Last edited 18 Nov 2016

Professional indemnity insurance

Contents

[edit] Introduction

Very few professional practices have sufficient resources within their own organisations to meet anything other than minor claims brought against them in respect of professional negligence. It is for this reason that professional indemnity insurance is so important to the construction professions and to contractors working on design and build projects.

Professional indemnity insurance (PII), sometimes known as errors and omissions insurance (E&O), provides insurance cover against claims of negligence. It is widely used where professional services are being provided to a developer or contractor, and will provide insurance up to a specified insured sum where negligence is proven to have been committed on the part of the service provider.

For the party taking out the insurance, the policy will also cover the cost of defending claims of negligence made against it, subject to the insured party paying the initial excess set out in the policy. The policy will not usually provide cover against allegations of criminal behaviour, nor against allegations of non-negligent workmanship.

Professional indemnity insurance policies are provided by a wide range of insurers and consequently the scope of policies can vary greatly. Policies are usually renewable annually. Policy extensions can be provided to provide cover against employee theft (fiduciary cover) and breach of duty.

Policies are usually written on a 'claims made' basis, where the negligent act causing the claim occurs within the policy period. 'Retroactive' dates can be written into the policy which allow for claims to be insured which pre-date the policy period but which are subsequent to the retroactive date. This is particularly relevant where services are provided over a number of years and where a professional firm may wish to change insurers during the contract period.

[edit] Proposal form, disclosure and risk

Insurance policies are contracts and so the usual rules as to the formation of contracts apply to contracts of insurance. In practice, the usual procedure is for the person seeking insurance to complete a proposal form - each company has their own standard form. The person seeking insurance will sign the proposal form and by so signing that they are offering to accept insurance on the basis of the proposal form and the insurers' standard conditions (to which reference will be made in the proposal form, although the terms will not usually be set out). Those terms will contain a provision to the effect that the answers given on the proposal form are incorporated into and are the basis of the insurance. As soon as the insurers have accepted the proposal, they will then issue a policy.

Contracts of insurance are, however, different to other contracts in one important respect: they are based on the principle of the utmost good faith of the parties (known as the principle of uberrimae fidii). One of the aspects of this principle is that the purpose of a proposal form is to enable the insurer to assess the risk so that they can decide whether or not to accept the proposal and, if so, on what terms both as to the conditions and the premium. Clearly, insurers cannot make a proper evaluation of those matters unless full disclosure is made by the person seeking insurance of every matter that is relevant to the risk. When making a proposal to an insurer, it is necessary to disclose all facts that are material and not to make a statement that amounts to a misrepresentation of a material fact. Such non-disclosure or misrepresentation entitles the insurer to avoid the policy.

[edit] Non-disclosure

Disclosure means disclosing all facts that are material. Material facts are matters that would have affected the mind of a prudent insurer in deciding whether to take the risk and, if so, on what conditions and at what premium. This involves disclosing all material facts that are actually within the knowledge of the person seeking the insurance and this duty is not limited by what the person applying for the insurance thinks is relevant. It is clear that facts which show that a risk is not an ordinary risk, but a greater risk than the ordinary, are material for this purpose.

It is also important to notify insurers at the earliest possible moment of a potential claim. This give insurers the chance to advise the insured and to mitigate risks. A cautious approach should be taken here, and insurers should be informed of any direct criticism even if it appears minor or unjustified.

[edit] The cover

The intention of a professional indemnity policy is to provide an indemnity in respect of the designer's legal liability for damages in respect of claims brought against the designer for breach of professional duty. The policy is therefore written on the basis that it covers claims made during the period of insurance. The period of insurance of professional indemnity policies is usually 12 months. It follows that a professional indemnity policy will cover claims made against the insured during that 12-month period. Indeed difficulties can arise where the full extent of a claim is not known during one period of insurance but becomes known during a subsequent period of insurance at a time when a different insurer is on risk: see for example TJwrman and Others v. New Hampshire Insurance Co (UK) Ltd and the Home Insurance Company.

[edit] Renewal

Professional indemnity policies run for a period of 12 months and can only be renewed with the same insurer if the insurer consents. At renewal, professional indemnity insurers may require the completion of a fresh proposal form and the same duty of the utmost good faith arises on the completion of a proposal form for renewal for the simple reason that it is in reality a proposal for a new insurance policy. If there is no new proposal form at renewal, then the insured has a duty to notify any material matters to the insurer before renewal. In any event, a new insurer may be appointed on renewal.

[edit] Run-off cover

When practice comes to an end, that does not necessarily mean that the possibility of claims has come to an end. Claims can arise for years after projects have been completed (See limitation of action) and it is important that practitioners maintain professional indemnity insurance for as long as such a risk exists.

As the likelihood of a claim reduces as time progresses, so the cost of a run-off policy should reduce year on year. Some insurers offer run-off policies payable with a one-off premium. This can reduce the uncertainty of ongoing premium payments.

[edit] Disclosure of collateral warranties

It is clear from the present position in the law of tort that in the absence of a collateral warranty, the tenant of a building put up by a developer would be unlikely to succeed in a claim in negligence brought against the architect or engineer or contractor of the developer in respect of negligent design. A collateral warranty entered into between the tenant and the architect, on the other hand, would enable that tenant to pursue their claim. It must follow that the existence of collateral warranties is a material fact that must be disclosed to insurers prior to professional indemnity insurance being taken out and at renewal. After all, against the background of the present law of tort, the existence of collateral warranties must be a matter which would affect the mind of a prudent insurer when considering whether to take the risk and, if so, on what conditions and at what premium.

Indeed, the fact that there are so many different forms of collateral warranty that have been signed, and are being signed, suggests that each and every collateral warranty actually entered into should be produced to insurers at renewal - at the very least a schedule of collateral warranties should be appended to the proposal form with a statement that they will be produced to insurers if insurers wish to see them. This is patently a burdensome obligation both on the insured and on the insurer, but given the law in relation to material disclosure in professional indemnity policies, any other approach by the insured is clearly dangerous for the simple reason that it may be that the policy could be avoided by the insurer if disclosure is not made of these material circumstances. The simple fact that many brokers (but not all), most insurers (but not all) and most underwriters are not set up to deal with a volume of work of this sort on renewal is irrelevant to the principle that full disclosure must be given of material circumstances. In practice, some insurers are closely involved in the approval of warranties (but only from an insurance point of view) prior to their finalisation. This may assist in meeting the insured's duty to give disclosure of warranties to the insurer.

Another day-to-day problem is this: should the insured, when asked to sign a new collateral warranty, obtain their insurer s agreement before they agree to execute a warranty? The strict answer to that question is that another warranty is, vis-a-vis the insurance policy, another material circumstance that will have to be disclosed on renewal; if on renewal disclosure is made and the insurer refuses cover at that stage, the insured runs the risk of being uninsured in respect of any claims arising under or out of that particular warranty. It is for this reason that a cautious view should be taken and all proposed collateral warranties should be shown to insurers, and their agreement to cover the risk obtained, before the warranty is executed.

Some standard forms of warranty have been approved by insurers for general use by people insured with them, and it will not then be necessary for the insurer's permission to be obtained on each and every occasion. Some insurers have their own suggested form of collateral warranty. In practice, insurers' own standard forms are rarely acceptable to commercial developers in their unamended form.

It should not be assumed that because some insurers approve particular standard forms, other insurers will automatically approve the same warranties - it is not the case for the simple reason that each and every insurance policy is a separate contract between the particular insured and the particular insurer.

The mere fact that the Form of Agreement for Collateral Warranty to be given to a company providing finance is said to have been agreed 'after discussion with the Association of British Insurers' does not mean that every insurer who is a member of that Association will give cover in respect of a liability arising under a warranty in that standard form; whether or not cover is given is a matter between the particular insured and the particular insurer by way of agreement or by way of endorsement on the policy. Furthermore, such approval as is given to particular standard forms by particular insurers is usually limited to cover where the warranty is entered into in its unamended form.

Another way in which the difficulties of constantly referring warranties to insurers for approval can be overcome to some extent, is by agreeing with the insurer a suitable policy amendment by way of an endorsement. This sets out the circumstances in which insurers will extend cover for collateral warranties; on that basis, the designer of contractor can decide, when faced with a particular collateral warranty, wither or no that warranty falls within the cover provided by the insurer, or whether it will have to be put to the insurer to see whether cover can be given.

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Comments

I would like to add that when choosing a provider for your premium, make sure you speak to the company and try to gauge their knowledge and understanding of the architecture and construction industry. It makes a huge difference if you ever need to make a claim, as a company who are experienced within this field will be a better fit than a provider who specialises in medical indemnity, for example.