Understanding your Professional Indemnity Insurance Contract

Welcome to our comprehensive guide on understanding your Professional Indemnity Insurance contract. Professional Indemnity Insurance (PII) is a critical safeguard for businesses, providing protection against claims arising from errors, omissions, or negligence in the course of client work. In this blog, we’ll explore key concepts such as the difference between Errors and Omissions (E&O) and Civil Liability cover, the claims made basis, retroactive date, coverage limits, legal costs, and more. Through practical examples, we aim to demystify complex insurance terminology and empower you to make informed decisions about your coverage. Let’s dive in!

What is the difference between Errors and Omissions and Civil Liability?

The main difference between Errors and Omissions (E&O) and Civil Liability cover is that E&O will state exactly what is covered, usually a financial loss as a result of your negligent act, error or omission to an individual who you owe a duty of care to.

Under a E&O policy, three things have to be proved in order for a valid claim to be made:

  1. you owe a duty of care to the claimant;
  2. you’ve breached that duty; and
  3. your breach caused loss to the claimant

 

Under a civil liability policy the wording will say that everything is included unless specifically excluded, a very wide definition regardless of negligence covering unintentional or inadvertent circumstances, hence sometimes the considerable difference in price.

Consider this scenario: You’re a software developer hired to create a custom application for a client. After completing the project, the client discovers a critical error in the software that causes financial losses to their business.

Under an Errors and Omissions (E&O) policy:

  • The policy explicitly states that it covers financial losses resulting from negligent acts, errors, or omissions committed by the software developer.
  • To make a valid claim, the client must demonstrate:
    1. The software developer owed them a duty of care (contractual obligation to deliver a functional application).
    2. The software developer breached that duty by delivering a faulty software application.
    3. The client suffered financial losses directly attributable to the software developer’s negligence.

Now, let’s examine how a Civil Liability policy would handle the same scenario:

  • The policy provides broad coverage, including unintentional or inadvertent circumstances that may lead to financial losses, regardless of negligence.
  • Unlike an E&O policy, a Civil Liability policy does not require the claimant to prove specific acts of negligence. Instead, it covers a wide range of liabilities, including those arising from unforeseen circumstances.
  • The coverage is comprehensive, encompassing various types of claims beyond errors and omissions, such as bodily injury or property damage.

In this scenario:

  • An Errors and Omissions policy would cover the financial losses incurred by the client due to the software developer’s negligent act (delivering faulty software).
  • A Civil Liability policy would provide broader coverage, potentially covering the financial losses even if they were not directly caused by the software developer’s negligence, as long as they fall within the policy’s terms and conditions.

This example illustrates how Errors and Omissions and Civil Liability cover differ in terms of coverage specificity and the requirements for making a valid claim.

 

 

What is a claims made basis?

Professional indemnity insurance is written on a ‘claims made’ basis, which means that when a claim is received it’s the insurer in place at that time that will respond rather than the insurer in place when the negligent act occurred. It also means that a policy needs to be in place at the time of a notification in order to be accepted unlike a liability policy which works on a claims arising basis.

Example: Imagine you’re a consultant providing financial advice to a small business. A year after completing a financial audit for one of your clients, they discover discrepancies in their accounts that lead to significant financial losses. They file a claim against you for negligence in your auditing services, assuming cover is in place your current insurer will respond to the claim.

 

What is the Retroactive Date?

The retroactive date is the date that you first arranged professional indemnity insurance. The professional indemnity policy will cover the consequence of work undertaken after this date. Your new policy with us, will cover all past work going back to the retroactive date.

If you have never held professional indemnity insurance cover before you will not be able to cover past work and cover will only apply to work undertaken after the inception of the professional indemnity policy.

Example: If you began your consulting practice in January 2022 but only purchased professional indemnity insurance in January 2023, the retroactive date would be January 2023. Any claims arising from work done between January 2022 and January 2023 would not be covered under your policy.

 

What is the difference between in the aggregate and each and every claim

When a policy is in the aggregate it means that your insurer will agree to pay up to the limit of indemnity chosen in total during the course of the year. Under an each and every claim basis you will have the full limit of indemnity at your disposal per incident.

Example: Suppose you’re an architect with a Professional Indemnity insurance policy with a limit of £500,000 on an aggregate basis. During the policy period, you’re faced with three separate claims, each amounting to £200,000. With an aggregate limit, your policy would cover all three claims up to the £500,000 limit, however the third claim may only partially covered and if a fourth claim arises, there would be no additional coverage available.

 

Are Legal costs included?

Legal costs are provided subject to the insurers’ prior consent. They cover the costs of investigation and defence. It may be necessary for your insurer to employ legal professionals or expert witnesses. Usually, the insurers will have arrangements to appoint the necessary representation on your behalf.

The legal costs can be included within the limit of indemnity, or they may be in addition leaving the limit for indemnity for compensation payments only. It is also important to find out whether your policy excess applies to the legal costs and expenses or only in respect of any compensation paid.

 

What is the Geographical Limit and Jurisdiction?

A Professional Indemnity policy will state two clauses, the geographical and jurisdictional limit. The geographic limit lists the areas in which coverage is effective. The jurisdiction or applicable court states under which law you claim will be fought.

 

Both of these clauses are very important as they confirm where you are covered to trade, and under what laws your insurer is prepared to issue proceedings in. If you are working abroad or with foreign entities it is important to check that the contracts you are signing fall within the scope of law provided by your policy.

 

Example: you’re an engineering consultant based in the UK, but you’re hired to work on a project in Germany. Your Professional Indemnity insurance policy specifies that coverage is effective within the UK and Europe. If a claim arises from your work in Germany, your policy would provide coverage, and any legal proceedings would be conducted under the laws of the UK or Germany, depending on the policy terms.

What should I do if I stop trading?

You should continue your Professional Indemnity Insurance but advise your insurer to put the policy in to Run Off. A claim could still come to light for work that you did when you were trading and subsequently the insurance should be kept in force to cover any historic liabilities of your business. It is the policy in force at the time the claim is made that pays the claim, therefore you must continue cover after you cease trading in order to adequately protect yourself.

 

I have been asked to arrange Professional Indemnity cover as a contractual requirement. Can I cancel the policy when the contract finishes?

Similar to if you stop trading, if you cancel your Professional Indemnity Insurance policy immediately after completing a project, you may be left exposed to potential claims that arise later due to the claims made nature of the policy. Typically errors or mistakes are discovered after work has been completed. It is therefore necessary to maintain cover after completion of the contract to ensure you are adequately protected. Contract conditions often require cover to continue for 6-12 years after completion of a contract.

What is a Material Fact?

A material fact is one that may influence the Insurers as to the acceptability of the risk and the terms on which it is based. A statement of fact or proposal form should include all the material facts relevant to the risk as it forms the basis of the contract. Material facts must be disclosed at the earliest opportunity including at renewal. If you are unsure whether a fact is material you should disclose it. The accuracy of the information provided by you to ourselves and the Insurers is your responsibility. Failure to disclose a material fact may invalidate the insurance cover and jeopardise a claim being paid.

Example: A technology consultancy , failing to disclose previous claims or lawsuits against your business when applying for professional indemnity insurance could invalidate your coverage if those claims resurface in the future.

Am I covered for previous business activity?

Because of the claims made nature of Professional Indemnity policies, special care needs to be taken to ensure that cover includes predecessor practices or partners’ liabilities arising out of former partnerships elsewhere, if required. If you have been insured under a previous name in the past, you may need to have the names noted on your policy as additional insureds.

Navigating the intricacies of Professional Indemnity Insurance can be daunting, but with a solid understanding of key concepts, you can confidently protect your business and reputation. By recognizing the difference between E&O and Civil Liability cover, understanding the claims made basis, paying attention to coverage limits and geographical jurisdictions, and ensuring full disclosure of material facts, you can mitigate risks and ensure adequate protection for your business activities. Remember, professional indemnity insurance is not just a legal requirement; it’s a fundamental investment in the longevity and success of your business. If you have any further questions or need assistance in securing the right coverage for your needs, don’t hesitate to reach out to us. We’re here to help you every step of the way.

 

 

 

 

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