When you receive THAT phone call, email or letter, your heart sinks. As a professional, there is nothing worse than the reality or perceived reality that you’ve made a mistake. What happens next for a Professional Indemnity claim?
Do you jump on a device and write a letter responding to the issue?
Do you give your client a call and discuss it further?
Do you just accept it and pay up?
Whilst these may be your natural instincts….
Professional negligence claims are traditionally complex. It is rare that a matter is simple enough that it can be resolved between a designer and their client. Even if it is straight forward, have both parties considered a release? How do you ensure no further action is taken?
Imagine settling a payout with your client only to receive another statement of claim the next day….and the next….
Professional Indemnity policies are designed to protect a business for errors made when providing advice and services to their clients. They are often referred to as Civil Liability policies. Not only will the policy cover the costs of the damages, but it will also cover the legal defence costs associated with investigating and defending a claim.
What does ‘Claims Made’ mean?
Most Professional Indemnity policies are offered on a ‘claims made and notified’ basis. This means that the claim will go against the policy in place when it is first notified. This is why it’s important to notify claims as soon as you FIRST BECOME AWARE.
If the policy is not active, you cannot lodge a claim. This is different to a ‘claims occurring’ policy whereby the Professional Indemnity claim goes against the policy that was in place at the date of the incident.
As an example:
A three year sample Professional Indemnity policy as follows:
- Policy period 1 – 1 April 2014 to 1 April 2015
- Policy period 2 – 1 April 2015 to 1 April 2016
- Policy period 3 – 1 April 2016 to 1 April 2017
Faulty design work occurred in October 2014 (Policy period 1) and the client complained in November 2015 (Policy period 2). Under a ‘claims made’ policy, the notification to the insurer would need to happen in Policy period 2.
If you fail to lodge this incident to the insurer until Policy period 3, the insurer is within their rights to decline the claim.
It is imperative that a Professional Indemnity claim or incident be notified to the insurer as soon as possible and within the policy period you are notified.
What is a circumstance?
A circumstance is a set of facts that an ordinary business would recognise and deem it reasonable that a claim could arise.
Circumstances can be, but are not limited to:
- Knowing incorrect advice has been given, including where a client does not know yet
- A client believing incorrect advice has been given, even if the designer disagrees with them
- Other allegations made against you such as copyright infringement
It is important to note that it is still considered a ‘circumstance’ even if the designer believes they have given the correct advice.
There are still costs associated with defending and ‘clearing your name’. The designer will have input with their legal representation appointed by the insurer and can put forward their opinions.
What happens when a circumstance is notified?
It is important to notify your broker as soon as any circumstance arises. Your broker can then guide you through your options and work as your advocate with the insurer.
It is important to note that your broker works for YOU and not the insurance company.
The first step is to complete a notification form which is sent to the insurer. The claims officer from the insurance company may take any of the following actions:
- Request further documentation or information
- Appoint an external solicitor
- Draft a response
- Provide feedback as to how to respond to the circumstance
- If it is a circumstance where no action is required, i.e. no formal allegations have been made, this will be recorded as a notification only
Importantly, the claims officer will also advise that there is to be no further correspondence with the claimant without their approval.
This will ensure that the designer does not prejudice the insurer’s position in relation to the defense of the claim.
Why is it important to notify a circumstance?
There are several reasons why all circumstances should be notified to the insurer promptly:
Insurers can assist
You pay for your Professional Indemnity policy to have a team of experts on your side. Insurers and solicitors are experts in the mitigation and handling of Professional Indemnity claims.
It is in the best interest of the insurer to have all matters handled swiftly and achieve the best possible result.
Avoid policy coverage issues
An unreasonable delay can result in an insurer suffering prejudice.
Where a professional fails to take the opportunity to resolve a matter without good reason, the insurer may reduce a payment or reject a claim.
Having the insurer across the matter early allows them to control the issue and resolve it where possible.
Other parties can be involved
In most cases you are not the only party involved in an incident. Other professionals and businesses can all be brought into an action together.
It is important to notify an incident to the insurer immediately so that your insurer can work with any other party that may be involved. As each party has the same requirement to notify their insurer, you don’t want to find yourself in a position of being brought in at the very end.
Once again, this has the potential to prejudice your insurer and their position.
Liability can be apportioned to each party in the amount they have contributed to the loss.
Common Misconceptions in a Professional Indemnity Claim
It is better to subscribe to the thought process of being safe rather than sorry. Some of the common misconceptions that we hear include:
I thought it would go away
It is easy to make a notification to the insurer. If no claim ever arises then the insurers will close their file. However, if a Professional Indemnity claim evolves and a notification has not been made, you may be left without coverage under your policy – See What does ‘Claims Made’ mean?
I thought it was under the excess
A Professional Indemnity claim or circumstance may start out as being under the excess, however, costs can quickly escalate. A claim can be defended by an insurer without an excess having to be paid when there is a ‘cost exclusive excess’.
A cost exclusive excess means that the excess is only payable on a claim settlement. There is no excess if the matter is legal defence costs only.
Further to this, the insurer can also assist with the drafting of a claim settlement release for matters under the excess.
This ensures that you will not incur further costs relating to the claim after an initial payment is made. Remember that a release will need to be signed.
I didn’t do anything wrong or the claim was frivolous
Unfortunately, there will be times in business where you do nothing wrong but are still questioned about it. The insurer’s role is to provide you support via legal expenses to fight the Professional Indemnity claim or circumstance.
Further to this, sometimes these claims end up being settled so it is important to notify your insurer so that you don’t end up out of pocket yourself.
The harsh reality is that the insurers are running a business to be profitable as well. If they have the option of a $5,000 settlement or $100,000 legal costs, they will take the settlement.
I didn’t want it to increase my premium at renewal
Notifying an insurer of a professional indemnity claim or circumstance does not automatically mean that you will be receiving a higher premium at renewal. The insurers take each matter on its merits and will only increase a premium where they deem it necessary. If there is an increase in premium, this is usually far less than the cost of a potential uninsured claim.
It is important to communicate with your broker as soon as any potential situation occurs. More often than not, your broker will advise you to make a notification as soon as possible to protect your position.
We have worked with many clients to assist them with their notification requirements. The notification process for clients is straight forward and a lot less stressful than worrying about it yourself.
Most importantly, we’re here to help!