If you are a contractor you might be familiar with Professional Indemnity (PI) insurance.
In fact, contractors are mandatorily required to buy these policies – so you really should own it!
But do you fully understand the inner workings of these policies?
Fear not! Because in this post, we’re going to tell you exactly what PI insurance is and how it works.
What is Professional Indemnity Insurance?
Professional Indemnity insurance is a commercial policy designed to protect business owners, freelancers and the self-employed if clients claim a service is inadequate.
How Are These Policies Underwritten?
There are two types of policies. Those underwritten on a Claims Made basis and those on an Occurring basis.
Firstly, those underwritten on a Claims Made basis means that at any time that a policy is in force the policy will cover any claim made by a client against the contractor. This is even if the cause of the claim emerges from events that were before the policy was purchased.
Secondly, those underwritten on a Occurring basis means that as long as you held a policy at some point in the past, any claim that is made against you several years later (subject to a limitation period set by the insurer) will be covered under the policy.
Almost all PI insurance is now written on a Claims Made basis. This is because PI insurance written on a Occurring basis leaves the insurer on the hook for a claim made many years after the policy period has expired.
Professional Indemnity Insurance – Four Things to Bear in Mind
Now you know what Professional Indemnity insurance is and how the policies are underwritten.
We will now explore four things that you must bear in mind when you own PI insurance.
1) Any incident that may give rise to a claim should be immediately notified
Claims Made policies contain notification provisions which give obligations and rights to the insured. The insured is obligated to notify the insurer as soon as possible of any circumstances of which it becomes aware under the policy period which may give rise to a claim.
This means that a claim made in year 2, 3 or 4 will be covered under the year 1 policy. Even if you don’t know the exact cause of the problem, the notification provision in the policy will keep the insurer on the hook for any related issues.
2) Keep policies active for at least 6 years
If policies are on a Claims Made basis (which they usually are) once discontinued they will not cover any future claims made by clients against work done by contractors in the past. Keeping policies active may feel like a wasted expense. However, Claims Made policies are generally cheaper than Occurring policies. This is because they only cover the risk of a claim for a defined period, usually a year, for which they are active.
As a contractor you should also consider that clients would normally have a claim against them on grounds of negligence, breach of duty, or breach of contract. By law, the limitation period on these is generous (up to 6 years). This means that a client could bring a claim against you for up to 6 years after the act has been committed.
To avoid this nasty surprise, we recommend keeping policies active for at least 6 years to ensure you remain covered. Alternatively, you could consider buying your final policy that is underwritten on an Occurring basis.
A client could bring a claim against you for up to 6 years after the act has been committed.
3) Reflect on any incidents that should be notified to the insurer
Every time you consider switching providers it is important to reflect on any incidents that should be notified to the insurer. It is always best practice to immediately notify any incident that may give rise to a claim.
If you are considering switching providers it also offers an opportunity to reflect on any incidents that should be have been notified to the insurer. A declaration at this stage may or may not affect future premiums you pay. But it is better to be safe than sorry.
4) Check if the policy provides an Indemnity to Principal clause
When buying an insurance policy you should check with the broker if the policy provides an Indemnity to Principal clause. This policy extends liability coverage to a principal (end client) if he is sued as a result of another person’s actions.
As principals are exposed to vicarious liability, they often require their subordinates to carry insurance that protects them in the event of a lawsuit. The policy should not decline cover simply because the claiming party is not in direct contract with the insured contractor.
When buying an insurance policy you should check with the broker if the policy provides an Indemnity to Principal clause.
Having read this guide and familiarised yourself with PI insurance you can avoid any nasty shocks in the future. Please feel free to contact us if you have any questions.
We also have dispute resolution expertise and it is a service we offer as part of our Managed Commercial Services offering.