PROFESSIONAL INDEMNITY INSURANCE
Most professional people and practices purchase their cover requirements on one criteria only, that of price. No one doubts the business discipline of every purchaser in wanting to keep costs down to a minimum, as insurance premiums are a major part of the overheads. Obtaining cover for the professional risk of the individual or the partnership is not the same as purchasing motor insurance protection.
The crucial test of any product is whether it performs when the need arises. Today, the professional person lives in an ever increasing demanding environment with the application of the law being modified by the Court of Appeal and, in some areas, by the European Union. If you are not a legal practice it is unlikely that you will notice changes unless your insurance broker draws your attention to them or you have advice from a professional information centre.
So what can be done to minimise your risk for the benefit of your practice and to achieve a reduction in the premium?
How often do we hear that expression being pronounced by the insurance industry today? To many people they see no benefit to their businesses but it can work where there is a good understanding between the client and his insurance broker. There are, however, two caveats to this scenario. The first is that not all local insurance brokers have an in-depth knowledge of professional indemnity cover and the second is that many brokers do not have agencies with the specialist underwriters and rely on the larger London city broker to place the cover for them.
Why do insurers issue the policy on a claims made basis wording and what effect does it have on the cover?
A claims made policy wording makes it clear to the insured that all claims and any matters that may lead to a claim at some point in the future must be reported to insurers during the period of the policy cover.
A claim is clearly understood but care must be taken to ensure that any correspondence that is critical of the practice/partnership and cannot be answered satisfactorily in a straightforward manner should also be notified, as many insurers will decline to deal with claims where it can be shown that the insured was aware of the problem before renewal of the current policy.
Our advice, when in doubt, is to notify all matters to insurers. You will not only be safe but you will also not be penalised by insurers at the following renewal as the matter may not come to anything.
What does the phrase ‘Retroactive Date’ mean?
When a policy shows a retroactive date it means that the Insurer for the period of cover in question will not respond to matters/claims notified which emanate from work undertaken prior to the retroactive date. For example: if an architect had a retroactive date in his policy of 1/1/2000 and a claim occurred as a result of work done say, in January 1999, the insurer would not respond as the work, which brought about the claim, was undertaken prior to the retroactive date.
Can the ‘Retroactive Date’ be removed?
A professional practice should take out professional indemnity cover from its first date of trading when the retroactive date would not be a problem. If, however, a practice wants to remove the restriction this may be possible by referring the matter to the current insurer for consideration.
Much will depend on the profession involved, the length of time that cover is required, and the claims experience to date. Even if the cover is available the price may not be acceptable to the practice.
What level of indemnity should the practice purchase?
This is a subject on which it is very difficult to give guidance and insurance brokers are well advised not to be specific in their response.
The practice should take into account the type of work it undertakes and to investigate the type and level of claims the profession attracts.
This can be obtained from particular governing bodies such as the RIBA but as a general rule, unless specified by a governing body, you should get quotations for different levels starting at £500,000 and going upwards.
Many professions consider a minimum of £2,000,000 to be appropriate in today’s commercial climate.
What is the situation regarding legal costs and expenses?
Legal costs represent a substantial part of professional indemnity cover as Insurers find that most of their costs in this class of business are incurred by defending insured entities against allegations rather than the claims themselves.
It is essential, therefore, that when considering the merits of different Quotations care should be taken to ensure that all legal costs and expenses are paid by insurers in addition to the limit of indemnity. We make this point as some quotations show legal costs and expenses as included within the limit of indemnity, which is a far less attractive proposition for an insured.
Can subcontractors be used by the practice?
This point has been raised more often in recent years because of the greater mobility in the work force.
The answer to this question is that subcontractors can safely be used provided you have satisfied that they have professional indemnity cover in force covering the area of work you want them to do. If in doubt on the extent of cover they have in force you should consult your insurance broker.
Situations arise where subcontractors do not carry professional cover. In these circumstances it may be possible to extend your cover to include them but the matter should be taken up with your insurers. Some are prepared to consider the enquiry on a case by case basis but only on the understanding that they retain full subrogation rights against the subcontractor.
What you have to realise is that any bad experience incurred by the subcontractor could affect your future level of premium at renewal.
Should the practice have a standard set of contract conditions?
In the litigious age in which we live it is most advisable that all professional practices use contract conditions for which legal advisers should be consulted. By using conditions you will be able to define your services with precision and Insurers will have a much better understanding of where your risk starts and finishes It should also enable your insurer to fine tune your premium.
What about cover for European Contracts?
Most policies that are in force today will cover the practice if it obtains a Contract with an organisation that is situated in a country that is a member of the European Union.
In every policy there is a section that states the territorial limits in which the cover will operate. By referring to that section you will be able to see whether your policy is operative. If the limit states United Kingdom only it should not be difficult to extend the policy to include Europe. Refer the matter to your insurance broker.
What are the considerations when the practice wishes to buy another business?
This question is answered excluding the professions of chartered surveyors and chartered accountants where their respective professional bodies have certain rules.
When a professional practice wishes to purchase another entity it must be clearly understood that it is about to pick up the insurance experience of the seller and care must be taken to check the insurance history of the practice.
Have there been claims in the past and over what period? If claims have arisen the cause should be identified. Has it been dealt with? What effect will the experience have on your policy for the future?
The question of past liabilities not yet come to light needs attention. If you are acquiring a partnership as opposed to a limited liability company who will accept responsibility for future claims from the business being bought out? Will you be responsible or will you make the original owner take out continuous cover or what we know as ‘run off’ cover? If that is the case how long will you require the cover to be taken out?
These questions should be discussed at the earliest times with your solicitors who are in a position to give you expert advice.
What considerations are there when my/our practice is sold and is continued professional indemnity insurance cover desirable?
When selling a practice it is quite common to find that the subject of professional indemnity insurance is way down on the list of priorities and so often the seller is put at a disadvantage when, with some preparatory work, the difficulties could be overcome.
Once the decision has been made to sell the practice your solicitor should be consulted to establish your negotiation position at the outset.
Your ideal position is to sell the practice so that the purchaser picks up all responsibility for past liabilities under the sale agreement. Clearly, this will have an effect on the selling price of the business as the purchaser will want you to make a contribution towards the cost of the ongoing professional indemnity cover but you would be able, under the contract drawn up by your solicitor, to avoid future exposure and costs.
The purchaser, on the other hand, will be looking to avoid this situation and so often in the past the seller has not identified this problem in time with the result that he is left with the risk of past liabilities. He then has to make the decision as to whether to insure or not.
One way to compromise is to negotiate a contract whereby you insure for one or two years on a ‘run off’ basis but whichever way you go close consultation with your solicitor is recommended at all times.