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PI Insurance FAQ

What is PI?

PI insurance is a cover against allegations of breach of Duty of Care. Should legal liabilities be established against a professional, PI insurance will, subject to its terms and conditions, pay for the damages together with any costs awarded against the defendant.

PI insurance is a fairly recent development, but the surge in the need for professional indemnity insurance as a result of heightened consumer awareness and the advent of Legal Aid has resulted in many professional bodies introducing PI cover as a prerequisite of membership.

What is Duty of Care?

Any professional owes ‘Duty of Care’ to anybody who might reasonably rely on his or her service or advice. The same Duty of Care is owed whether a fee is charged or not, even if it is for an obvious secondary function or service.

What is a Claims Made policy?

The majority of PI insurance policies are written on a Claims Made basis. This means the policy will respond to claims first made within its duration, even though the work, which caused the loss, may have been undertaken before hand.

What is the difference between a Civil Liability policy and a Negligence policy?

A negligence-based policy provides coverage for breach of duty of care by way of negligent act error or omission. There is no coverage for claims based on breach of contract or statute law.

A Civil Liability policy does not set boundaries (other than the exclusions) as to the nature of the wrongdoing. It may encompass more than just negligent acts errors or omissions and include breach of duty of trust, conflicts of interest, breach of statute law and defamation. These may not necessarily arise from negligence and therefore may not be covered under a negligence policy.

Most civil liability policies do however contain a greater number of exclusions so it is extremely important to understand the extent of such exclusions and seek advice from a specialist PI insurance broker.

What is the difference between a Costs Inclusive and a Costs Exclusive excess?

Costs Inclusive – The excess applies to the aggregate of damages, defence costs and penalties (if insured).

Costs Exclusive – The cost of defence is paid in full by Insurers regardless of any excess provision.

What does Run Off Coverage mean?

Run Off coverage applies where a company ceases to trade, sells its assets or merges with another entity. The policy provides coverage specifically for any acts occurring prior to the date on which the company/entity ceased trading, sold its assets or merged. It is common also where individual directors of companies or partners of professional firms have retired or relinquished their positions.

What does the term Vicarious Liability mean?

This occurs where liability is imposed on one person for the wrongful acts of another. An example of this is an employee of a company providing negligent advice on its behalf. The legal basis being that a “principal ” is liable for the acts of its ‘agents’ .

Do Professional Indemnity policies provide coverage for claims alleging the non payment of trading debts?

In some cases yes. However this is totally dependent on the insurer and policy wording in question. The extent of coverage should be checked thoroughly and advice sought from a specialist PI Insurance Broker.

What is meant by Retroactive/Retrospective cover?

An insurer for a client who has not previously held PI insurance may not be willing to cover claims that arise from work undertaken prior to the issue of the policy. Retroactive cover may then need to be secured, covering past work done by a firm.

An insurer might decline to offer retroactive cover and offer the first time PI buyer cover from the inception date of the policy. This is known as a Retro Date Inception (RDI).

What is Loss of Documents cover?

Loss of Documents is another common extension to PI policies. It pays for costs arising from the loss of paper and computer records, maps, certificates, etc.

What is Libel and Slander cover?

This is a prudent extension to the PI policy for any professional who needs to be open in his views and comments. Libel and Slander are written and verbal statements of a defamatory nature, which misrepresent and harm the reputation of another.

Some common terms and phrases

Common phrases used in PI insurance include:

Limit of Indemnity: The highest possible compensation paid out under the policy should a claim be made. The cost and expenses incurred in the action can either be included within the limit of indemnity or in addition to it.

In the aggregate or in all: Here, the limit of indemnity stated is the total amount of money that will be paid out under the policy in the given period. For example, if the limit is £250,000 and an early claim results in a payment of £200,000, the cover for the duration of the policy stands at only £50,000.

Any one claim or each and every claim: Here, every claim made can potentially result in the payment of the stated limit. For example, if the limit is £250,000 and an early claim results in a payment of £200,000, the limit still remains £250,000 no matter how many claims are made against the policy. It is normal to treat all claims arising out of one set of circumstances as one claim for these purposes.

Excess or deductible: In common with many other types of insurance, policies may have a variable amount for which you would be responsible under any claim. This is known as the excess or deductible.

What are Collateral Liabilities, Collateral Warranties, Duty of Care agreements, etcetera?

Recently, contract wordings have placed additional or increased responsibilities on professionals. A standard PI insurance policy would not cover additional responsibilities assumed under contract. Insurers may be prepared to extend policies to cater for some or all of the additional responsibilities assumed under contract providing that these are fully disclosed.

What actually constitutes a notifiable circumstance or claim?

It is essential that any claim or incident likely to lead to a claim should be notified as soon as possible. The difficult question here is “What actually constitutes a notifiable circumstance or claim?” You may receive complaints, many of which, with diplomatic attention, will not lead to a claim. It is in your best interests to notify to the insurer any such circumstances in order that it may be decided whether or not any action needs to be taken and, indeed, assistance can often be provided in reaching an amicable solution.