Whilst the Insuring Clause gives the cover, the exclusions clauses take some of it away.
A typical list of exclusions would include:
Assumed Duty or Obligation
Bodily Injury/Property Damage
Financial Services work Investment Advice
Fines & Penalties
Unauthorised Mediation Activities
War and Terrorism
Exclusions- The Burden of Proof
Whereas you must prove to the insurer that the claim is covered by the Insuring Clause (see above) the burden of proof is the other way round with regard to exclusions. The onus is upon the insurer to provethat an exclusion clause applies to the policy.
However, it is important to note that if the Insuring Clause includes a phrase such as “Excepting… (a certain aspect of cover)” then it is for you to prove that such exception does not apply. It is important to appreciate that in some cases the burden of proof can be shifted from Insurer to Insured by the wording of the policy. It will usually be found under the heading “Conditions” and so you must be alert.
Exclusion clauses can broadly be divided into two categories:-
- Risks that are inappropriate to cover,
- Risks that the Insurer does not wish to cover.
Risks that are inappropriate to cover
- It is against Public Policy
- It is more properly covered under a different kind of Policy.
- Where there exists a Moral Hazard.
Against Public Policy
Example – Misdeeds
“This policy shall not cover Loss in connection with any Claim arising out of, based upon or attributable to any act which a judge, jury or other official tribunal or panel finds, or which an Insured admits, to be a criminal, dishonest or fraudulent act; and in such event, the Insurer shall be reimbursed for all Loss paid in connection with such Claim; provided, however, that this exclusion shall not apply to the Fraud/Dishonesty Cover”.
This clause removes cover for criminal acts. It would be against Public Policy to provide such cover.
It is more properly covered under a different kind of Policy
Example – Bodily Injury/Property Damage
“This policy shall not cover Loss in connection with any Claim arising out of, based upon or attributable to Bodily Injury or Property Damage.”
These risks should be covered under a general Third Party Liability Policy.
There exists a Moral Hazard
Example – Claims by associated companies
“This Policy shall not indemnify the Assured in respect of any claim or loss made against the Assured by
(i) any other person or entity falling within the definition of the Assured, or
p class=”maintext”>(ii) any associated, parent or subsidiary company of the Assured, or
(iii) any person or entity having a financial, executive or controlling interest in the Assured, or
(iv) any company or entity in which the Assured or any director, partner or member of the Assured has a financial, executive or controlling interest unless such claim is for indemnity or contribution in respect of a claim made by an independent third party against such company, person or entity and directly results from breach of a professional duty owed by the Assuredto that third party arising out of the Assured’s Business”.
These risks are excluded because there is a Moral Hazard that the Holding (or Parent) Board could deliberately cause a claim to fall upon an insured subsidiary and benefit by claiming against it. Alternatively, they could incite one subsidiary to act negligently towards another enabling a claim to be made that would provide funds that may help to avoid a trading loss or even bankruptcy.
Risks the Insurer does not wish to cover
- Cover the insurer does not wish to give for reasons of underwriting selection.
- Where the insurance market, as a whole, generally agree not to cover certain risks.
- Where reinsurance is unavailable to Insurers.
- The following exclusions would be typically found in a PI policy.
Cover the insurer does not wish to give for reasons of underwriting selection
The most common example of this is the Exclusion of any cases brought in the Courts of the USA & Canada, or USA/Canadian judgements that are enforceable in the UK.
Example1: USA/Canada Exclusion
Insurers shall have no liability under this Policy in respect of any Claim or loss: in the form of any kind of legal (including arbitration) or regulatory proceedings brought in the United States of America or Canada or outside of the United States of America or Canada to seek enforcement or upholding of a judgment, award or order made in the United States of America or Canada
Example 2: Assumed Duty or Obligation
Insurers shall have no liability under this Policy in respect of any Claim or loss: directly or indirectly arising out of, or in any way involving any liability, duty or obligation incurred or assumed by the Insured which is not incurred or assumed in the normal conduct of the Insured’s Professional Business Practice Insurance Mediation Practice;
Other examples include
- Financial products
- Regulatory Reviews instituted by, for example, PIA, Fimbra and the FSA, It may be possible to negotiate the deletion of some exclusion clauses.
Risks avoided by the insurance market as a matter of common agreement.
Many of these are standard exclusions the most obvious example of this is the
“Radioactive Contamination or Explosive Nuclear Assemblies Exclusion”. This clause usually appears in a standard form in a Professional Indemnity insurance.
Occasionally it might instead form part of the definition of “Pollutants” which is then used in a Pollution Exclusion.
Where reinsurance is unavailable to Insurers
There is not a great deal that can be done in this case except to find an Insurer who can insure this Risk. The point is that if an insurer cannot get reinsurance (as distinct from does not buy reinsurance) there may be a business decision to be made in selecting your insurer.
POINTS to CONSIDER
- Do any of the Exclusions remove cover for activities necessary for you to conduct your core business? If so then the Policy needs to be renegotiated as it does not provide the cover that you require to protect your business
- Do any of the Exclusions remove cover for any activities necessary for you to conduct your non- core business? If so then the Policy needs to be renegotiated if possible or you may need to consider if this is an area of business in which you can continue to operate
- Are any of the Exclusions phrased in a way that could be ambiguous, unclear and therefore be interpreted to exclude activities that would be ordinarily be regarded as Authorised Insurance Intermediary business? For example, an exclusion that excludes activities “in any way connected to or involving……” could result in a dispute, particularly if the broker may arrange insurance for a client involved in the excluded activity.
- Do any of the Definitions in the policy change the meaning of words in the Exclusions? If so ensure that these changes are taken into account and seek clarification of their intention and potential impact.
- Does the wording of any Exclusion transfer the Burden of Proof to you? For Example “The Insured shall prove to Insurers’ satisfaction that …”
You should ask for clarification of any expressions, words or phrases that are unusual or unclear, or both. Do not ASSUME you understand them. The specialist PI Broker will usually bring to your attention any unusual or unusually onerous terms exclusions or conditions and is further reinforcement of the value in using an Accredited Broker.
It is difficult to judge whether the exclusions in a policy of insurance are fair and reasonable unless there is a point of reference by which to make that judgement. The best point of reference is not to the policy wording itself but to a careful analysis of what the business is doing and what risks ought or need to be covered.
This is of course the principle behind a Demands and Needs statement that brokers are required to take into consideration when advising their clients. Curiously when buying their own PI insurance this is often left out.
At a time when insurance brokers are expanding into wide ranges of services it is very important to look carefully at how they may be described or defined in relation to te description of the business in your policy.
Exclusion clauses have evolved over the last 25 years to exclude those activities that underwriters would prefer not to insure. Very often these include:-
- matters of financial advice and services,
- trading risks,
- underwriting and agency authority.
By drawing a visual diagram of the activities ordinarily undertaken by the business which should be contributed to by the people in the business that are doing it every day, it is possible to create a benchmark by which one can judge the appropriateness or otherwise of the exclusions in the policy.