“There is no requirement that an insurance policy is reasonably intelligible in terms of content and there is no requirement that it be especially legible.”
“ Birds’ Modern Insurance Law”
This statement may appear at first sight to contradict the FSA regulatory position but was of course written before the introduction of FSA regulations or of Contract Certainty.
Nevertheless, I believe there remains an element of truth in the warning. Insurance companies are competing for business and they are free to choose their own style of policy and the words phrases and expressions they utilise to define their offering. These can differ immeasurably and I believe insurance intermediaries should now be aware of the differences and how they could impact the very important protection they expect from the PI policy.
This is the second part of our PI Initiative, which attempts to move the industry to clearer definitions/understanding of the wordings and consider the advantage and disadvantage of a minimum standard. This extensive guide will help members interpret PI policy wordings; I hope you find it useful.
How to use the guide
This guide is intended to serve two purposes.
The first is to provide the person responsible for buying PI with a comprehensive understanding of what to look for and what to avoid.
The second is to provide the business with material that can form a useful basis of education for staff. It is of paramount importance in today’s regulated environment that employees are constantly aware of the risks associated with being a broker and taught to recognise the signs of a potential complaint and claim.
The information in this guide will help to create that awareness and can usefully be sent to all relevant employees.
Part1 is a general descriptionof the issues surrounding PI insurance
and
Part 2 describes the component features of a typical PI policy.
The guide avoids legal and technical jargon. It has been compiled as a systematic examination of the structure of policy wordings, how the insurance should work in practice and the pitfalls that the insured may encounter that could result in a dispute with insurers and possible loss of cover.
The guide is intended to be of practical use when negotiating insurance but is not a legal treatise on policy wordings. If the reader has any questions concerning legal aspects of PI policies or their interpretation it would be as well to seek specific legal advice.
The guide includes headings entitled “Points to Consider” and “Top Tips”.
“Points to Consider”
These are questions that the reader should ask themselves to test the effectiveness of the policy and to highlight its potential shortcomings.
“Top Tips”
These assist the reader in understanding the context of the information contained in each section and offers tips for achieving best value .
Don’t Attempt DIY PI
The Broker’s Role
The role of the Broker is rather more complex than most other professions for the following reasons:-
- The broker gives advice but often does not specifically charge for it.
- The broker acts as a transactional procurer of a commodity, insurance, for which the Insured may not pay directly.
- The broker is often remunerated by the seller of the insurance, the insurer, whereas the broker’s first duty is to his client the buyer.
- The broker can often owe a duty of care to both his client, who is relying on him to procure the right insurance for his needs and to the insurer who may rely upon him for administrative or other functions.
- Brokers who act as holders of underwriting authority for insurers in fact have a conflict of interest although it is a common practice to do so in the broking industry. This inherent conflict can cause brokers to make ill-judged decisions that later become complex features in a PI claim
Professions such as surveying. law and accountancy are simply advisers who are remunerated for their time by their client. They are less vulnerable to conflicts of interest such as brokers are and this makes the law governing their professional advice fairly comparitively forward.
Not so with brokers. The law concerning broker’s duties of care and fiduciary duties are increasingly complex because of the multiple roles as set out above and the introduction of the FSA Principle based regulations that wll eventually test the broker’s role ever more stringently.
A specialist skill
PI insurance is a specialist class of business requiring many years of experience to fully understand how it works in practice. Whilst, as a class of business, it is often regarded as a commodity class, the law concerning professional negligence is increasingly complex and policy wordings are regularly, subtly changed to counter balance the risks.
For the reasons set out above insurers look very closely at the activities of the broker and tend to seek to exclude some of the activities they believe present the greatest risk.
Negotiating effective PI policies is a skill. The skill lies in understanding how the policy will respond in the event of a claim. Handling professional negligence claims also requires specialist skills because both market practice and prevailing case law can influence the management of claims.
It is never a good idea for a physician to try to heal himself. So with your PI insurance. Do not assume that you are your own best adviser when it comes to placing your insurance, or more importantly, defending your own claims.
There is always a tendency for a broker to believe that, because he is a broker he can negotiate his own insurance better than a specialist. Experience has proven otherwise on many occasions. Objectivity is essential at these times and this is best supplied by an independent expert.
Only those who deal with such matters day in and day out know how best to deal with them. Seek advice from a specialist. Consult a BIBA Accredited Broker
Accredited Brokers
BIBA Accredited Brokers have the skill to serve you better than you can serve yourself. BIBA strongly recommends its members to take advantage of their specialist knowledge and experience.
- BIBA has reviewed the PI cover available in the market in conjunction with the Accredited brokers and this has already raised the standard of cover being offered.
- The BIBA PI initiative has also increased the competitiveness of PI cover for members.
- The three Accredited Brokers, between them, represent all the leading PI insurers offering PI fro Brokers.
- The Accredited brokers have a special knowledge of PI insurance and the skills required to negotiate the best available cover for BIBA members.
- The relationship between the Accredited brokers and their selected insurers will offer the best available resources and negotiating skills in the event of a claim.
- BIBA now has a panel of experts to handle disputes or conflicts for members.
Part 1 The Issues
Broker’s ependency and reliance on pi insurer
Brokers are dependant upon their PI insurance for the financial support and legal advice of insurers and their agents to defend them. Also, it is a requirement of FSA regulation that PI is in force and maintained. It is therefore essential that the policy upon which the broker is dependent and relies will prove fit for its intended purpose when called upon.
There are four principal issues to be aware of:-
- No insurance broker is immune from a complaint or claim.
- Common pitfalls of a typical policy – Gaps in cover and hidden conditions.
- How Insurers assess your risk- obligations of materiality and disclosure
- Claims notification obligations. These are frequently misunderstood and lead to disputes with insurers at a time when the firm can least afford it.
Being left without indemnity is a serious matter. It can happen and does happen that brokers fail to take the care for themselves that they would take for their clients. This can lead to failure to appreciate the gaps in cover they have bought and the strict claims notification conditions that are an onerous feature of PI insurance.
Throughout this guide the word “broker” has the same meaning as Authorised Insurance Intermediary.
No immunity
No broker is immune from a complaint or claim-
FSA regulations provide no immunity or defence
In any business, however well run, things will go wrong. Insurance brokers will sometimes make mistakes and communications can break down between both the insurer and the insurance intermediary or the insurance intermediary and their client. This will sometimes lead to a claim.
Compliance with FSA regulations provides no immunity from claims of negligence. Neither is it a defence to say that you acted in accordance with the FSA regulations when it comes to matters of duty of care or contractual obligations between broker and client. It is important for every broker to recognise that FSA regulations are not intended as a surrogate form of risk management, nor do they fulfil that role.
Brokers will readily understand that policyholders’ expectations of insurance often exceed what is reasonable, resulting in complaints or, worse, claims, against the insurance broker. Complaints and claims are a fact of business life but if there is an awareness of how they come about and what NOT to do when they occur the broker will find themselves in much better shape to put up a defence.
Cost irrespective of liability
It is of no consequence whether the broker is eventually found to be liable or not to the extent that the broker will nevertheless be required to defend the allegation and this is always a costly, time consuming and stressful experience.
Once an allegation or claim has been made there is no option for the insurance intermediary but to enter a defence. Defence costs,even for misconceived or unmeritoriousclaims can be far beyond the financial reach of most small businesses.
It is a common misconception that all costs are covered by the PI insurance. They are not. The cost of the Insured’s time in compiling records, attending meetings and preparing statements combined with the resulting loss of business opportunity is not covered by insurance. It is often overlooked until revenue or cash flow difficulties come to light.
Failure of policy to meet expectations
There are many insurers competing for your business and each offer terms and conditions expressed in teir own way. These do not each offer precisely the same cover, although at first sight the differences may appear to be merely cosmetic. Unless care is taken to understand what is being bought the restrictions and exclusions will only become apparent for the first time when underwriters dispute liability.
This guide will help you to make that choice and demonstrate the perils of buying on price alone.
What is required of your PI Policy?
The most important feature is the defence it provides against the allegation or claim against you. If this fails at the first fence it has serious consequences for the eventual negotiation and settlement of any claim.
The insurers should :-
-
- Accept notification of a genuine “circumstance” without demur.
- Provide competent and timely advice and support from their solicitors.
- Wherever possible, use dispute resolution/mediation and so avoid litigation.
- Keep you informed of progress at all times.
- Have due regard to your reputation when settling a claim
Does your policy meet your needs?
The first and prime requirement of a PI policy is to provide the legal expertise of insurer’s solicitors and the insurer’s financial support in defending the allegation or claim.
CAUTION In a recent case a BIBA member firm had misunderstood their policy coverage. They had not reviewed their cover against their activities and needs and had failed to recognise the obligations imposed upon them by the policy wording. This exposed the firm to several million pounds of uninsured loss.
Cover – words, phrases, expressions and definitions
Recent research has discovered a variety of different policies available to brokers containing widely differing terms and conditions. At first glance one policy wording looks very similar to another, but words, phrases, expressions and definitions can have materially different meanings as between one insurer’s policy and another. The devil, as always, is in the detail.
Frequent changes introduced
Policy wordings are regularly changed and updated. The changes are influenced by market practice and claims experience. It is important to appreciate what is a sound PI policy for your purposes and what is not.
Selection by Price
There is a significant risk that the broker selecting cover by price alone will find the policy deficient for their needs. Brokers routinely tell their clients that there are risks in buying the cheapest insurance. So too with their own.
Reputational damage
Your firm’s reputation can be damaged if the claim is not handled sensitively. Insurers will take over the conduct of the claim and may want to settle a claim for ‘commercial’ reasons which may not suit the Insured. This possibility should be anticipated and taken into account when deciding upon choice of insurer. Most brokers know that bad news spreads fast in their community and so there is a considerable value on professional, discrete claims handling.
BIBA members experiencing difficulties of this kind can now obtain expert advice fro BIBA’s special advisers. Full details are available from BIBA website at www.biba.org.uk
Value for Money?
The value of a PI insurance is directly proportional to the cover, assistance and reassurance given by the insurers when you most need help. This defines its fitness for purpose.
Usually, value for money is only calculable when the Insured needs help but with the assistance of this Guide it is possible to assess the true value of the policy at the time of purchase.
Key tests of fitness for purpose include:
At time of purchase;
- A policy that properly covers the activities of the Insured.
- Clarity of the definitions, exclusions and conditions.
- Clear and practical notification conditions
At the time of notification of circumstance or claim:
- Acceptance of, and a positive response to, first notification.
- Full support of the insurer and their lawyers in defending the allegation or claim.
- Dealing with the claim sensibly and using Mediation or other similar forms of alternative dispute resolution to avoid litigation if possible.
Top Tip – Always compare the cover offered by two or more policies currently available from the market.
Make enquiries of the BIBA Accredited Brokers about the insurer’s reputation in the market for fairness, support and paying claims.
Assessing the Risk
It is important to appreciate insurer’s considerations when assessing your risk. It will assist you in understanding what is material to an insurer and what needs to be disclosed beyond the questions in the proposal form. Failure to disclose information that insurers investigating the claim deem to have been material is a serious risk.
Insurers consider the proposer’s :-
- Claims record, including circumstances that came to nothing
- Commission/Fee income
- Classes of insurance placed – any specialist services
- Agencies and binding authorities
- Experience and qualifications of directors and staff
- Territories and Jurisdiction outside European Community
- Size and nature of clients
- Limit of indemnity
- Excess
- Other special information
Proposal form – an important consideration
Proposal forms play a more important part in professional indemnity insurance than in most other classes of insurance. They are required to be completed in full, every year, and they are relied upon absolutely by insurers as a true representation of the material information upon which they offer their terms.
Inconsistency between what is disclosed in the proposal form and what is discovered upon investigation of a claim can result in the policy being voided back to inception. See Part 2 -Proposal Forms for a detailed explanation.
Claims
Frequently encountered difficulties
The most frequently encountered difficulties concern:-
- late notification or non disclosure of circumstances or claims
- non-acceptance of a notification of circumstances
- reservation of rights and acting as “prudent uninsured”.
- inadvertent breach of policy conditions
- non disclosure of material information
- the solicitor representing the best interests of the insurer but not the insured
Notification of circumstances and claims
Every PI policy will require you to notify “circumstances” within a specified time limit;. The expressions used concerning notification of circumstances can vary considerably and the expressions can affect the insurers’ entitlement to deny liability.
Notification is a strict obligation and Insurers will often, immediately, deny liability if the obligation is breached. There may be a temptation for the broker to leave notification to the last minute in the hope that the “circumstance” will come to nothing. This often leads to a dispute with the insurer. It is a grave mistake to fail to notify insurers at the earliest moment. The BIBA Accredited Brokers can help to advise what and how to notify a circumstance or claim
Top Tip
Brokers sometimes try to use their business relationship with an insurer to negotiate their way out of a potential claim but this can be dangerous; it can invalidate the insurance intermediary’s PI insurance. If you intend to do this first get the permission of your insurer.
Duty to understand
Unsurprisingly Insurers expect insurance intermediaries to better understand risk and insurance than any other Insured and to:-
- Observe the duty of disclosure and the nature of material information
- Understand and comply with policy terms and conditions.
- Fulfil all regulatory and legal obligations
CAUTION – There are strict notification obligations in Brokers’ PI policies. Experience has shown that many insurance brokers are unaware of just how strict are these obligations. In particular, employees are often unaware of the obligation to notify circumstances. Failure to adhere to these obligations can result in loss of cover and increased future premiums.
Non- Acceptance of notified circumstances
Insurers should never reject a notification made properly and in good faith.
Some insurers are reluctant to accept notified circumstances even when notified in compliance with the policy terms and conditions, because they do not consider them to be sufficiently specific. They are persuaded that they have the right to make a judgement about what constitutes a notifiable circumstance. This is contrary to good practice and very unfair to the Insured who is obliged to notify, unconditionally, in accordance with the terms of the policy. Insureds finding difficulty in notifying a circumstance should seek specialist advice. This is now available to members through BIBA.
This problem has largely been brought about by so calledblanket notifications of circumstances that could give rise to a claim. This has occurred most recently in connection with Pension and Endowment mis-selling and it is for this reason that some policy wordings set out a list of more specific information required to notify a circumstance.
For example a broker could report to insurers that they know of 28 clients who may have a claim against them arising from an endowment policy that has been identified in the press as “questionable”. The insurers may well refuse this as being not specific. However, If the broker fails to disclose this material information and later seeks to claim then the insurers at the time will be able to deny liability for late notification or non disclosure of material information. Further, if the matter is disclosed to an insurer then it will be excluded from cover by future insurers.
The points to consider are as follows.
Professional indemnity insurance is on a “claims made” policy basis. This means that a policy must be in force at the time that the notification or claim is made against the insured. That notification must therefore be made within the policy period.
Example
A policy runs from 1January 2006 to 31December 2006. The insured notifies a circumstance that they believe might give rise to a claim on 15 November 2006. No claim has actually been made at the time but the client has not paid their fees to the insured for the past three months and the insured recognises that there are significant difficulties with the client that may give them reason to make a claim. The insurers reject the notification of the circumstances that could give rise to a claim on the grounds that no claim, threat or allegation has been made. If the policyholder accepts the rejection of the notification they run the risk of being uninsured at a later date.
How does this happen? When the insured submits their request for renewal of the policy (or for a new policy with a different insurer) on 1 January 2007 they will be asked if there are any circumstances of which they are aware that could give rise to a claim. They would be obliged to refer to the notification given to insurers on 15 November 2006. The new insurer would automatically exclude any claim arising out of that circumstance from the 2007 policy. If on, say, 20 January 2007, having renewed the policy on 1 January 2007, the matter referred to on 15 November 2006 comes to fruition and results in an allegation, threat or claim then the insured cannot go back to the old insurers and the new insurers have already excluded the claim.
CAUTION
If an insurer rejects a notification you should immediately seek specialist advice .
Inadvertent breach of policy conditions –no excuse
A typical PI policy contains several Conditions that have more impact than may at first be apparent. The Conditions impose obligations upon the Insured which, if not met can entitle insurers to rebut the claim. It is frequently found in the course of managing the claim that the Insured had not appreciated the extent of their obligations until they were pointed out at the time of notification. Some of these concern the interpretation of words, phrases, expressions or definitions but more often than not there is evidence that the Insured had simply not read the policy and understood what is required of them. This is not a mitigating excuse.
Who is the Insurer’s solicitor representing?
The Insured is entitled to expect that the solicitor appointed by the insurers is representig the best interests of the Insured. Where the solicitor is obliged to represent the interests of the insurer before those of the Insured (i.e to advise the Insurer whether the claim falls within the policy, whether any exclusions apply and whether conditions have been breached) there are well established conventions for the management of this conflict of interest.
In brief, the solicitor is representing the insurer when advising whether the claim is covered by the policy and representing the Insured when negotiating the defence of the allegation or claim.
Specialist legal skills are needed to:
- Know when to defend or negotiate
- Conduct a full investigation of the facts and issues
- Gather and analyse relevant evidence
- Liaise between insurer and Insured
It is important that Insurer’s solicitors receive the full cooperation of the Insured at all times. This can be a time consuming and onerous responsibility. Inevitably there are occasions when the Insured feel they are not getting the best advice or service from the solicitor. The Insured is entitled to question the solicitor in these circumstances and to ask for support from the Insurer. The solicitor is the agent of the Insurer, by whom they are paid but they also owe a duty of care to the Insured as well as to the Insurer.
Under English law, a solicitor instructed in by Insurers owes a duty of care to the insured: Groom v Crocker [1939] 1 KB 194. More recently, the Court of Appeal confirmed the position in K/S Merc-Scandia XXXXII v Underwriters [2001] EWCA Civ 1275; 1 Lloyd’s Rep IR 802 at 809. It is a duty to ‘protect the insured’s interests and to carry out his instructions in the matters to which the retainer relates by all proper means.’ It is a duty to act reasonably in the interests of both the assured and the insurers.
Part two The Policy Framework
Modern insurance policies differ in their appearance but there is a basic general shape to all policies as shown in the table below.
Preamble
Insuring Clause/s
Exclusions
General Conditions
Claims Notifications Conditions
Definitions
Schedule
Endorsements
Insurance policies vary considerably in the way in which they are written, the terms and expressions used, and the interpretations that can be put upon them. It follows that some care should be taken in understanding these because they will be fundamental to the satisfactory negotiation and payment of a claim or the acceptance of a notification of a circumstance which might give rise to a claim.
To do this you must know where to look and what to look for. This guide sets out the principal features of each of the components of the policy wording, as shown above, explaining the purpose and making observations on points to take into consideration.
There is no single right or wrong way of manuscripting a policy wording. Nothing in this guidebook purports to suggest that there is only one way or a best way of ensuring the right cover. This is a job for you and your broker if applicable to work out between you. This guide’s purpose is to offer guidance on important points of negotiation.
The Proposal Form
There is one other essential component to the contact of PI insurance that is not contained in the policy wording; the proposal form. The proposal form forms the basis of the contract and it can be the document that is relied upon by insurers and their legal advisors in determining their liability to pay a claim. This concerns the matter of material information and full disclosure of activities, claims history and the like.
For all practical purposes the starting point of a PI policy is the link between the description of your business in the policy wording in comparison with the description of your business in the proposal form and any supplementary information appended to the proposal form. If there is a material difference between these two things there is an inherent weakness in the insurance cover.
A significant proportion of a Professional Indemnity Proposal Form is devoted to facts and figures relating to the business being insured. These can be questions relating to the proportions of business by category transacted by your firm, questions relating to internal procedures and questions relating to how many of certain types of policy or product have been transacted in previous years. The accuracy of these answers is paramount. Insurers can, and do, attach significance to the slightest discrepancy in these facts and figures.
It must also be said that the questions in the proposal form are not exhaustive and it may be open to Insurers to argue that information material was relevant albeit not requested in the proposal form itself.
Today, the law relating to non-disclosure is harsh. Developed at a time when the law played a less prominent part in the commercial decisions of underwriters the law relating to non disclosure has been relentlessly tightened to a pitch that is now a significant peril for every policyholder. Whilst there have been calls from the judiciary for this aspect of the law to be reformed, as things currently stand experience has shown that the courts will assume that an insurer was entitled to rely upon the information as disclosed, in whatever form disclosed and rely upon the disclosure as being totally accurate
Further it is assumed that as the Proposer knows more about their business than the insurer. The Proposer will also be expected to know what more the insurers should be told, that is material, beyond what is asked in the proposal form. This is especially true of insurance brokers; experts in the subject in their own right. So if material information is not disclosed to the insurer, even if not specifically requested, the insurer may be entitled to avoid liability.
The proposal form is the basis of the contract of insurance and insurers may refer back to it at the time of a claim to establish if the representations made are in fact true. It is easy to overlook a material fact.
Invariably, proposal forms will not ask questions that cover every aspect of the Proposer’s business. If there is any doubt that an aspect of your business is not covered by a question in the proposal form then you should make reference to it in an addendum to the form and give underwriters the opportunity to ask further questions. Failure to do this has led to claims being denied and policies being voided.
Preamble
The preamble simply says that the insurers will, in return for the premium, pay the losses or claims made under the policy. Most policies have a distinct preamble although some modern policies do not. There are occasions when the preamble and the Insuring Clause are merged into one clause. Generally there is nothing contentious about a preamble clause although it is often the clause that incorporates the Proposal Form into the policy and makes it the basis of the cntract.
The following are examples of preambles from a selection of modern policies
Example 1 is a typical, distinct Preamble.
Preamble – Example 1
Whereas the Assured have made to Underwriters a written Proposal bearing the date stated in the Schedule which shall be the basis of this contract and shall be considered as incorporated herein, and in consideration of the agreement to pay the Premium stated in the Schedule……….
Example 2 also describes the cover under the policy i.e., the Insuring Clause.
Preamble – Example 2
The Insured having submitted the Proposal to the Insurer which it is agreed shall be the basis of, and be incorporated into, this policy and in consideration of the Premium paid or to be paid by the Insured, the Insurer agrees to indemnify the Insured, subject to the terms, conditions, exclusions and limitations in this policy. ………….
The underlined section of this clause is the beginning of an Insuring Clause which then goes on to describe the cover in detail.
“Top Tip”
Take the trouble to read the Preamble and the Insuring clause together and ensure you understand them.
Read also the policy’s Definitions so that you understand the scope of the cover intended by the Insurer.
Insuring Clauses
The Insuring Clause describes what is covered by the policy. It may also set out some measure of qualification of the scope of cover. This could be described as the heart of the policy and, in modern PI policies, will very often be a description of broad and comprehensive cover. This broad cover is, later in the policy wording qualified and restricted by exclusions, terms and conditions.
Insuring Clauses are sometimes called operative clauses or simply labelled as “cover”. More importantly they may also include sub clauses that are not truly part of the Insuring Clause at all. For example, an Insuring clause that states that the policy will not cover something; this is not helpful because exclusions are better kept under one part of the policy for ease of reference.
Where the insurance policy includes two or more distinct types of cover the Insuring Clause may be divided into two or more Insuring Clauses each dealing specifically with each aspect of cover.
For example:
Insuring clause 1 legal liability,
Insuring clause 2 fraud/fidelity risk and
Insuring clause 3 loss of documents
Insuring clause 4 Defamation/ Infringement of copyright
Where policies are structured in this way it is usual to reflect the structure in the policy schedule so that the respective sums insured and applicable excesses are clearly set out in respect of each Insuring Clause.
Claim and Loss
The words ‘claim’ and ‘loss’ can have different meanings. Both will be used in respect of liability cover to describe a claim against the Insured and a claim by the Insured against the policy loss suffered by the claimant. The word Claim with a capital C will usually mean claim against the Insured but this is not universally so and therefore it s important to find out what is meant by claim / Claim according to the policy definition.
The word “Loss” will also be used to describe the loss suffered by the Insured in respect of fraud/fidelity and property damage/loss of documents cover. It is important to ensure that these phrases are correctly expressed consistently, throughout the policy wording because they do sometimes get used inappropriately, by accident and this can lead to misunderstandings and disagreements in the event of a claim. It is frequently found that endorsements to a policy use words that are inconsistent with the original meaning in the policy.
Errors and inconsistencies in construction
Often it is not until a policy comes under examination in the course of litigation that errors in drafting and construction are first discovered. It is only too easy for insurers and brokers to completely overlook fundamental errors in construction because of over familiarity or simply relying upon the fact that the policy wording was at one time presumably drafted by a lawyer and therefore can be relied upon.
Errors in construction in the Insuring Clauses can create a fundamental flaw in the policy and have been known to allow a claim that would otherwise have been covered to be rejected on the grounds that the policy says what it says even though it was not the intention. There can be occasions when the “Contra Proferentem” rule may not apply so there is every reason to check the wording of the policy to ensure there are no obvious errors, but this is usually the argument of last resort.
Claims Made / Losses Occurring
Professional indemnity policies are typically written on a “claims made” basis. This simply means that the insurance policy must be in force at the time the claim is made against you for which there is an indemnity under the policy. Other types of liability policy are underwritten on a losses occurring basis which means that provided there was a policy in force at the time the insured peril occurred then cover will be in force (subject of course to the other terms and conditions).
Examples
Insuring Clause – Example 1
“To indemnify the Insured against any Claim(s) or Loss(es) first made against or incurred by the Insured during the Period of Insurance as shown in the Schedule in respect of any civil liability whatsoever or whensoever arising (including liability for Claimants’ costs) incurred in connection with the conduct and performance of Businesscarried on by, or on behalf of, the Insured.”
This clause has three requirements:
- The claim must have been firstmade against you or the loss incurred by you during the Policy Period.
- The claim or loss must relate to a civil liability, and
- The claim or loss must have arisen in connection with the “conduct and performance of Businesscarried on by, or on behalf of, you as the Insured.”
When all three requirements are present the policy will respond subject only to the other terms and conditions.
Insuring Clause – Example 2
Except as provided by the Fraud/Dishonesty Cover below, all cover under this policy is afforded solely with respect to Claims first made against an Insured durin the Policy Period and reported to the Insurer as required by this policy.
Professional Liability
The Insurer will pay on behalf of any Insuredall Damagesresulting from any Claim for any act, error or omission which gives rise to a civil liability of the Insured
The important difference in this clause is that the the claim / loss must not only be made / incurred during the policy period but aslo reported to insurer during the policy period. With this type of Insuring Clause if a Claim is made in one policy period but reported in another then there is no cover.
The clause goes on to specify…. Damages arising out of any act error or omission which gives rise to a civil liability. This implies that if there was no act error or omission then there is no cover whereas example 1 only requires there to be any civil liability.
This is a good example of how different phrasing, apparently saying the same thing, can imply a different meaning. The argument must be,logically, that the words “act error or omission”, qualifying the term civil liability, are intended to convey some restriction.
Insuring Clause – Example 3
The Underwriters agree, subject to the terms, conditions, limitations and exclusions contained herein
1. CIVIL LIABILITY
to indemnify the Assured against all sums which the Assured shall become legally liable to pay as damages (including claimants’ costs and expenses) as a result of any claim or claims first made against the Assured and notified to the Underwriters during the policy period by reason of any civil liability incurred by the Assured in the performance of the Business.
This clause is different again. There is a requirement in this clause to notify the claim in the same policy period. It indemnifies the Assured for legal liability to pay damages as a result of civil liability incurred in the performance of the Business (which will be defined in the Definitions and will probably relate back to the description provided in the proposal form).
POINTS to CONSIDER
Several important points emerge from the three example clauses above:
- Be sure that you understand the scope of the cover as expressed in the Insuring Clause.
- Remember that the Burden of Proof is on you to show that the claim comes within an Insuring Clause. This extends to provisions elsewhere in the policy where they must be complied with in order to satisfy the Clause. This applies, for example to the reporting and notification provisions in Examples 2 and 3, above.
- Check that you can accept and comply with any obligations or restrictions that the clause imposes.
“Top Tip”
The breadth of cover may vary considerably by use of different expressions such as
“Civil liability” or “Acts, Errors or Omissions giving rise to a civil liability” or “Negligent Acts Errors or Omissions”, more restricted still, be sure to understand any other terms incorporated in the Insuring the clause. If in doubt seek advice from your Broker or a specialist lawyer.
The maxim that provides for ambiguities to be construed against the person responsible for draftng them.
Exclusion
Whilst the Insuring Clause gives the cover, the exclusions clauses take some of it away.
A typical list of exclusions would include:
Existing Claims
Fraud/Dishonesty
Assumed Duty or Obligation
Contractual Liability
Trading Debts
Associated Company
Bodily Injury/Property Damage
Property/Occupier’s Liability
Insolvency
Financial Services work Investment Advice
Underwriting Losses
Insurance Management
Insurer’s Claims
Fines & Penalties
Pollution
Other Insurance
USA/Canada
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 prove that 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 conection 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
(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
For example:
- 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 posible 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.
“Top Tip”
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 the 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.
General Conditions
“There is no requirement that an insurance policy is reasonably intelligible in terms of content and there is no requirement that it be especially legible.” “ Birds’ Modern Insurance Law ” 6 th Edition 2004
This quotation, from Bird’s Modern Insurance Law, sets out, very well, one of the difficulties that face an Insured when buying insurance. The law has attached meanings to terms and phrases that the courts will use in interpreting the application of any contract of insurance.
The quotation states the legal position before the introduction of FSA regulations and so it remains to be seen how the impact of the regulations, which now require contract certainty and treating your customer fairly will influence the drafting of future wordings. However, this is outside the scope of this guide.
It is necessary first to consider the different types of Conditions and then relate these to the needs of the buyer to have in mind when negotiating a policy.
The policy’s Conditions regulate the manner in which the policy operates. There are several types of condition each having specific powers that give the underwriter the opportunity to limit their liability to pay a claim. The following Conditions are typically found in a modern PI policy.
The policy will usually contain a section entitled “Conditions” or “General Conditions”.
Conditions
Parts of a policy that must be complied with by one party or the other. Conditions may be implied by law or expressed, i.e. set out in the policy. The effect of a breach by the insured depends upon whether it relates to a condition precedent (things to be done before the contract is concluded, e.g. utmost good faith); a condition subsequent (things to be done during the policy term, e.g. maintaining certain standards); a condition precedent to liability (things to be done before the insurer is liable for a particular loss, e.g. proper notification).
Reproduced Courtesy of Chartered Insurance Institute
These may include clauses that are more properly described as:-
- Simple Conditions
- Warranties,
- Conditions Precedent to Liability,
- Conditions Precedent to the bringing of a Claim,
- Clauses descriptive of risk.
Each type of Condition has particular features that determine the insurer’s abilityto reject a claim or avoid a policy.
As a general rule the Burden of Proof is upon the Insurer to prove a breach of a Condition. There are exceptions, for example: if the clause states that compliance must be proved to the Insurers’ satisfaction. Typically this appears in the Innocent Non-Disclosure clauses.
Example:
Innocent Non-Disclosure Clause
The Insurer will not exercise its right to avoid this policy on the grounds of any alleged non-disclosure or misrepresentation of facts or alleged untrue statements in any information supplied to it, provided that the Insured shall establish to the Insurer’s satisfaction that such alleged non-disclosure, misrepresentation or untrue statement was free of any fraudulent conduct or intent to deceive.
Simple Conditions
There are several types of Conditions that are typically included in a PI Policy but two broad categories exist.
- Conditions that impose an obligation or procedure upon you; for example Claims Notification Conditions, and
- Conditions setting out the rights of the Insurer; often these simply restate the existing legal position.
Retroactive Clauses and Retroactive Cover Limitation clauses.
These clauses are important and need to be understood.
Retroactive Cover limitation Clause.
This clause states that the insurer will not be liable for any claims you knew about or ought to have known about before a specified date, usually the inception of the policy.
Retroactive clause
This clause states that there will be no cover for any claim that relates to an occurrence prior to that Retroactive date.
For example;
If the “negligent” act took place prior to the Retro Active Date then there is no cover even if the claim is only made during a current period of insurance. As it usually takes between 6 and 18 months for a claim to emerge this can be a very significant limitation.
A Clause that is “Retroactive Date Inception” provides almost no cover for the first six months of the policy. The Retroactive Date should be not less than six years or the date at which Insured firm started trading if that is less than six years.
Warranties
Warranty
A condition that must be complied with literally. A breach precludes the Insured from recovering under his policy, although the loss may not have been affected by the warranty. Insurance warranties may consist of undertakings that certain things shall be done (waste removed from premises daily) or things shall not be done (certain changes in risk factors) or a declaration whereby the Insured affirms or negatives a certain state of affairs, e.g. representations in a proposal form.
Implied warranty
A warranty which by law is tacitly understood to be binding and does not have to appear in the policy.
Continuing Warranty
A warranty whereby the Insured promises that a state of afairs will exist for the duration of the policy.
Courtesy of Chartered Insurance Institute
There are two main types of Warranty:
- Warranties of past or present fact,
- Continuing Warranties
One legal text book on this subject states that “warranties tend to be promises on your part that the insurers will rely upon”.
Warranties of past or present fact
These Warranties are usually found at the foot of the Proposal Form for example
I declare that the statements and particulars made in this Proposal Form are true and that I have not misstated or suppressed any material facts.
This clause is self explanatory, but it is important to understand that the proposer is promising that the facts are true. This is not the same as “True to the best of my knowledge and belief.” Any inaccuracy in the proposal form will be a breach of Warranty and discharge the Insurer from his obligations under the policy.
Nearly all Professional Indemnity Policies have a clause that incorporates the proposal form into the policy and by doing so this declaration becomes a Warranty.
Continuing Warranties
Continuing Warranties are promises made by you that a certain fact will or will not prevail in the future. Examples of these include:
- warranties that certain personnel will not be allowed to undertake work without supervision of a qualified person.
- all Cover Notes to be signed by a Director.
Conditions Precedent
Conditions Precedent can appear either:-
- as a result of a specific statement in a clause such as “It is a Condition precedent to Underwriters’ liability that…” or,
- as a result of a blanket statement, for example, “All conditions are conditions precedent to Underwriters’ liability”.
Conditions Precedent can come in two forms:
- “Conditions Precedent to Liability” and
- “Conditions Precedent to the Bringing of a Claim.
Conditions Precedent to Liability have to be satisfied before any liability can attach to the Insurer.
Conditions Precedent to the Bringing of a Claim In this case failure to satisfy the condition will only allow the insurer to reject the claim after liability has attached; as such they are procedural in nature and the Insurers’ remedy could be damages rather than rejection.
Some conditions cannot be Conditions Precedent to Liability as they can only be applicable once liability has attached. An example of such a condition is the requirement to provide all assistance to Insurers in pursuing subrogation rights.
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