SMART Professional Indemnity answers common pi questions.
What is automatic reinstatement?
According to the Lloyds – Glossary of Insurance Terms Reinstatement of cover means "The restoration of cover following its exhaustion as a result of a loss by payment of an additional (reinstatement) premium. Many insurances provide for one or more automatic reinstatement of covers."
Hence a Professional Indemnity policy is better cover if it includes one or more Automatic Reinstatements.
Automatic Reinstatement Clause
Is a provision in a policy stating that after a loss has been paid, the total original limits of the policy are once again in effect. For example, assume a loss of $40,000 has been paid under a $100,000 liability coverage.
After payment of the loss, the original $100,000 is reinstated, either automatically (if the policy provides Automatic Reinstatement) or by the payment of an additional premium. Automatic reinstatements are granted in the policy, which means that there is no extra premium payable for the reinstatement. The business (or its Broker) must check your PI policy carefully to see:
- If the policy includes Automatic Reinstatements.
- If so, how many?
- If not, you must be aware that an extra premium will become payable to reinstate the Limit if a claim payment exhausts all or part of the limit.
Automatic reinstatement can offer you a second layer protection - or more when negotiated on larger policies.
If your initial cover limit is exhausted the automatic reinstatement allows the aggregate limit to be reinstated. The limit for any one item remains the same. Automatic reinstatement is particularly useful for professionals who use the same methodology across many clients. For example, with financial planners professional indemnity insurance policies.
What is Professional Indemnity Run-Off Cover?
Run-Off cover provides protection for outgoing business owners when they have sold the business or ceased practicing. Just because a professional business is no longer providing their professional service they are still subject to claims for their activities while they were in the business.
Run-Off cover provides protection against any insurance claims which would have been covered by the original policy. Cover can be purchased for upto 84 months.
What is a Retroactive Date?
The "Retroactive Date" is the earliest date from which events and circumstances which occur in the past can be covered under your current policy.
If you have been practising your profession for a while a retroactive start date can provide Professional Indemnity cover for you from the retroactive date. The retroactive date has to be negotiated – and might go back to the day you started your business in certain circumstances.
What is Negligence?
Generally, negligence is a failure to take reasonable care to avoid causing injury or loss to another person or business. In terms of professionals and professional businesses, there are four steps in proving negligence. The claiming party must firstly prove, that there is a duty in the circumstances to take care (Duty of Care). Secondly, that the behaviour or inaction of the professional or professional firm in the circumstances did not meet the standard of care which a reasonable professional would meet in the circumstances (breach of duty). Thirdly, that the claiming party has suffered injury or loss which a reasonable professional in the circumstances could have been expected to foresee (damage). Lastly, that the damage was caused by the breach of duty (causation).
What are Claims Made Policies?
There are a few important considerations which the Insured's need to keep in mind when considering moving to a new insurer. For this reason, we will draw your attention to the claims-made nature of these policies, continuity of coverage, prior knowledge/prior known facts exclusions, claims/loss conditions and complying with your duties under the policy in the defence and settlement of a claim.
Claims Made and Notified
Professional Lines policies (professional indemnity, directors & officers etc.) is based on a claims-made and notified basis. This essentially means that a policy must be in force at the time that a claim or circumstance is made. It is therefore important that any known claims or circumstances, or any facts you may or ought to be aware of which could potentially lead to a claim under the policy (even if you believe it's frivolous), is notified prior to the expiry date of your existing policy.
Continuity of Cover – Continuity Date or Retroactive Date Continuous cover
Claims Made policies generally exclude Claims arising from facts and circumstances known to the insured before the start of the policy period. An inadvertent and innocent failure to disclose a known fact or circumstance that gives rise to a Claim could result in an uninsured loss.
Continuous Cover clauses address this situation by extending cover under the policy to a Claim arising out of a fact or circumstance which could have been notified under a previous professional indemnity insurance policy but the insured failed to do so.
For a Continuous Cover clause to apply, usually the insured must have been insured under a professional indemnity insurance policy issued by this or another insurer at the time they first became aware of the fact or circumstance that gives rise to the Claim.
The Claim must have been able to have been covered under the previous policy and the insured must have been continuously covered, without interruption, by a professional indemnity insurance policy with this or another insurer until the time when they notify the Claim to the insurer.
This simply means that:
- All PI policies should have a "Continuity Date" or "Retroactive Date" shown in the Schedule.
- There should be a "Continuity" or "Continuous Cover" clause in the policy.
- The first Continuity/Retroactive date is set when you first take out a PI policy. It should either be the date the business commenced, or the inception date of the first PI policy. The first insurer will set or agree that date on the first policy and then that date should be carried forward in every subsequent PI renewal.
- If you change insurers then the business (or its broker) must ensure that the new insurer accepts the carried forward Continuity/Retroactive date AND they allow the continuous cover under their policy, even though the previous cover(s) were with other insurer(s).
Prior Knowledge/Prior Known Facts Exclusions
When changing insurers, the new policy will have a prior knowledge (or prior known facts exclusion) built into the policy. This means that the new policy will not cover any facts or circumstances that you knew, or should reasonably be expected to foresee, giving rise to a future claim against you.
In summary, if you haven't notified your existing insurer before the expiry date (as required under a claims made policy) and you enter into a new insurance contract (which contains the prior knowledge/prior known facts exclusion), you may find yourself uninsured, for that prior known fact only.
Generally speaking, you must notify the insurer of anything that triggers/potentially triggers a "Claim" (as defined) under the policy. Policies may differ in what they define to be a "Claim" so it is important that you familiarize yourself with this definition in your policy. However, commonly, the definition is broad and may even include a verbal notice or an investigation where there is yet to be an allegation of a wrongdoing.
So when a claim should be notified? You should notify a claim as soon as you become aware of a situation, claim or circumstance which may lead to a claim being made against you, or is reasonably foreseeable to give rise to a future claim. If you receive a letter or phone call which threatens legal action, or demands compensation for an alleged loss, you should notify your insurer immediately.
Notification must be made irrespective of:
- The amount which may be involved;
- Your views or opinions on liability;
- Whether you consider the claim or circumstance to be spurious or without merit Your duties with respect to defence and settlement:
- Do not admit or assume liability
- Do not appoint legal counsel/conduct proceedings unless duty to defend lies with you
- Do not settle or enter into any settlement agreement, stipulate to any judgment or incur any defence costs, without first obtaining written consent of your insurer(s) to do so;
- Keep your insurer(s) via your broker fully-appraised of all material developments to allow them to associate themselves with the defence, if they so wish
- If you do not comply with the above, you may be in breach of the policy conditions and may entitle the insurer to deny your claim
To discuss your specific Professional Indemnity questions and to get a competitive quote on a suitable Professional Indemnity policy call a SMART Business Insurance broker on 1300 542 573 or email email@example.com.