16th August 2010
In a Professional Indemnity Policy the term “reinstatement” refers to the reinstatement of an aggregate Limit of Indemnity following a loss or claim.
There are two main types of Reinstatement, “Direct” and “Round the Clock”.
A Direct Reinstatement
This reinstates each layer of insurance as it is exhausted. This means that the Primary layer of insurance will pay up to its limit and then Reinstate the full limit of indemnity, perhaps once or twice, according to what is negotiated. The excess layers may not reinstate at all and only pay when a particular claim exceeds the Primary policy limit of indemnity. However it is possible to agree an excess layer Reinstatement as well following the underlying policy.
This is a matter for careful negotiation because the trigger points for reinstatement are notoriously difficult to define.
A “Round the Clock” reinstatement
This type of Reinstatement requires each layer of insurance to step down as its underlying policy is exhausted. If there are four layers this could mean that the fourth layer becomes a Primary insurer. When that layer has been exhausted the cycle can start again if a reinstatement has been negotiated.
The practical disadvantage of “Round the Clock” reinstatements can be that excess layer insurers, if they become primary insurers will handle claims in their own way. If they are not also regular Primary insurers (some are and some are not) this can differ substantially from what the client might have expected and agree with the original Primary insurer.
Reinstatements v Each and Every Claim
Reinstatements of an “Aggregate” limit are often offered instead of an “each and every claim” limit of indemnity. Some insurers prefer not to offer “each and every claim” but will offer unlimited reinstatements. What is the difference? It is a moot point. The devil is in the detail of what kind of reinstatement is being offered. It is market convention to regard “unlimited reinstatements” of an aggregate limit as being the same as “each and every claim” but strictly speaking they are not the same. The difference depends upon the precise terms of the policy. Each and every claim provides indisputable full cover for each and every claim (Claim as defined). Reinstatement policies offering unlimited reinstatements may exclude reinstatements for the purpose of paying more than one claim arising from the same original source or cause. It is important to look closely at how multiple claims would be dealt with both with regard to the Limit of indemnity and the excess.
Deciding the pros and cons of this issue requires particular, specific attention from an expert in the PI field.
Reinstatements and Premium
Reinstatements can be offered in a number of ways but the two most common are:
- One or more reinstatements are negotiated at inception and the premium is paid at that time in anticipation of them being used.
- The insurer agrees to offer one or more reinstatements but only on the condition that the additional premium is calculated at the time it is triggered. The difficulty arises if the premium is punitive at a time that the firm is already distressed because of an earlier claim.
It is important to understand when and how a Reinstatement would be triggered. It is worth discussing this with an experienced PI insurance claims practitioner who will have experience of how they operate in practice and explain the inherent elephant traps.
Particular care is required when claims are outstanding but not fully paid thereby creating an incurred loss position. Disputes have arisen on this topic on many occasions resulting in you being de facto uninsured (i.e. required to act as a prudent uninsured) for the period of time until the dispute is resolved.
Excess layer insurers will often take their own view, separately from the Primary insurers, as to the manner in which claims on their layers of insurance shall be dealt with. They will have their own view of the trigger points of reinstatement clauses. It is important to establish that there is clear understanding from the each of the excess layer insurers as how they intend the Reinstatements will be triggered.
Points to Consider
Do you understand how the reinstatement works?
Do you have the necessary monitoring in place to keep track of when the reinstatements may trigger?
Are you confident that the Insurers understand how each layer will be reinstated?
Do you know how outstanding claims that ar likely to exceed the underlying limit of indemnity will affect the trigger of the next layer up on the notification of a new claim?
Do you know how the reinstatement premium will be calculated and charged?
Is there a possibility that insurer could refuse to give the reinstatement or impose punitive terms after a serious claim?
Do not assume a Reinstatement policy is the same as an “each and every claim” policy. Seek clear guidance as to how the reinstatement will be applied, under what terms and whether it is automatic or at the insurer’s discretion.
Do not assume that each excess layer follows the terms conditions and settlements of the Primary policy. They often don’t unless it has been specifically agreed in writing.