Excess and Related Clauses
The Excess clause sets out the amount that you must pay before the Insurer makes a payment. There are two main purposes behind the setting of the level of excess
- To give you an interest in avoiding claims.
- To avoid paying small claims.
There is also the principle of the voluntarily assumed excess which allows you to reduce the premium by accepting a level of excess higher than that required by the insurer.
Types of Excess Clauses
Excesses are generally:
- In the Aggregate, (i.e. in all in the policy period)
- Each and Every Claim or
- Any One Claim,
The excess will always apply to the settlement, award or damages but it may also apply to the costs and expenses incurred in the settlement of the claim. This is an important feature of the policy negotiation.
The Excess should always be expressed as
- Including Costs and expenses,
- Excluding Costs and Expenses.
These terms are generally understood but for the sake of completeness we will look at their application and then consider a more recent development concerning claimants.
An Aggregate Excess means that the amount of the excess, say £5,000, is the total that you will pay during the period of the Policy. If you have four claims for £1,000 each then each claim will reduce the amount of the excess by £1,000. Leaving a policy Excess of £1,000 for the rest of the Policy Period,
Each and Every Claim or Any One Claim
An Excess expressed as Each and every Claim or Any one Claim means that the Insurer will only pay excess of £5,000 in each case.
The definition of Claim is of fundamental importance to determining the amount at risk to you. For example if five separate Claims (from different claimants) arise out of the same original cause (e.g. a policy sold to several Insureds in each case containing the same error) then it is open to Insurers to apply the excess five times unless this eventuality is dealt with in the policy document..
Including Costs and Expenses,
This means that the costs and expenses (as defined in the Policy) go towards the amount you must pay before Insurers will indemnify.
Excluding Costs and Expenses
This means that the Insurer will pay all the costs and expenses (as defined in the Policy) without applying the excess to them.
Where the policy contains several Insuring Clauses and/or Extensions introducing different aspects of cover there may be a separate excess for each of these. This should be clearly set out in the policy- usually in the Schedule.
Compound Excess provisions.
The structure of the Excess can be complex. These are typically applied to the larger firms, with a regional office infrastructure.
For example, the excess may be expressed as:-
£250,000 in the Aggregate plus £50,000 each and every claim in respect of the London office and £25,000 each and every claim in respect of all other offices, not exceeding £500,000 in all and £10,000 thereafter each and every claim.
Such clauses require careful consideration as to how they are to be applied in practice. It is beneficial to work through some hypothetical cases to se how they would be applied in practice. Then check your understanding with an experienced PI claims broker.
Ideally there will be a “series clause” which ensures that related claims count as one claim for the purposes of the policy, for example:
4.2 All Claims and losses resulting from:
(a) one and the same act error or omission; or
(b) one and the same originating cause or source;
(c) the acts errors or omissions of one person or persons acting together or in which such person or persons is/are concerned or implicated; shall jointly constitute one Claim under this Policy, and only one Retention shall be applicable in respect of such Claim
The important benefit for you is that if a series of claims can be aggregated together then only oneexcess applies to all of those claims.
“Each and Every Claim, Each and every Claimant”
This phrase was introduced by insurers in response to the volume claims arising out of the Pensions Review.
“Each and Every Claimant” was intended to mean that the excess was applicable to each claimant irrespective of whether there was only one original error (source or cause) that gave rise to each separate claim.
The combination of these clauses would mean that if there are several claimants the excess will apply to each claimant but there would remain only one limit of indemnity. i.e. if there are ten claimants the excess will apply ten times.
Notification Limits and Settlement Limits.
Where Insurers imposed sizeable excesses there can be a clause that sets a reporting or notification limit. This means that you do not need to notify Insurers until the notifiable claim or circumstance has reached a pre set level.
For example;- Insurers may impose an excess of £50,000 each and every claim but agree that any claim or circumstance for an amount up to £25,000 may be dealt with by you without reference to insurers.
Such clauses tend to be reserved for larger Insureds who have the proven experience to deal with the claims and are intended to avoid the Insurer becoming involved in claims that will rarely exceed the Excess.
Cost and affordability
The amount of the excess that underwriters require is normally set by reference to the firm’s annual turnover. It is important to remember, however, the turnover has no relationship to cash flow or profitability. Consequently the amount of the excess selected by the underwriter, whilst appearing to be a small percentage of turnover, can in fact be a very substantial sum in relation to cash flow or profit.
Excesses are usually negotiable and it is important that you can reasonably expect to be able to pay the excess at comparatively short notice. Therefore, if cash flow is tight (and this happens to every business from time to time) then the firm needs to be able to raise the money. The FSA regulations concerning capital adequacy are a protection in this respect but thought should be given to the practical implications of the amount of the excess, nevertheless.
There is often a temptation to increase the amount of the self insured excss in order to save premium. Very rarely does the premium saving justify the increased risk of the excess. This is a matter for personal judgement.
Always be clear as to the precise application of the excess. Be sure to understand what is meant by “any one claim” each and every claim” and how this may differ in practice from the same expression used in relation to the limit of indemnity. Sometimes the two expressions (LOI and Excess) do not work well together.
Where the excess is capped or where there is an “aggregate excess” followed by an “each and every claim” excess upon exhaustion of the aggregate (e.g. £100,000 in the Aggregate and £10,000 each and every claim thereafter) then it is important to know what contributes to the aggregate and whether this has only to be incurred or actually paid before it counts. This is because claims can take years to settle and a later notification may settle before an older one.
Costs and expenses
Be sure to understand whether costs and expenses are included in the excess and if so what costs and expenses are allowed and what are not. For example your own costs and expenses in compiling and dealing with a claim are not included. Neither are they covered by the limit of indemnity.
POINTS to CONSIDER
- How does the Excess operate in conjunction with other Clauses?
- Are there any limits below which you do not have to notify Insurers?
- Do Insurers pay the Costs from the first Pound or do the Costs erode the Excess?
- Do the Excess Clauses impose any obligations on you?
- Do the Excess Clauses relieve you of Any Obligations?
- Do you have the skill and resource to monitor the erosion of an Aggregate excess?
Take the time to consider how the excess will apply in practice. It will have an impact on cash flow and this can be particularly damaging to the smaller business.
Do not take a voluntary excess unless the saving is in proportion to the extra amount of excess.