Understanding Your Professional Indemnity Insurance: The Fundamentals Part 2
No two Professional Indemnity (PI) insurance policy wordings are the same. In this second instalment we continue our discussion of common PI Insurance terminology, to assist you in developing a better understanding of how your policy operates and the level of cover it provides. 
 
PI policies are generally designed to provide cover for claims for legal liability to third parties arising out of an actual or alleged breach of professional duty.  The main basis of cover is detailed in the policy insuring clause which can vary significantly from one policy to the next.  Some policies are triggered by claims arising out of acts, errors or omissions of the insured (arguably a narrower scope of cover) whereas some policies are triggered by claims arising out of the insured’s civil liability (a very broad level of cover). There are many variations on these basic policy triggers with the scope of cover also further broadened or restricted by extensions and exclusions in the policy wording.
 
Consumer Protection Legislation policy clauses provide cover for misleading and deceptive conduct under consumer protection legislation such as the ‘Competition and Consumer Act 2010 (Cth)’. Previously known as the ‘Trades Practices Act 1974 (CTPA)’, the act was amended and renamed on 1 January 2011 as part of the national harmonisation of consumer protection legislation.    It is a common requirement in consultancy contracts that the consultant hold professional indemnity insurance that includes a consumer protection legislation extension.
 
It is common for professional services contracts to contain clauses requiring consultants to assume liabilities (contractual liability) that extend beyond those that would exist under common law. Many PI policies specifically exclude contractual liabilities that are beyond what would have existed in the absence of a contract. Contractual liabilities may arise through guarantees, ‘hold harmless’ agreements or indemnity clauses. The following are common examples of contractual liabilities that will typically be excluded under PI policies. 
 
Proportionate liability legislation apportions liability between respondents according to their degree of fault; this replaces the doctrine of joint and several liability.  Proportionate liability is particularly important in building matters whereby litigation often involves multiple respondents. In some states (including NSW) parties are able to contract out of proportionate liability legislation and by doing so one may find themself 100% liable for a matter that he/she was only 1% responsible for.   Most professional indemnity policies contain clauses that exclude cover for liability assumed under contract such as through the contracting out of proportionate liability legislation; therefore consultants should be very mindful of the obligations they assume under contract because they may find they are uninsured for these assumed liabilities.
 
Contributory negligence refers to an act, error, or omission by a claimant that indicates they did not exercise due care and therefore contributed to the loss. Insurers often rely on this defence to reduce liability under a professional negligence claim. PI Policies often oblige the insured to protect the insurer’s right to claim contributory negligence. In the event that the insured has waived such rights under contract they may find their insurer will not indemnify them to the extent the insurer was prejudiced by the waiver.
 
Some insurers will provide contractual liability cover in certain instances but this should be thoroughly discussed with your broker.
 
It is common for professionals to engage sub-consultants or contractors to provide specialised services. In doing so the principal consultant may be found to be indirectly (‘vicariously’) liable for the acts, errors or omissions of their sub consultants. Most PI policies provide cover for an insured’s vicarious liability arising from the conduct of its sub consultants but it will not extend to cover the liability of the sub-consultant who committed the act, error or omission. It is advised that the sub-consultant hold their own PI insurance, however if requested, an insurer may consider extending cover to the sub-consultant, which can be done by specifically naming them on the policy. Due to the claims made nature of professional indemnity policies any sub consultants will have to continue to be named into the future in order that they remain insured.
 
Traditionally PI policies only provided cover for third party compensation, but with many professionals also being exposed to legal costs for representing themselves at inquiries or hearings by professional or regulatory bodies, policies now often contain an extension that provides cover for certain inquiry costs incurred for attending such hearings.
 
As a claims made product, PI policies provide cover for claims made against the insured and notified to the insurer during the policy period, these polices also require the insured to notify the insurer during the current policy period of any circumstances he/she becomes aware of that may give rise to a claim.  Notification of circumstances is critically important and PI policies generally exclude claims arising from facts or circumstances known to the insured prior to the inception of the policy. Failure to disclose a known fact or circumstance that later gives rise to a claim is by far the most common basis for professional indemnity insurers denying liability for claims.
 
Continuous Cover clauses can extend cover under a policy to a claim arising out of a fact or circumstance which should have been notified under a previous policy but was not. Further requirements for a continuous cover clause to grant relief often include that the claim must have been one that would have been covered under the previous policy and the insured must have been continuously covered by the same insurer, uninterrupted, until the time the notification is finally made. These types of clauses (not all policies have such clauses) are a significant benefit to a policy and a worthy reason for maintaining a relationship with the one insurer.
 
Companies or individuals ceasing to trade still have exposure to claims made against them arising out of previous services provided. Regardless of whether a PI policy was in place at the time the service was provided, due to the claims made nature of PI policies the failure to maintain some form of PI insurance, even after retirement, will result in there being no cover in place. Professionals who contemplate retirement or wish to cease trading need to consider purchasing Run-Off Cover. Run-Off Cover policies are designed to only cover the past activities of the insured and will not insure any services delivered after the inception date of the Run-Off policy and are often a more cost effective option than maintaining a traditional PI Policy. 
 
Understanding how PI policies operate is crucial to determining the appropriateness of a policy for your needs. We hope these articles have provided some assistance in developing your understanding of this complex class of insurance. 
 
Author:  Gillian Stefaniuk
Disclaimer: The above outlines general industry terminology and is not advice in relation to any particular policy wording. For details of the scope of any particular policy you should refer to the policy document.
 
 
 

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