Report that Circumstance... or Else! The Importance of Notifying Circumstances Under a Professional Indemnity Insurance Policy

December 2009

PI belongs to an exclusive class of insurances that operate on the "claims made" basis which means that the policy responds to claims made against you (and notified to the insurer) during the period of insurance. This generally means is that it is the policy that is current when a claim is made that responds to that claim rather than the policy that you had when you actually did the work.

The two mechanisms that support this "claims made" policy operation are detailed in the insurer’s policy wording and Section 40 of the Insurance Contracts Act 1984 (ICA).

A "claim" is always defined in the wording and therefore it is usually relatively straight forward to assess documents, other correspondence or a situation to determine whether or not it falls within the definition of claim.

The following is a typical insuring clause which outlines the basic policy operation:

With a typical definition of claim: 

Claim means: any writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counter-claim or third or similar party notice served upon You. 

In addition to the above, a PI policy also responds to claims that arise out of circumstances that the insured became aware of and notified to the insurer during the period of insurance even though the actual claim may be made at a later date. Following FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd in 2001 clauses referring to "circumstances" were removed from insuring clauses in policies in the Australian market with this policy benefit now solely being provided by Section 40(3) of the ICA which reads as follows:

Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract. 

In addition to understanding how the policy operates to provide cover on the "claims made" basis we must also consider the mechanism by which insurers can deny claims where the Insured has failed to notify a claim or circumstance at the appropriate time. This is the "known circumstance" exclusion with a typical example as follows: 

We will not cover You for any Claim:

  • made, threatened or intimated against You prior to the Period of Insurance;
  • arising out of any fact(s) or circumstance(s) that might give rise to a claim against You which You were aware of, or ought reasonably to have been aware of, prior to the inception of this Policy, whether notified under any other insurance or not;
  • arising out of any matter the subject of any claim(s) or fact(s) that might give rise to a claim against You referred to in Your proposal form, declaration or underwriting information being the basis of this policy.
  • The above exclusion is the most common ground for professional indemnity insurers to deny claims on the basis that the Insured had knowledge of a potential claim prior to the commencement of the policy.

What is a "circumstance"?

Some policy wordings avoid defining what is a "known circumstance", this may well be for a reason! Other insurers outline the meaning of a circumstance in their policy exclusions as above with the key words being "circumstance that might give rise to a claim" and "were aware of, or ought to reasonably been aware of".

Some insurers define a known circumstance as:

any circumstance(s) of which You were aware at the Inception Date of the Policy and which You knew or ought reasonably to have known might give rise to a Claim under the Policy.

Based upon this definition the tests you can apply to identify if you need to report a circumstance are:-

  1. Do you know about any situation or fact; and
  2. Based upon your knowledge and experience or that which a similar person in your situation would have; and
  3. Would a reasonable person in your situation realise:

That such situation or fact could lead to claim against you at some time in the future?

It is critical to remember that neither the definition of claim or circumstance mention fault on your part but rather refer to actions or potential actions against you. The most dangerous circumstance is one you fail to report to an insurer because you believed it was not worthy of reporting as "you didn’t do anything wrong"! Unfortunately the courts have issued hundreds of judgements awarding damages against professionals who believed "they didn’t do anything wrong"!

In addition to protecting your entitlement under the policy there are other reasons why you MUST advise insurers about any potential matter that could give rise to a claim against you:

  • You allow the insurer to make the judgement call as to whether or not the matter requires their immediate involvement. Liability insurers are professional litigants and are in the best position to deal with claims and circumstances.
  • A less obvious reason to report circumstances is to satisfy your duty of disclosure. Even if you are confident that a circumstance is going to "go away" and you fail to report it the insurer may attempt to use your failure to disclose such circumstance to reduce their liability for any subsequent claim when you do need the insurance.

Whilst it may be difficult for an insurer to argue non disclosure where a single minor matter has not been reported it is much easier to deny liability where you demonstrate a history of failing to report such circumstances. The insurer can then legitimately argue that if they had known that you had suffered several circumstances, and despite none of these ever developing into a claim they would never have contemplated insuring you.

Unfortunately some professionals believe that through handling minor matters "in-house" they better manage their risk and avoid potential premium increases for their PI insurance. This is extremely dangerous because when you need the insurance it may well not be there.

If you wish to manage a circumstance yourself this is possible – but you must secure the agreement of the insurer. They will either let you handle the matter or wish to take over conduct; or if you are particularly confident then you can agree not to seek indemnity under the policy and "go bare" in respect of this matter. You still protect your future rights under your PI and manage the circumstance as you see fit.

If you are aware of a claim requiring notification or are unsure whether something is a "circumstance" the best option is to talk the matter through with your insurance broker – they are in the best position to advise and assist you in determining the most appropriate course of action. Involving your broker at this early stage can also help in determining whether there is potential for the insurer to apply their known circumstance exclusion and to assist you with strategic advice in this regard. Don’t try to handle the matter yourself.

To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on any advice you should obtain advice specific to your needs.

 
 

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