy that covers only, will provide the best coverage from a reporting standpoint. no reporting requirement.
Claims Trigger
A PI policy’s definition of claim is a crucial component. It determines a policy’s coverage, and when it is triggered. All policies will respond to a claim made against an insured. It is often not easy to determine when the claim was’made’. These are the two areas you should be looking out for:
- Written notice or demand OR written or oral demand or notice
- Demand or notice to be compensated or damaged OR demand or notification seeking a legal remedy (including an injunction)
You should move quickly from “circumstances that might give rise a claim” into an actual claim to which your policy responds. The broadest definition of a claim would be provided by a written demand or notice seeking legal remedies. The legal remedy language would also respond to claims for damages that have not yet been filed or are not being made.
Every insurer has a different definition so make sure you read your policy. You should be familiar with the policy definition of claim to identify when a claim has already been filed against you. Failure to declare a claim could result in your coverage being canceled due to the notified nature and claims made by PI policies. Policies have a prior knowledge/previous circumstance exclusion that removes coverage for situations you know about before the policy was issued. These exclusions are a major reason for disputes and indemnification problems.
Reinstatement versus Aggregate Limit
A limit of indemnity that includes a reinstatement may seem to be equal to a limit with indemnity that has an aggregate of twice the limit. If there is a loss, and the limit has been exhausted partially or completely, the insurer will reinstate the full amount of indemnity for that period. A combined limit could lead to multiple reinstatements of that limit until it is exhausted.
An example is the best way to show it. A PI policy is issued to an insured with a $1M maximum indemnity limit and one automatic reinstatement. During the policy period, three separate claims are made against them with costs and damages totalling $250K, $1M and $250K respectively. The insurer would restore the $1M limit after the first claim, even though it had only partially exhausted. A limit loss would be the next claim. This would exhaust both the per-claim limit and the aggregate for the rest of the period. Therefore, the $250K subsequent claim would be uninsured.
However, a policy with an aggregate limit of $2M would have a policy limit that is only reduced by the amount of any claim. The policy would pay all claims and leave $500K for the rest of the period.
This is a subtle difference, but it is important if there are multiple claims. Although the wording of the reinstatement clause can vary from one insurer to another, some provide an aggregate limit. You should carefully read the product, as with all other items.
Each policy is unique and different. The headings and words used may not have the same meaning. To fully understand the coverage provided, you should carefully read the document. You may not need the most comprehensive policy, but the extra coverage may be worth the additional expense.