Professional Indemnity Insurance and Multiple Claims - Check the small print


Professional Indemnity and Multiple Claims - Check the small print

Is your professional indemnity insurance structured so that you have a given amount of cover that is subject to automatic reinstatement? Are you aware what this means?

Most professionals purchase professional indemnity insurance cover on an 'each and every claim' basis. This means that if a firm has a £10 Million policy they will have £10 Million worth of cover against each claim intimated in the period of insurance.

Some firms have difficulty in obtaining cover, perhaps because of a poor claims record, so instead purchase cover on an aggregate basis. On a £10 Million aggregate policy there is only £10 Million worth of cover available regardless of the number or value of claims in the period of insurance. There is therefore a risk that the 'pot' will be depleted at some point during the period of insurance. Some aggregate policies provide for one automatic reinstatement. This is a second layer of insurance which acts as a 'top up' once the primary layer has been depleted. The second layer is normally in the same amount as the primary layer. However it is the trigger for the activation of the second layer in the wording of some policies that can be problematic and some insured could be left at least part uninsured. This is best explained by an example.

Suppose that the partnership of Brodies Engineers have cover of £10 Million in the aggregate subject to one automatic reinstatement in the period of cover from June 2007/2008. They receive a claim from Company A valued at £5 Million in June 2007 (Claim A) and settle it in that amount. This leaves £5 Million in the primary layer for future claims in that period of insurance. In July 2007 they receive a claim from Company B in the sum of £6 Million (Claim B). The key issue for Brodies Engineers will be whether this claim will activate the automatic reinstatement so that £5 Million of the claim will be met by the primary layer and £1 Million from the secondary layer.

In some policies the automatic reinstatement would not be activated by Claim B as the secondary layer does not come into play until the primary layer has been depleted to zero. This leaves a 'black hole' in the insurance cover, with the automatic reinstatement only being activated by any third claim. For Brodies Engineering it would mean a potential £1 Million to meet from the assets of the partnership - including the personal assets of each partner!

How can you protect against this? The best solution is to employ a broker who specialises in the procurement of professional indemnity insurance. A good broker with clout will be able to negotiate far better terms for aggregate policies than a small, inexperienced broker. Thankfully this is not a common problem as most insurance is still written on an 'each and every claim' basis. However it is a critical issue if your firm is considering buying, or indeed has, aggregate cover subject to automatic reinstatement.