Professional Indemnity Quote

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What or Who is a Professional

If a person holds themselves out as possessing skill or knowledge beyond that of the layman, they will be judged by a higher standard of care, namely that of the reasonably competent specialist or professional. Accordingly, while the duty is high it does not set a standard of perfection although if a person holds themselves out as possessing special skills or knowledge in a particular area their standard of care will be related to the degree of skill they profess to possess.

Professional Duty

A duty is owed to any person who may be affected by a lack of care and whom the professional person should have had in contemplation at the time of the act in question. Accordingly, liability can attach to the professional’s client both in contract and tort.

A client can chose whether to sue in contract or tort or both. There may be advantages in either plea on the basis of remoteness, measure of damage and limitations, all of which may be different in tort and contract. It can also attach in tort to third parties, who may be affected by the professional’s lack of care and be in a sufficient close proximity.

Whilst damage to property and injury can be caused as a result of a professional error, it is rare and the majority of cases will involve liability for economic loss.

What is Professional Indemnity Insurance

Professional Indemnity insurance is a financial lines product, which is part of the suite of the general insurance products available on the market. A typical professional indemnity policy will cover your liability arising from a negligent act, error or omission committed by you. Many policies now also cover your civil liability.

Being a financial lines product the policy is underwritten on a claims-made basis and not on a claims-occurred basis. This means that the policy which will respond to the claim is the one that is in force when a claim is made upon you and not the one when it occurred. It is extremely important that you fully understand this principle as failure to report a claim within the correct policy year, can result in you not being granted indemnity.

Who does it cover

The policy will normally cover the company, business or firm, its directors, principals, officers and employees for breaches committed by them of a professional nature. Some policies can also extend cover to include contractors that are engaged by the insured, to undertake activities or service solely on the behalf of the insured.

What does it cover

The policy covers the insured against claims made upon them arising from a breach of their duty of care arising from a civil liability, act, error or omission, which results in another party sustaining economic loss, property damage or injury. Not all professional indemnity policies cover bodily injury or property damage, but those that do, will normally make it a condition that the injury or damage had to arise from a breach of professional duties or services. In addition the policy will respond to defend you against a claim for which you deny any wrongdoing. The policy will cover the solicitor and legal costs incurred to defend your good name.

Claims Made vs Claims Occurred

Example 1. Claims Occurred

You have a Public Liability policy, which is a claims occurred policy that runs from the 1st January 2001 to 1st January 2002.

You knock some over and they break an arm on the 1st February 2001. They pursue a claim against you on the 1st September 2001 so it will be this insurance policy that will cover it.

If they wait until September 2002 to make the claim, even though you have renewed your policy in January 2002, the claim will still be handled by the policy that existed at the time the arm was broken. That is the January 2001 to 2002 policy and not the January 2002 to 2003 policy. Even if you change insurer or don’t renew your policy, the fact that you had a valid policy at the time of the accident means that you will be covered no matter when the claim is made upon you. Claims for motor, home, business, liability, etc would all be handled on a claims occurred basis.

Example 1. Claims Made

You have a Professional Indemnity policy, which is a claims made policy that runs from the 1st January 2001 to 1st January 2002.

You make an error resulting in a financial loss of $5000 for your client on the 1st February 2001. They pursue a claim against you on the 1st September 2001 so it will be this insurance policy that will cover it. This is because the claim was made upon you during the January 2001 to 2002 policy period.

If they wait until September 2002 to make the claim, then it will now be your policy that runs from January 2002 to 2003 that will deal with the claim. This is because the claim was made on you during this policy even though it occurred during the prior year policy.

However, the second policy will only respond to the claim, provided that the first you knew about the claim was when it was made upon you in September 2002. If you became aware of the possible claim prior to your renewal in January 2001 then you must report it to the insurer at that time, otherwise the second policy insurer will argue that claim was actually made on you during the prior policy year, so it is not their responsibility. That fact that you didn’t report it to the original insurer prior to the renewal means that you will not be covered.

We hasten to add that this is a very simplistic overview and that many issues come into play. For instance, if you renew with the same insurer, then the late notice may not be an issue, if you report the matter to the first insurer as a circumstance or possible claim, then you will be able to go back and have them indemnify you. There is also the question of retro-active cover. If your retro-active cover does not extend back to the time of the incident then again your new insurer could deny indemnity, even if you reported the claim correctly.

The golden rule is, if ever you are in doubt or even suspect that something may have gone wrong then you must always report the circumstance to your broker and/or insurer as soon as possible. Then at least you have complied with your duty of reporting and will not prejudice your rights to indemnity.

Retro-active cover

Retro-active cover is the period by how far back a current professional indemnity insurer will offer you protection for claims arising from matters that occurred in the past. On your schedule of insurance you may see any of the following:
Retro-Active Cover
• From 2 May 2002, excluding known claims or circumstance
• From inception, excluding known claims or circumstance
• Unlimited, excluding known claims or circumstance

If the schedule specifies a particular date or has the words from inception, then your insurer will not indemnify you for any claim made against that occurred prior to that date, even if you knew nothing about it and the claim was made upon you during your current policy period. The insurer is restricting the distance to how far back in time that they will cover you for claims.

If the schedule states the words “Unlimited”, then your insurer will not restrict the distance to how far back in time that they will cover you for claims.

Reinstatements of cover

Professional Indemnity is very different to Public Liability when it comes to the actual limit of policy cover. If you have $10 million Public Liability cover, then you are covered up to $10 million for each and every claim that occurs during the policy period. You could in theory cause hundreds of $10 million claims and the insurer would have to pay them all.

With Professional Indemnity insurance the policy cover limit is one fixed amount. If you have a $1 million cover limit then that is your maximum limit of cover no matter how many or how large the claims you have. Every time you make a claim against your policy the $1 million limit is reduced by the amount of that claim. So if you had a $100,000 claim then the remaining cover limit would be $900,000, if you had another claim of $600,000 then the remaining cover limit would reduce $300,000. At the renewal of your policy your cover limit is put back to the original $1 million limit.

If during the policy year you have a claim or series of claims that completely erodes the $1 million cover limit to zero, then you will be able to activate the “reinstatement of cover” provision of your policy. Reinstatements of cover, which can range from none to unlimited, are back-up cover limits designed to replace the original cover limit that has been used up. However, if you have sufficient claims that use up all the cover reinstatements then you will have no cover left.

If you only have $250,000 cover with say two reinstatements then you will have an aggregate cover of $750,000. However, if you have a $500,000 claim then the maximum that the insurer will pay is $250,000. This means that you will have to pay the balance of the claim yourself. The reinstatements of cover cannot be added together to pay the $500,000 claim. That is why it is important to have a policy with a high cover limit.

Professional Indemnity Quote Form

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