PI Explained
Traditionally, people like Accountants, Surveyors, Engineers, Solicitors and Architects, the ‘traditional’ professions, were regarded as 'professionals'. But the times have changed and there is now a long list of people who provide a service and are considered to be professionals. This list includes the likes of IT companies, design & construct firms, media consultancies, management consultants, agricultural consultants, environmental, acoustic engineers and so it goes on. Modern reliance upon services provided by others and the increased use by business of outside consultants has increased the scope of this term and a professional is now often regarded as any person who offers 'specialist advice or service'.
How does liability arise? - The professional person must exercise whatever degree of skill and care is reasonably expected of any competent practitioner in that profession at that time. If a person provides advice or a service to another and carries that work out negligently, they can be held legally liable for the consequences. Normally, such advice or services are provided under the terms of a contract. Liability can arise because there has been a breach of duty of care or a breach of contract (the latter normally only covered by a PI policy where there has also been a breach of duty of care).
Other than in breach of contract, for legal liability to be established the professional must be shown to owe a duty of care, be in breach of that duty, the breach must have caused a loss and the loss must have been one that was reasonably forseeable. There is an alarming move towards liability being ascribed to professionals such as Architects when things have gone wrong on a build project and actually the developer may be at fault.
What is Professional Indemnity (PI)?
Breach of duty - A typical PI policy will provide indemnity to the insured against ‘loss arising from any claim or claims for breach of duty which may be made and reported to the insurers during the policy period by reason of any neglect, error or omissions committed in the conduct of the insured's professional business...’. Some policies are more tightly worded.
Civil liability - Some PI policies go further than the standard cover and provide indemnity to the insured "for any civil liability whatsoever...” This covers such areas as breach of contract, libel and slander (some standard policies may include libel and slander as extensions to the policy wordings). Because the operative clause of a "civil liability" policy is so wide, there is normally a long list of exclusions in order to exclude liabilities that should be covered elsewhere - otherwise things like Employers Liability (EL) and Public Liability (PL) might be covered.Breach of a contractual liability that is not caused by negligence - This is often excluded from PI policies and occurs when a professional signs up to a contract which might impose a liability that goes beyond what one would normally expect in law. Examples include liquidated damages, e.g. late delivery penalties - or accepting liability for otherwise unforeseeable economic loss, e.g. business interruption.
Contractual liability - This is an important issue in highly competitive professions or during times of recession when the insured's client holds all the negotiating cards - a case of "just sign here and you've got the job". But the professional can pay for it later. In some professions, it becomes a way of life to the extent that PI insurers must offer to cover an element of contractual exposure (such as collateral warranties) in order to meet the insured's basic professional needs.
Legal costs - These are normally covered by PI policies, subject to the insurers' prior consent. They cover the costs of investigation, defence and settlement of claims. These costs might embrace lawyers for investigation and defence, loss adjusters, experts and court costs. Claimant's legal costs normally form part of the claim against the insured professional.
‘Claims made’ insurance
Professional indemnity, (along with directors & officers, medical malpractice and libel insurance) is written on a "claims made" basis. This means that the policy covers claims made (and reported to insurers) during the currency of the policy period unlike most liability policies which cover the loss occurring during the currency of the policy.
A claim is generally notifiable under a PI policy when the insured first becomes aware of a circumstances that could lead to a claim - this could be anything from a verbal criticism to receipt of a written statement of claim. The interpretation of when this situation occurs is the source of frequent policy disputes between the insurer and insured. If in doubt notify insurers and let them decide if the matter is a notifiable event.
Notable features on a ‘claims made’ policy are:
- A claim might be made against a policy written now but the act of neglect might have occurred many years previously.
- It protects the insured against the erosion of the value of cover by inflation. Where latent defects might lead to claims many years after an act of neglect, such as in the construction industry, this can be crucial in times of only modest (let alone high) inflation.
- It protects the insurer against the effects of legislative changes, inflationary awards and claims made with new knowledge. It was not so long ago that the market was predicting the disappearance of "losses occurring" policies altogether following the wake of losses arising from US asbestos and environmental claims under policies written decades previously, on terms and conditions prevalent at the time which could not possibly have anticipated the losses to hand.
- If the policy lapses for any reason, there is normally no cover thereafter for any claims that might arise, regardless of when the alleged neglect might have occurred.
What do Insurers look for?
Insurers use a proposal form to assess the risk. The proposal form allows the underwriter to build a mental picture of the work being undertaken by the Professional and so assess the exposure the risk has. It allows the underwriter to identify high and low risk areas of work the clients experience in their specialist field and their approach to risk management.
The proposal form contains key information to allow the underwriter to do all of the above.
- Type of Firm - is it a limited company, partnership or someone self-employed? How large is the firm? This is often revealed by the number of directors, staff and fee income.
- Experience - this is often demonstrated by qualifications. Certain professions have governing bodies with set qualifications (i.e. Surveyors & the RICS, Accountants and the ICA). But experience is also a key factor which an underwriter will take into consideration.
- Type of Business - just what is it the professional does? A full description of the business activities is important, along with any other supporting literature such as brochures or websites. It is vital an underwriter understands the work being undertaken, so that they can assess the risk properly.
- Risk Factors - each profession faces different risks and within each profession that risk will vary depending on the nature of the work being undertaken. At HCC International we write over 150 different professions and so there is very little we haven't seen before. Claims - the reaction of an insured to a claim tells an underwriter a lot about a risk. If the claim is valid, is the insured is willing to review their working practices to avoid a repeat.
- Claims often identify if an Insured's working practices are effective or not, for example do they keep orderly documents detailing the project requirements and any changes made during the project?
- Contract Size - it is true to say that the bigger the contract, the bigger the claim. Larger contracts tend to be more complex with more money at stake. When a claim does arise they are harder to resolve and as a result cost more to settle.
- Technology - in construction / manufacturing industries underwriters prefer to write risks where tried and tested methods are being used. Those clients involved in "cutting edge" technology have a higher risk as the technology being used is new and no one is yet certain of its capabilities.
- Overseas Exposure - does the Insured undertake work overseas? If so what is that work and on what legal basis was the contract signed. Underwriters would pay careful consideration to any US or Canadian clients.
- Retroactive exposure - PI is written on a claims made basis. A retroactive date is often applied stating the date from which previous work is covered. Insureds need to understand that any claims arising out of work undertaken prior to that date will not be covered.
- Environmental exposure - certain professions specialise in this area but a number of other professions can easily get involved unknowingly. Certain professions may need to complete a specific questionnaire if there work exposes them to claims for pollution or asbestos.
