In this introductory guide for claimants we explain what professional indemnity insurance is, what benefits it provides to companies and individuals wishing to pursue a claim for professional negligence and how it operates in practice.
What is professional indemnity insurance?
Professional indemnity insurance is an insurance product purchased by professionals to protect them from any financial liability they incur to another party, as a result of any error or omission they make during the course of professional practice.
Professional indemnity insurance is also polyonymous and commonly referred to as PII, PI insurance, professional liability insurance and E&O (short for ‘errors and omissions’) insurance.
PI insurance is widely available, both in the UK and abroad. While it was originally the preserve of traditional professionals (such as solicitors, barristers, accountants and surveyors), it is now considered suitable for almost any firm or practice acting in an advisory or service capacity. As a result, many emerging professionals (such as IT consultants, translators, business consultants and examiners, to name but a few) also obtain this type of cover, as do many local authorities and universities.
How does professional indemnity insurance benefit claimants?
PI insurance is often arranged by professionals for the primary purpose of protecting their own firm or practice, complying with their regulatory obligations, or both. However, there are also a number of benefits for clients, as well as third party claimants, who have suffered a financial loss as a result of professional negligence and who wish to pursue a claim for compensation.
The benefits of PI insurance for these claimants are that it can:
- Reduce the commercial risks ordinarily faced by a claimant of not being able to recover any award of compensation and/or costs secured against a defendant
- Enable disputes to be resolved more efficiently, by removing the need to embark on time consuming and, potentially, costly enforcement proceedings
- Allow consumers to have added trust and confidence in their professional advisers
- Improve the prospects of obtaining third party funding in relation to any claim for compensation
- Make it easier to resolve claims for compensation by taking the claim out of the hands of the policyholder and placing in those of an insurer who, being more dispassionate and objective, may be more accepting of it
Both individually and collectively, these benefits can be of real value. Therefore, before instructing any professional service provider, it is often sensible to enquire as to the existence and level of professional indemnity insurance they have.
What liabilities are covered by professional indemnity insurance?
The liabilities covered can vary enormously from one PII policy to another. For some professions, such as solicitors and chartered surveyors, the PII policies will have to comply with certain minimum requirements (known as ‘minimum terms’) stipulated by the profession’s regulator. In turn, such policies tend to be more consistent in the cover they provide.
Generally, however, PI policies are intended to cover, amongst other things, a firm’s or practice’s liability for any compensation and/or costs that are payable to a claimant and which arise as a result of a civil wrong (such as negligence, breach of contract, breach of fiduciary duty, breach of trust or breach of statutory duty) committed in the ordinary course of business. In many cases, these policies also cover any financial awards made in favour of a claimant by an industry Ombudsman.
How does PI Insurance work?
In most first-party policies, such as buildings and contents insurance, it is the insurance policy in place at the time of the insured event (such as a fire, flood or theft) that responds to the claim. However, PI insurance policies operate differently and on a ‘claims made’ basis. This means that the relevant policy is the one in place at the time that a claim is first made against the professional, rather than the policy in place at the time when the error or mistake which gives rise to the claim occurs.
This has a number of important implications for claimants. Firstly, the policy in place at the time that any work is done, may be written on more generous terms than the policy which ultimately responds to any subsequent claim. Secondly, and if there is a delay in discovering grounds for a claim and/or in pursuing a claim, there may be no policy in place to meet it. For these reasons, it is often advisable for claimants to act swiftly when a financial loss or exposure become apparent.
Where a professional negligence claim is made, it will usually be directed to the firm or practice at fault, rather than to its PI insurer. If the claim is successful, the PI insurer will then indemnify the firm in relation to any compensation payment required.
How do I find out if any PII cover is in place?
There are a number of ways to find out if a firm or practice has PII cover in place. Which method is most appropriate can depend on the type of professional concerned and their financial status.
Under regulation 8(1)(n) of the Provision of Services Regulations 2009 (implementing European Directive 2006/123/EC on services in the internal market) and subject to regulation 2(2), any service provider who is subject to a requirement to hold PI insurance must provide the contact details for any (compulsory layer) insurer and the territorial coverage of the insurance. This information must be made available to a customer in one of four ways (see regulation 8(2) of the 2009 Regulations). These include making it available electronically (such as on a website) or displaying it at the place where the service is provided.
Therefore, a simple way to find out whether any PII cover is in place can be to look on the firm’s or practice’s website, where the name of a PI Insurer is sometimes displayed, or by asking the firm itself. However, it should be noted that these regulations do not require a firm or practice to provide any other details of its PI insurance, such as the amount of cover it has or the level of its policy excess.
If the professional concerned is a solicitor then, pursuant to Rule 18 of the SRA Indemnity Insurance Rules 2013, the firm or practice is obliged to provide to a claimant upon request the name of their (compulsory layer) insurer, the policy number and the address and contact details of the insurer. However, to trigger this obligation a claim falling within the scope of any policy, rather than a simple complaint, must be asserted.
Where the firm or practice has suffered an insolvent event then, pursuant to the Third Party (Rights Against Insurers) Act 2010, a person who has a reasonable belief that a liability has been incurred to them by that firm or practice has the right to request details of any PI insurance held by it. The request must be made in writing and may be addressed either to the firm or practice concerned or to any other party (such as an insurer or insurance broker) who may be able to provide the requisite policy information. The information that may be requested is set out in Schedule 1 of the 2010 Act and as follows:
- whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it;
- if there is such a contract:
- who the insurer is;
- what the terms of the contract are;
- whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability;
- whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and, if so, relevant details of those proceedings;
- in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities; and
- whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.
What level of cover will the professional indemnity insurance provide?
The amount of cover (known as the ‘limit of indemnity’) varies enormously between professions and from practice to practice. Some professions, such as chartered accountants, solicitors and chartered surveyors, are required to maintain specific levels of cover as a minimum. For solicitors, the compulsory level of cover required for any one claim is £3 million for a limited liability partnership and £2 million for an unlimited partnership or sole practitioner.
However, this is only a minimum level of cover and many firms and practices, particularly the larger ones, purchase additional cover, known as ‘excess layer’ or ‘top up’ insurance. As the terms of this additional insurance are not governed by the minimum terms set by some regulators, such cover is often less expensive and, therefore, potentially more attractive. However, it can also be more easily avoided.
Will there be an excess or deductible payable under the policy?
A policy excess or deductible is typically the first amount payable towards any insurance claim by the policyholder. In the case of an excess, the amount payable by the policyholder is in addition to the maximum amount insured under the policy (also known as the ‘limit of indemnity’ or ‘sum insured’). In the case of a deductible, the amount payable by the policyholder is deducted from the maximum amount insured under the policy.
Most professional indemnity policies carry a policy excess or deductible. Depending on the size of the firm or practice concerned, these can range from a few hundred pounds to hundreds of thousands.
In some cases, the excess or deductible is also insured, either in full or in part. This is done through a separate policy often termed ‘in-fill’ insurance. In other cases, the excess or deductible per claim may be subject to an overall limit (or ‘aggregate’) in any policy year.
Under the terms of PI insurance required for solicitors, and in the event that the excess is not paid by the policyholder within 30 days of it becoming due, a claimant may give notice to the insurer of the policyholder’s default, whereupon the insurer itself will become liable to pay the policy excess on the policyholder’s behalf. In turn, this significantly reduces the potential for any shortfall in the recovery of compensation or costs awarded against solicitors.
Will the professional indemnity insurance cover some or all of my claim?
The fact that a professional carries PI insurance does not guarantee that it will cover your claim. However, at a general level, it may be noted that:
- The policyholder will usually have a vested interest in securing cover for any claim
- The policyholder’s insurance broker (if any) is likely to have an interest in securing cover for any claim
- The minimum terms of insurance cover required by traditional professions (such as chartered accountants, solicitors and chartered surveyors) make it much more difficult for the insurers of those professions to decline cover for a claim
- Changes to insurance law introduced by the Insurance Act 2015 make it more difficult for insurers to avoid claims
What if there is no policy or it does not cover my claim?
Whether or not any professional indemnity policy is available to cover a claim has no bearing on its legal merits, but it is relevant to its commercial merits and, specifically, the physical recovery of compensation.
Depending on the size of the claim and the financial status of the professional firm or practice concerned, the absence of cover may have little practical consequence. However, where the value of the claim is significant and the nature and value of any assets held by the policyholder are unknown, there is likely to be greater uncertainty and additional commercial risk.
In the absence of PII cover, and depending on the structure of the firm or practice in question, any successful claim might then be enforced against one or a number of partners personally, or against an incorporated entity. In appropriate circumstances, it may also be possible to pursue a claim against and enforce an award against a negligent employee. This is explained more in our article: Personal liability of employees: An emerging issue
What if the firm or practice is no longer trading?
Because some claims are not discovered until many years after the event, it is not uncommon to discover that the negligent firm or practice has ceased to trade. However, it is still possible that it has maintained professional indemnity insurance cover or that a claim is covered under the policy of another firm, known as a successor practice. This is explained in more detail in our article: Claims against closed professional firms and practices
Where can I obtain further information and assistance?
If you think you might have grounds for making a claim for professional negligence it is often worth contacting a solicitor who specialises in this field.
As professional negligence solicitors we would be happy to discuss matters with you , free of charge or commitment, as part of an initial consultation. Should this assist, please do not hesitate to contact us on 0800 195 4983 or by email at mail@pnclegal.com.
At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.
