Endorsements and Extensions
An Endorsement is the term used to describe an amendment to a policy document. An endorsement is sometimes referred to as an “Addendum”.
Its purpose is to record any change to the original terms of the insurance so as to reflect the negotiated agreement between the parties. An endorsement may either be attached to the policy or included in the policy document, usually towards the back. It may be used to vary the terms of a standard policy in which case it will be attached from the inception of the cover or it may be added to the policy during the term of the policy to reflect a mid term change in the cover.
Endorsements are usually used to
- Extend cover
- Restrict cover
- Exclude cover
- Clarify intentions
Endorsements are part of the contract of insurance and are therefore governed in the same way; by contract law.
If a policy has been amended by endorsement at inception then it will override the original terms of the policy, as applicable, to reflect the true intention of the parties to the contract. It will be assumed (in law) that the amendment was a deliberate act and the effects of the change had been considered and were intended.
If the policy is amended by endorsement subsequent to inception (i.e. mid term) then that amendment will override the original policy including any existing endorsement/s to that policy, where applicable.
POINTS to CONSIDER
When considering the effects of an Endorsement there are a number of points to consider.
“What has changed?”
In particular you should consider:
- How does the Endorsement change the cover provided by the Policy?
- Does the Endorsement change any of your obligations under the Policy?
- Does the Endorsement create any new obligations or Warranties?
- Are any of the policy’s time limits affected by the Endorsement?
- Do any of the Definitions in the Policy change the meaning of the Endorsement?
Extensions to cover are effected by endorsement of the policy. The term “Extension” can have two quite different meanings.
- Extensions of the policy period or
- Extension of the cover provided.
Extension of the policy period
This usually occurs at the end of the policy period in order to facilitate the renewal negotiations.
A problem that can arise here is the extent to which you have a duty to disclose any material information that has come about since the original inception of the policy. The safest approach to take is to obtain a waiver of further disclosure pending the presentation of renewal information. However, if there is likely to be a change of insurers then particular care needs to be taken. This requires specialist advice from your adviser or broker.
Extension/s of cover
These are used to incorporate additional cover into the Policy. In PI policies they are frequently used to add cover that does not fall under the category of negligence or breach of duty but which cover is ordinarily required by you to protect them against other commonly recognised risks such as :-
- Libel & Slander
This covers you for claims against them for defamation.
- Data Protection Act
This covers you for Breaches of the Data Protection Act.
This covers you for loss own money. In larger Insureds this is often a separate policy.
- Dishonesty of Employees
This covers you for their legal liability arising out of a dishonest act of an employee; e.g. stealing a third party’s money; giving advice knowing it to be dishonest.
- Cyber Liability
The cover concerns your liabilities arising out various aspects of e-commerce, Web sites and e-technology. This has many meanings, according to the insurer. It is important to fully understand what this extension is intending to add.
- Copyright Infringement
- Patent Infringement
This covers you for inadvertent infringement of another’s Patent.
- Breach of Confidentiality
This covers you for inadvertent unauthorised disclosure of confidential information.
- Loss of Documents
This covers you for the costs of replacing or restoring any documents that have been lost or stolen that belong to you. (Those for which you are responsible, or in your care, custody or control, are covered by the liability part of the policy).
- Automatic Run-Off Cover
This covers you for liabilities that arise out of work done during the period of insurance but where has ceased trading. In some cases this applies to Appointed Representatives who have left you firm.
- Directors’ & Officers’ Liability
This covers you Company’s Directors’ and Officers’ for their liability as Company directors. Where the company is of substantial size there is often a separate policy.
Application of Terms and Conditions to extensions
In all the above examples the Extension may specify a separate limit of indemnity and/or a separate Excess. Sometimes additional premiums will be charged for the extension.
Typically, in a Professional Indemnity Policy there are three approaches to including these additional Risks in the Policy:
- The Policy may have a series of Insuring Clauses so that each of the extensions becomes another Insuring Clause.
- The Policy may have a number of Extensions that have been endorsed onto the policy.
The Policy may have a system of excluding the Risk but having a specific clause to “buy-back” the cover.
POINTS to CONSIDER
In the case of Extensions of period of insurance
- Is there a duty to further disclose material information?
In the case of Extensions of cover
- Do the Extension Clauses have their own Definitions that are different from the Definitions in the rest of the policy?
- Do the Extension Clauses introduce any new terms or obligations to you?
- Do the Extension Clauses alter (or conflict with) any other terms in the Policy?
- Do the Extension Clauses cover the risks for which cover is needed?
- If so, what disclosure needs to make to be made to the Insurer in respect of the disclosure of Material Facts?
Market convention has allowed and, to an extent encouraged, policies to be endorsed with extension clauses to give flexibility to standardised Insurance Policies and allow them to be tailored more to bespoke needs. However, experience in dealing with claims has shown that Extension clauses can be the cause of policy dispute. This is usually because they are drafted independently of the original policy and include phrases and terminology that are inconsistent with the original wording. Whilst the intention may appear clear at the time the clause was issued, te same clause, in the hands of a solicitor several years after the event, can take on an entirely different meaning. This is where the dispute can arise.
It is well worth the time and effort to ensure that any extensions to a PI policy are clear, unambiguous and use the same phrases and terminology that are contained in the original policy. This is a skilled job and may require specialist advice. Furthermore, where a policy contains severalextensions it is not uncommon to find that one conflicts with another. This again can cause extreme confusion at the time of negotiating a claim and can easily be the subject of a dispute with insurers.
So-called “buy-back” extensions have become more common in recent years. The insurer excludes all cover in respect of a particular risk and then puts the cover back by way of extension endorsement. These require particularly careful attention because the extension must take into account the effect of all the other terms, conditions and exclusions. Again these require careful attention usually from a specialist advisor.