Reports of customer dissatisfaction with the services of their professional advisers appear in television consumer programmes and our national papers on a regular basis. All professionals - accountants, solicitors, insurance brokers, surveyors or financial advisers among others - are prone to be sued for negligence, should the advice given not meet the expectations of their clients.
Professional Indemnity Insurance (PII) covers damages, which may be awarded against the insured firm and also the legal expenses incurred in the defence and/or settlement of a claim.
No firm will ever be able to completely mitigate negligent acts or breaches of duty. In the more serious cases, without insurance being in place, this could result in claims to a level that might require the liquidation of both personal and business assets.
How does pii work?
PII policies are invoked on a ‘claims made’ basis. That is to say cover only comes into operation if an active policy is in force at the point when either the claim is first made, or when the circumstance which may give rise to a claim becomes known. Only the policy active at the time of the claim will determine the basis upon which it is settled.
Take, for example, a policy effective from 1 January to 31 December 2011 and assume that an allegation, or a circumstance which may give rise to a claim, is notified on 1st February 2011. The allegation arises from work carried out in 2007. Through complications, the claim takes some time to settle. When on 4th June 2015 the matter is settled, the claim is paid in accordance with the terms of the policy taken out in 2011.
The lessons to be learnt from this illustration are:
• The date of the allegation of the breach of (when the claim is made) is critical.
• The date the breach of professional duty occurred does not determine cover.
What is covered in a pii policy?
A PII policy principally provides cover if a consultant is legally liable to pay damages for breach of professional duty arising from his work.
’Professional duty’ is generally defined as those duties advertised as a firm’s usual business and any duties reasonably related to them for which the firm and its practitioners are qualified by relevant examination or experience and which are stated in the proposal form.
To obtain PII cover a practitioner will need to disclose, by the completion of a proposal form, all the business activities which the firm intends to undertake. If the practice diverges from the types of work declared in the proposal form, there may be no cover in the event of a claim occurring. For example if a financial adviser has failed to declare to insurers investments in offshore trusts, any claims emanating from such work may not be covered by the PI policy.
The policy does not cover trading losses, ie: those risks associated specifically with the business of the firm. For example if a financial adviser has losses attributable to normal fluctuations in the money market, they would generally be considered trading losses.
Self-insured excess and limit of indemnity
The ‘excess’ is the amount an insured person or practice must contribute towards costs before insurers make a payment. (The same principle as applies to domestic policies.)
‘Limit of indemnity’ is the maximum amount insurers will contribute in the event of a claim. A claim is the total amount a practice is legally liable to pay which would include damages plus the claimant’s legal costs. Cover is placed on the basis of either ‘each and every claim” or ‘in the aggregate’.
• Each and every claim – the total insured sum available from insurers in respect
of each claim made against a practice during a policy year. Legal costs incurred by insurers in the defence of a claim are generally covered in addition to the limit of indemnity where cover is placed on an each and every claim basis.
• In the aggregate – the total payments made in a year added together. Once insurers have contributed up to the limit of indemnity, any further additions to the total will not be covered. Underwriter’s legal costs are generally included in the policy indemnity limit when cover is placed on an aggregate basis.
Firms should seek guidance from their insurance broker on the necessary level of indemnity and ask for advice regarding levels of cover taken out by organisations carrying out similar work.
In assessing their appropriate level of protection, a practice should carefully consider what could realistically be the maximum potential claim that could occur if sued for breach of professional duty on any contracts undertaken or proposed.
On occasions a firm’s client might stipulate as part of the contract that their consultants insure at a specified level to be awarded a contract. Public bodies appointing a consultant will often require a minimum limit of £5m particularly for construction type projects.
Many professional bodies and regulators now require their members to carry professional indemnity cover to specified minimum levels. This would include bodies representing, among others, solicitors, surveyors, accountants and the Financial Services Authority, which regulates financial advisers.
The cost of cover
To obtain the correct cover at the right cost you must explain clearly and fully the work you undertake. The Insurance Underwriter’s principal philosophy is to build up a sufficient level of premium to cover the cost of claims, which might arise from a particular profession. They will consider general features and risks that apply to a specific professional sector and review statistical information on the types and amounts of their claims, usually over the last 10 years. Each firm applying for cover will be individually assessed against fee income, staffing levels, claims record and type of work undertaken.
In proposing for insurance a firm must clearly explain to their insurers the exact nature of the work to be carried out, their experience in this sector and any risk management procedures put in place to protect the firm from claims. An increasing number of claims reported have their roots in a lack of communication and inadequate contract documentation among the various parties involved in a contract. Insurers will often ask to review the firm’s terms of engagement in assessing the defences a firm might have to prevent potential claims.
PI cover for the self-employed
It is important all self-employed practitioners seek professional advice before committing themselves to contracts, which require professional indemnity cover. If you practise as a professional consultant, clearly identified as independent, and you are offering advice, you should consider taking out PII cover.
If, on the other hand, a person is contracted to work for a firm on a self-employed basis, it is often not necessary. Indeed, PI insurers are highly unlikely to grant him/her cover as they would not consider him to be independent but an employee.
Increasingly, larger firms are taking on staff on a self-employed basis. But, whether on a short or long term contract, the independent consultant is acting as part of a team of staff for that company and would be urged to resist calls for personal PII. He/she should is free to negotiate and discuss the professional indemnity clauses within the terms of their engagement with their client before entering into a binding contract, and to ensure that the firm has PII to cover for his work on a self-employed basis.
Self-employed consultants, nevertheless, should carefully manage their risks. It is good risk management to ensure that, so far as is authorised, all work is carried out on the letterhead of the principal. They might consider signing documents and survey reports, done on behalf of the firm, in the name of the firm itself rather than disclosing personal identity.
Directors & Officers and trustee liability cover
Additional insurance cover family offices should consider are directors and officers and, where appropriate, trustee liability. A directors and officers (D&O) policy will indemnify a director for his personal liability as director of a company and also, where legally permitted, actions against the company itself arising from breach of its legal and statutory duties. As an extension, many D&O policies also cover employment practices indemnity, which will provide cover for the costs and expenses involved in employment disputes.
Non-executive directors will generally insist that a D&O policy is in force before joining the board of any company.
Similarly those acting as trustee of, for example, a charitable organisation or perhaps a pension fund, should first ensure that trustee liability cover is in force before they accept the role of trustee.
