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A Guide to Choosing Professional Indemnity Insurance and Understanding the Policy Terms
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Professional Indemnity Insurance (PI) can be a complex area. Policy wordings can vary quite fundamentally from Insurer to Insurer. Different professions have different needs and as a result specialist wordings exist for some industries such as IT, marketing, media, construction, surveying, architects, etc.
Some professional bodies require their members' insurances to be written on an approved wording, Accountants and Solicitors PI being two examples.
Examples of the professional indemnity insurance terms that you are likely to encounter when considering this cover for your business include:
Claims Made
Professional Indemnity Insurance policies are written on a claims made basis. This means that it is the insurance policy that is in place on the date a claim is made against you, rather than at the time you carried out the work, that would respond to a claim
Retroactive Date
As mentioned above as your professional indemnity insurance policy is written on a claims made basis, it is your existing insurance company who is liable for claims made today for work carried out in the past. The retroactive date noted on your policy fixes the date from which they are potentially liable. A claim made against you for work carried out prior to the retroactive date will not be covered.
Your PI policy will show a retroactive date of either:
- Inception - namely the date from which you first placed your insurance with them
- A specific date eg 01/01/2000 - this is usually the date that you took out your first professional indemnity insurance policy
- None - this usually applies if your business has been insured uninterrupted for many years.
Negligence or Civil Liability?
Some policies will only indemnify you in respect of a claim brought against you for a negligent act. Others are written on a much wider civil liability basis, which would cover you in respect of claims arising from
- Breach of professional duty;
- Dishonesty of employees;
- Libel or slander;
- Unintentional breach of confidentiality;
- Unintentional infringement of intellectual property rights. (Some insurers restrict this to unintentional infringement of copyright only)
- Loss of or damage to documents.
The Limit of Indemnity
The limit of indemnity is the maximum that an insurance company will pay out. A classic example of when professional indemnity insurance terms can make it difficult to compare quotations, you will need to know whether the limit of indemnity applies "in the aggregate" or to "any one claim".
- "in the aggregate" this means that the limit of indemnity is the maximum your insurance company will pay during the entire period of insurance, regardless of how many claims you make. For example if your limit of indemnity is £1,000,000 in the aggregate and during the period of insurance you are unfortunate enough to have three claims successfully made against your business each for £500,000, you will find yourself having to fund a £500,000 claim yourself
- "any one claim" the limit of indemnity is the maximum your insurance company will pay for any one claim. In the example above as each claim is less than the £1,000,000 limit of indemnity they will pay each claim in the full (less the policy excess see below)
The choice of limit of indemnity for your business' professional indemnity insurance is muddied further by the issue of defence costs, see below.
Including Defence Costs or Defence Costs in Addition
How your insurance company treats the issue of defence costs should be an important factor when assessing your limit of indemnity. Some insurance companies state that their limit of indemnity is £x, defence costs in addition. This means that the limit of indemnity applies to the awards element of a claim against you and that legal costs incurred will be paid by your insurance company in addition to the limit. Other insurers will include defence costs within the total limit of indemnity meaning that a low limit of indemnity could get quite quickly eaten up by legal costs.
The Excess
The treatment of the excess can vary from policy to policy too. Some Insurers apply it to the whole claim including the defence costs. Others only apply it to awards meaning that you do not need to fund the initial defence costs yourself.
Professional Indemnity Insurance can be a complicated form of Business Insurance. I hope this article has helped you to understand some of the terms and jargon that you are likely to encounter and will help you to interpret the differences in cover when comparing quotations.
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