Professional indemnity insurance should protect you against claims made arising
from your work. And despite the growing ‘compensation culture’, good cover is
still available. By John D Wright
We hear a lot about ‘compensation culture’. This has been a long-standing
feature of life in the US, and has now reached the UK, putting a real strain on
the reserves of insurance companies.
Claims by employees injured at work and professional indemnity claims lead
the field, resulting in a very sharp increase in premium rates, and even
withdrawal of cover in some cases.
The reasons for this are not under discussion here, but the input of risk
management procedures, such as rehabilitation and OH training, is of
considerable interest to insurers.
More communication is needed with senior UK underwriters, but in the
meantime, there is a huge growth in the demand for health and safety
consultants and OH therapists. This will bring with it an increased demand for
professional indemnity insurance.
Duty of care
A professional indemnity policy insures the legal liability of a
professional arising from their work activities. As with all business transactions,
such liability may arise in contract or in tort law. Most claims are based on
the contract itself, but at the same time may be tort related, that is,
negligence is a common feature. This concurrent liability in tort and contract
is well established in English law.
The duty of a professional adviser is one of reasonable skill and care. This
is not a duty of perfection, but one where he or she must act and show the same
level of care as others in the same profession. If, however, the individual claims
to be an expert in a particular area, for example, on stress management, they
will be judged on the higher level of expertise that they profess to offer.
Most insurance policies are written on an errors and omissions basis, which
is sufficient to cover the reasonable skill and care duty. However, some claims
may arise purely because the contract terms have been broken, irrespective of
negligence. Much depends on the wording of the contract, and care is needed
before signing a contract that creates a legal liability that goes beyond
reasonable skill and care. Some insurers will offer cover on a full civil
liability basis, which will include breach of contract, but such cover is not
widely available in the present difficult market.
What the insurance covers
Professional indemnity insurance is a mystery to many people, but there is
no logical reason for this confusion. The purpose of professional indemnity
cover is no different to any other type of insurance – to transfer the
financial burden of risk to another. There are, however, a few basic features
that require explanation.
Cover is written on a ‘claims made’ basis. This means that any claim must be
notified in the current insurance period. So, as soon as you are aware of a
problem with a client, you should notify the insurer, even if a formal claim
has not been made at that point.
The indemnity limit may be expressed as ‘aggregate’ or ‘each and every
loss’. The latter is preferred as it allows for more than one claim in the
insurance year, each up to the stated limit. On an aggregate basis, the
monetary limit reduces by the amount of the first claim, possibly leaving the
policyholder exposed on future claims.
Legal costs may be payable either as part of the indemnity limit or in
addition to it. Again, the latter is preferred.
The first part of any loss is excluded, for example, an excess or
deductible. This is usually a minimum of £500 for each claim, and may be much
higher for larger risks. Legal costs may be inclusive or exclusive of the
excess. The latter is preferred because a claim may be investigated and, if
successfully defended, the insurers will be responsible for the costs.
Only the declared activities are insured. It is essential, therefore, to
ensure that the schedule in the policy accurately describes the work carried
When cover is first taken out, it only applies to claims made on or after
the inception date, in respect of services carried out from that date. It is
possible, however, to cover claims made in the future in respect of services
carried out prior to the inception date. Any date can be specified, provided
the proposer is not aware of any pending claims or circumstances when taking
out the policy.
Policy restrictions and excesses
All insurance policies carry restrictions in cover because insurers cannot
afford to leave the covers open ended. They can only underwrite a business
within acceptable parameters.
In professional indemnity, it is usual to limit liability to negligent acts,
errors or omissions – to comply with the duty of reasonable skill and care
outlined earlier in this article.
Insurers would, therefore, exclude liability that arises out of the giving
of any express guarantee or warranty. So care is needed before entering into
any formal contract with a client. If a written agreement is required, ensure
that you are not giving any onerous promises. Seek legal advice if in any
doubt. On the other hand, a clearly stated agreement setting out the scope of
the services on offer will at least avoid disputes as to the extent of
liability at the end of the day.
Other exclusions relate to punitive or exemplary damages, work in the US,
insolvency of the policyholder, bodily injury and damage to property claims.
The latter should be covered by a public liability policy, but the wording
needs to be dovetailed correctly between the two policies.
A policy excess, sometimes called a deductible, is usual in professional
indemnity insurance. This cuts out smaller losses and saves administration
costs. It is the same principle that operates in motor and property insurance.
However, all claims and circumstances must be notified. Leaving insurers out of
the loop because you think the claim will fall within the excess is dangerous.
Insurance cover with legal costs payable exclusive of the excess is available,
so notifying should not be a problem.
As mentioned above, the insurance is written on a ‘claims made’ basis. To
ensure that a claim is made during the currency of the policy, it is essential
to notify it as promptly as possible.
However, the condition in the policy not only requires claims to be notified
promptly, but also any ‘circumstance’ that might give rise to a claim. A claim
is easy to recognise, but a ‘circumstance’ is far more difficult. How do you know
when a ‘circumstance’ has arisen? If ongoing advice is not producing the right
result, this may not be apparent for some time. Even if it is apparent, it may
be thought to be controllable without reference elsewhere.
Months could elapse between the start of a problem and a severe
deterioration, which results in an accusation. In the meantime, the policy may
have been renewed, possibly with a new insurer.
The nature of the cover means that the new insurer will not pick up the
claim, as it would be deemed to have occurred in the previous period of
insurance. The previous insurer would not pick it up either, because it was not
reported in their period of insurance.
Care is needed, therefore, not only in notifying, but when changing
insurers, unless you are certain there are no ‘circumstances’ in the pipeline.
A specialist insurance broker will provide ongoing advice at the time of taking
out the cover, and again at each renewal date.
Examples of claims
Claims can and do arise from a range of situations, either from advice
given, failure to advise, lack of monitoring or failure to warn, breach of
regulations, breach of recommended procedures and breach of confidentiality.
Claims may arise from the presence of an OH professional, where noise levels
or dust levels are not monitored correctly. The employer may be in breach of
the regulations, such as COSHH, but will look to the consultant whose job it
was to monitor the situation. Rehabilitation work is intended to reduce the
length of absence from work, but incorrect advice could have the opposite
effect, resulting in frustration and possible claims from the injured party as
well as the employer.
The insurance market is difficult at the moment. In the professional
indemnity sector, some 50 per cent of all claims payments relate to the legal
Underwriters are reluctant, therefore, to reduce premium rates, and premiums
are likely to remain high for some time. The OH area is, on the other hand,
able to secure cover at reasonable rates at the moment. For an individual
practitioner, a premium of £350 for cover of £100,000 would not be unrealistic.
Much depends on the fee income and the CV of the individual. An excess of £500
is usual, perhaps larger for a bigger consultancy.
Although the premium is important, it should not be the only consideration
when choosing an insurance product. Insurance policy wordings and the
interpretation of them vary.
The best advice is to use the services of an insurance broker, preferably
one who is experienced in the professional indemnity market. Alternatively,
there may be a scheme cover available, operated by one of the professional
bodies, such as the RCN.
– John D Wright is a fellow of the Chartered Insurance Institute and an
independent risk consultant, specialising in professional indemnity insurance
and risk assessment