BIBA – Leading the way in UK insurance

Professional Indemnity InitiativeAn introductory guide to professional indemnity policy wordings 2007

British Insurance Brokers’ Association

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03 Foreword

04 Introduction

05 Why use the BIBA PI facility?

06 The principal issues

09 Assessing the risk

10 Claims

13 Checklist summary

14 Professional indemnity buyer’s checklist

CONTENTS

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This statement may appear at first sightto contradict the FSA regulatoryposition but was, of course, writtenbefore the introduction of FSAregulations, and contract certainty.

Nevertheless, I believe there remainsan element of truth in the warning.Insurance companies are competing forbusiness and they are free to choose theirown style of policy and the words,phrases, and expressions they use todefine their offering. These can differimmeasurably and I believe insuranceintermediaries should be aware of thedifferences and how they could impactthe very important protection theyexpect from a professional indemnity(PI) policy.

This is the second phase of our PIinitiative, which attempts to move theindustry to clearer definitions/understanding of the wordings andconsider the advantages anddisadvantages of a minimum standard.

We are also publishing a morecomprehensive guide to members’ PI onour website. This is an extensive guide tothe interpretation of policy wordings andI hope you find both this introductoryguide and the website guide useful.

The next phase of the PI initiative willlook at a minimum wording, claimshandling and risk management.

Eric GalbraithBIBA Chief Executive

‘‘‘‘’’’’There is no requirement that an insurance policy is reasonably intelligible in terms of content and there is no requirement that it be especially legible.Birds’ Modern Insurance Law, 6th edition, 2004

FOREWORD

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This guide is asummary point ofreference for BIBA memberswith responsibilityfor buying the firm’s PI insurance

THE INTRODUCTORY GUIDE

This introductory guide is designed tocreate awareness of:• the necessity to ensure the PI policy

meets the firm’s needs andexpectations

• contractual obligations of thepolicyholder

• acts or omissions that can cause thepolicy to fail.PI insurance is complex and contains

strict obligations on the policyholderwhich, if breached, can result in loss ofcover. In today’s heavily-regulated tradingenvironment that is a risk that no BIBAmember can afford to take.

Recommended readingThose responsible for buying their firm’sPI insurance or for the recognition andnotification of potential claims arerecommended to read the BIBA Guide toProfessional Indemnity Insurance wherematters described in this introductoryguide are dealt with in greater detail.

This is available exclusively tomembers on the BIBA website atwww.biba.org.uk and includes:• useful tips• examples of key policy clauses• explanation of claims obligations• common exclusions to cover• a buyer’s checklist.

A specialist skillPI insurance is a specialist class ofbusiness. It requires many years ofexperience to fully understand how itworks in practice.

Negotiating effective PI policies is askill which requires an understandingof how the policy will respond in theevent of a claim. Handling claims alsorequires specialist skills because bothmarket practice and the prevailing case law can influence how claims are best managed.

Only those who handle such mattersday in and day out know how best to dealwith them.

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The benefits ofchoosing a BIBA-accreditedbroker

‘‘‘‘’’’’BIBA-accredited brokershave a special knowledgeof PI insurance and the skills required to negotiatethe best available cover for BIBA members.

WHY USE THE BIBA PI FACILITY?

BIBA-accredited brokers have theseskills and BIBA strongly recommendsthat members take advantage of theirspecialist knowledge and experience.

Key points:• BIBA has reviewed the PI cover

available in the market in conjunctionwith the accredited brokers and hasraised the standard of cover available

• the BIBA PI initiative has alreadyincreased the competitiveness of PIcover for members

• the accredited brokers have a specialknowledge of PI insurance and theskills required to negotiate the bestavailable cover for BIBA members

• the relationship between theaccredited brokers and the selectedinsurers can avail you of the bestavailable resources and negotiatingskills in the event of a claim

• BIBA has identified a panel of expertsto handle disputes or conflicts for members.

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BIBA members are encouraged not tobuy their own PI insurance but to usethe services of one of the accreditedbrokers. The reason for this is that BIBA believes that brokers need the independent support andrepresentation of a specialist in the field of PI insurance.

Brokers are dependent upon their PI insurance in the event of a claim; it is a requirement of FSA regulation that PI isin force and maintained. However, thecost of PI insurance is a considerableannual overhead and so there is a naturaltendency to buy on price alone.

BIBA is concerned for members thatbuying on price alone can lead to afailure to obtain the most effective andsecure cover and this can lead to a disputewith insurers at the time of a claim.

Please be aware:• that no insurance intermediary is

immune from a complaint or claim• that a common pitfall is a gap in cover • of how insurers assess your risk and

your obligations for materiality and disclosure

• of claims notification obligations.These are often misunderstood andlead to disputes with insurers at atime when the firm can least afford it.These issues and many more described

in this summary, are dealt with in detail inthe full Guide to Professional IndemnityInsurance available exclusively to BIBAmembers on the BIBA website,www.biba.org.uk

This guide is designed to help the BIBAmember make informed choices whenpresented with the various optionsavailable in the market.

BIBA is intent upon helping itsmembers to identify the “elephanttraps” associated with PI insurancebecause it is essential for the protectionof the business and reputation ofmembers that the cover is effective andfair when called upon.

THE PRINCIPAL ISSUES

‘‘‘‘’’’’Top tip: Alwayscompare the coveroffered by two ormore policiescurrently availablefrom the market.

The key issuesassociated withpurchasing PI insurance

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The cost of the policyholder’s time incompiling records, attending meetingsand preparing statements, combined withthe resulting loss of business opportunity,is not covered by insurance. This is oftenoverlooked until cash flow difficultiescome to light.

Common policy pitfalls Unless care is taken to understand what iscovered, restrictions and exclusions willonly become apparent for the first timewhen underwriters repudiate a claim.

WWhhaatt iiss rreeqquuiirreedd ooff yyoouurr PPII ppoolliiccyy??The most important feature is thepractical defence it provides against theallegation or claim . If this fails it hasserious consequences for the eventualnegotiation and settlement of any claim.

The insurers should:• accept notification of a genuine

“circumstance” without demur• provide competent and timely advice

and support from their solicitors• wherever possible, use dispute

resolution/mediation to avoidlitigation

• keep you informed of progress at all times

• have due regard to your reputationwhen settling a claim.

DDooeess yyoouurr ppoolliiccyy mmeeeett yyoouurr nneeeeddss??The first and prime requirement of a PIpolicy is to provide the legal expertise ofinsurer’s solicitors and the insurer’sfinancial support in defending anallegation or claim.

In a recent case, insurance brokers hadmisunderstood their policy coverage.They had not reviewed their cover againsttheir activities and needs, and failed torecognise the obligations imposed uponthem by the policy wording. This exposedthe firm to several million pounds ofuninsured loss.

CCoovveerr –– wwoorrddss,, pphhrraasseess,, eexxpprreessssiioonnssaanndd ddeeffiinniittiioonnssThere are several PI policies available atany one time containing widely differingterms and conditions. At first glance onepolicy wording looks very similar to

No immunityNo insurance intermediary is immunefrom a complaint or claim.

In any business, however well run,things will go wrong. Insuranceintermediaries, however well run, willsometimes make mistakes andcommunications can break down bothbetween the insurer and the insuranceintermediary and the insuranceintermediary and their client. This canlead to a claim.

Consumers’ expectations of insuranceoften exceed what is reasonable and it is this that can lead to complaints and claims. They are facts of modernbusiness life.

Cost – without liabilityWhether or not the allegation or claim is justified is of no consequence.Once an allegation or claim has beenmade, there is no option for the insurance intermediary but to enter adefence. Defence costs, even formisconceived or unmeritorious claims,can be far beyond the financial reach ofmost small businesses.

It is a common misconception that all costs are covered by PI insurance.They are not.

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another, but in fact they can be verydifferent. Words, phrases, expressionsand definitions can have materiallydifferent meanings as between oneinsurer’s policy and another. The devil, asalways, is in the detail.

Policy wordings are regularly changedand updated. The changes are influencedby market practice and claims experience.It is important to appreciate what is asound PI policy for your purposes andwhat is not.

SSeelleeccttiioonn bbyy pprriicceeThere is a significant risk in selection ofcover by price alone. Deficient covercannot be rectified at the time of a claim.

DDaammaaggee ttoo rreeppuuttaattiioonnYour firm’s reputation can be easilydamaged if the claim is not handledsensitively. Insurers will take over theconduct of the claim and may want tosettle a claim for ‘commercial’ reasonswhich may not suit your commercialneeds. This possibility needs to beanticipated and taken into accountwhen deciding upon choice of insurer.

BIBA members experiencingdifficulties of this kind can nowobtain expert advice from BIBA’sspecial advisers. Full details areavailable from BIBA.

Value for money?The value of PI insurance is directlyproportional to the cover, assistanceand reassurance given by the insurerswhen you most need help. This definesits fitness for purpose.

Usually, value for money is onlycalculable when the policyholder needshelp, but with the assistance of the BIBAGuide to Professional Indemnity Insurance itis now possible to assess the true value ofthe policy at the time of purchase.

KKeeyy tteessttss ooff ffiittnneessss ffoorr ppuurrppoosseeiinncclluuddee::At time of purchase:• a policy that properly covers the

activities of the policyholder• clarity of the definitions, exclusions

and conditions• clear and practical claims

notification conditions.At the time of notification ofcircumstance or claim:• acceptance of, and a positive response

to, first notification • full support of the insurer and their

lawyers in defending the allegation or claim

• dealing with the claim sensitively,such as by using mediation or othersimilar forms of dispute resolution toavoid litigation, if possible.

‘‘‘‘’’’’Top tip: Make enquiries of the BIBAaccredited brokers about the insurer’sreputation in the market for fairness,support and paying claims.

THE PRINCIPAL ISSUES

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It is important to appreciate theinsurer’s considerations when assessingyour risk. It will assist you inunderstanding what is material toyour insurer and what needs to bedisclosed beyond the questions in theproposal form.

IInnssuurreerrss wwiillll ccoonnssiiddeerr tthhee pprrooppoosseerr’’ss::

• claims record• commission/fee income (turnover)• classes of insurance placed• territories and jurisdiction• size and nature of clients• limit of indemnity • excess• other special information.

PPrrooppoossaall ffoorrmmss –– tthhee bbaassiiss ooff tthheeccoonnttrraaccttProposal forms play a more importantpart in PI than in many other classes ofinsurance. They must be completed infull every year. They are relied uponabsolutely by insurers as a truerepresentation of the facts upon whichthey offer their terms.

The law relating to non-disclosure isharsh. Developed at a time when the lawplayed a less prominent part in thecommercial decisions of underwriters, ithas been relentlessly tightened to apitch that is now a significant peril forevery policyholder.

Whilst there have been calls from thejudiciary for this aspect of the law to bereformed, as things currently standexperience has shown that the courtswill assume that an insurer is entitled torely upon the information disclosed inproposing for insurance (in whateverform it is disclosed) as being accurate

and given in utmost good faith.Furthermore, it is generally acceptedpractice that a proposer knows moreabout his business than an insurer andthis creates a heavy burden upon theproposer to ensure that anything unusualabout the business is disclosed to theinsurer, even if no specific question isasked about it in the course ofnegotiations for insurance. This isespecially true for authorised insuranceintermediaries, because they couldreasonably be regarded by insurers asexperts in the subject and so should knowthe rules of disclosure. Failure to disclosematerial information can result in thepolicy being voided back to inception.

Beacuse the proposal form is the basisof the contract and insurers may referback to it at the time of a claim to establishif the representations made are in facttrue. It is easy to overlook a material fact.

Invariably, proposal forms will not askquestions that cover every aspect of theproposer’s business.

If there is any doubt that an aspect of your business is not covered by aquestion in the proposal form then youshould make reference to it in anaddendum to the form and giveunderwriters the opportunity to askfurther questions. Failure to do this can lead to cover being denied.

ASSESSING THE RISK

How risk isassessed by aPI insurer

CLAIMS

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‘‘‘‘’’’’Top tip: Brokers sometimes try to use their business relationshipwith an insurer to negotiate their way out of a potential claim. Thiscan be dangerous as it can invalidate the PI insurance. If you intendto do this, always obtain permission from your PI insurer, first.

The problemsassociated withmaking a PI claim

Frequently encountereddifficulties

The most frequently encountereddifficulties concern:• late notification or non-disclosure of

circumstances or claims• non-acceptance of a notification of

circumstances• reservation of rights and acting as

“prudent uninsured”• inadvertent breach of policy

conditions• non-disclosure of material information• the solicitor representing the best

interests of the insurer but not theinsured.

NNoottiiffiiccaattiioonn ooff cciirrccuummssttaanncceess aanndd ccllaaiimmss Every PI policy will require you to notify“circumstances” within a specified periodof time. The terms concerningnotification of circumstances can varyconsiderably and the expressions used can affect the insurer’s entitlement todeny liability.

Notification is a strict obligation andinsurers can immediately deny liability ifthe obligation is breached. This issue isdescribed in detail in The BIBA Guide to Professional Indemnity Insurance.

There may be a temptation to leavenotification to the last minute in the hopethat the “circumstance” will come tonothing. This often leads to a dispute withthe insurer. It is a grave mistake to fail tonotify insurers at the earliest moment.BIBA-accredited brokers can help toadvise what, when, and how to notify acircumstance or claim.

DDuuttyy ttoo uunnddeerrssttaannddUnsurprisingly, insurers expectinsurance intermediaries to betterunderstand risk and insurance than anyother insured and to:

• observe the duty of disclosure andthe nature of material information

• understand and comply with policyterms and conditions

• fulfil all regulatory and legalobligations.

Caution – There are strict notificationobligations in insuranceintermediaries’ PI policies.Experience has shown that manyinsurance intermediaries are unawareof just how strict these are. Inparticular, employees are oftenunaware of the obligation to notifycircumstances to their directors.Failure to adhere to these obligationscan result in loss of cover andincreased future premiums.

NNoonn--aacccceeppttaannccee ooff nnoottiiffiieeddcciirrccuummssttaanncceessInsurers should never reject anotification made properly and ingood faith.

This is a problem from time to time.Some insurers are reluctant to acceptnotified circumstances even whennotified in compliance with the policyterms and conditions, because they donot consider them to be sufficientlyspecific. They are persuaded that theyhave the right to make a judgementabout what constitutes a notifiablecircumstance. Whilst there are severalreasons why an insurer may do this, it iscontrary to good insurance practice andmembers finding difficulty in notifyinga circumstance should seek specialistadvice. This is now available tomembers through BIBA.

IInnaaddvveerrtteenntt bbrreeaacchh ooff ppoolliiccyyccoonnddiittiioonnss –– nnoo eexxccuusseeA typical PI policy contains severalconditions that have more impact thanmay at first be apparent. The conditions

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impose obligations upon thepolicyholder which, if not met, mayentitle insurers to rebut the claim.Often the extent of the obligationswere not appreciated by thepolicyholder until they were pointedout at the time of claim. Some ofthese concern the interpretation ofwords, phrases, expressions ordefinitions, but more often than notthere is evidence that thepolicyholder has simply not read thepolicy and not understood what isrequired of them.

WWhhoo iiss tthhee iinnssuurreerr’’ss ssoolliicciittoorrrreepprreesseennttiinngg??The policyholder is entitled to expectthat the solicitor appointed by theinsurers is representing the best

‘‘‘‘’’’’Insurers shouldnever reject a notification madeproperly and in good faith.

interests of the policyholder. Where thesolicitor is obliged to represent theinterests of the insurer before those ofthe policyholder there are wellestablished conventions for themanagement of the conflicting interests.

In brief, the solicitor is representingthe insurer when advising whether theclaim is covered by the policy andrepresenting the policyholder whennegotiating the defence of the allegationor claim.

Specialist legal skills are needed to:• know when to defend or negotiate• conduct a full investigation of the

facts and issues• gather and analyse relevant evidence• liaise between insurer and

policyholder.

CLAIMS

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CHECKLIST SUMMARY

Here’s a checklist of the key areas to consider in aprofessional indemnity insurance policy

A detailed checklist is available tomembers on the BIBA website.

The checklist includes:• the completion of the proposal form –

what is required of the proposer • understanding the insured’s

contractual obligations which, if notmet, may result in loss of cover

• comparing the cover available fromcurrent typical policy wordings with the firm’s demands and needs.

Proposal formThe proposal form is the basis of thecontract of insurance and may bescrutinised by insurers for accuracy anddisclosure of material facts at the time ofa claim. Omissions from or errors in theproposal form can result in policy coverdisputes and may result in loss of cover.

Insured’s contractualobligationsExperience shows that insureds rarelyread the policy document until they havea claim to defend. By this time, there mayhave been a breach of policy conditionswhich immediately puts the insured intoa dispute with insurers. The mostcommon breach is late notification ofcircumstances or non-disclosure of aprevious claim.

Conditions and definitionsThere are two particularly important partsof the policy that should be understoodfrom the moment the policy comes into effect: • the conditions imposing the

contractual obligations • the definitions by which the conditions

will be interpreted. The policy’s definitions qualify the

nature and scope of cover. They arefrequently overlooked but their impact can determine the cover available todefend the claim.

Demands, needs andcoverageThe broker’s demands and needs are knownonly to themselves and their broker. It isessential that these are compared with thecover available from the policy. The insuringclause is the cornerstone of the policy.Insuring clauses vary frompolicy to policy. Do notassume that they allprovideidenticalcover.

Exclusions and definitionsThe policy’s exclusions restrict the cover.They can be further influenced by thepolicy’s definitions and they too arefrequently overlooked when choosing theinsurance. Their impact may only bediscovered at the time of a claim.

Self-insured excessThe self-insured excess can operate in avariety of ways and it is important to beclear how it will be applied in practice.This is particularly important whenthere are a series of claims arising fromone event.

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Questions to ask whenbuying professionalindemnity insurance

The following questions are a selectiononly from the full checklist on the BIBAwebsite available to members.

IInnssuurriinngg ccllaauusseess

• does the insuring clause clearlydescribe what is insured?

• does the cover you understand youhave bought meet the cover you need?Set out your demands and needs andmake a careful comparison.

DDeeffiinniittiioonnss

• do any of the definitions change themeaning of words or expressions inthe insuring clause/s or exclusions?

• do any of the definitions relate to theclaims notification clause? If so dothey affect your understanding ofwhat you must do to comply with theclaims notification obligations?

CCoonnddiittiioonnss

• are there any procedures that you mustfollow?

• are there any extensions of theinsurers’ rights under the contract?

• are there any conditions that appear tochange the cover from yourexpectations and needs?

EExxcclluussiioonnss

• do any of the exclusions remove coverfor any activities necessary to conductyour core business?

• do any of the exclusions remove coverfor any activities necessary to conductyour non-core business?

• do any of the definitions change themeaning of words in the exclusions?

EExxcceessss aanndd rreellaatteedd ccllaauusseess

• do you understand how the excessoperates in practice?

• do insurers pay the costs and expenses incurred in defence of the claim (or do these fall within the excess)?

• if the excess is “in the aggregate” doyou have a means of monitoring theerosion of the excess to know when ithas been exhausted?

• do you understand theimplications of an excess whichincludes the phrase “each and every claimant”?

CCllaaiimmss ccoonnddiittiioonnss

• what are the time limits concerningnotification? Are they reasonable andpracticable?

• do you understand exactly whatobligations the claims conditionsimpose on you?

• does your office/business run in a waythat can accommodate the obligationsof prompt notification and therequirements of the policy to complywith the claims conditions?

SScchheedduulleeThe schedule to the policy contains thefeatures (monetary limits, names ofinsured, etc.) that are specific to yourinsurance. If something important isomitted from the schedule it may implythat this was not intended to be covered. Itis not uncommon for errors to be made inthe schedule of a policy and they can leadto disputes over coverage at the time of aclaim. It is essential that you carefullycheck the schedule for accuracy.

The example, shown right,demonstrates what is typically includedin the schedule.

‘‘‘‘’’’’Top tips: It is not uncommon for errors tobe made in the schedule of a policy and theycan lead to disputes over coverage at thetime of a claim. It is essential to carefullycheck the schedule for accuracy so that youmatch your expectations and needs.

Example1. Policy number: 867SY391

2. Insured: Smith and Smithe Insurance

Brokers Ltd.

And others as listed in Appendix A

attached.

3. Premium: £2,765.00 +IPT £138.25

£2,903.25

4. Period of Insurance:

From 30th November 2007

To 29th November 2008

(both dates inclusive)

5. Limit of Indemnity:

£2,000,00o any one claim and in all,

including costs and expenses

6. Excess: £25,000 each and every claim

excluding costs and expenses

7. Excluded persons: None

8. Other activities: None

9. Proposal dated: 20th September 2007

PPooiinnttss ttoo ccoonnssiiddeerr

• do the details set out in the policyschedule agree with the terms of thecontract that you negotiated?

• are there any typing errors in theschedule; especially those that maychange the meanings of expressions or definitions?

• check dates• check numeric values• check names and addresses.

PROFESSIONAL INDEMNITY BUYER’S CHECKLIST

British Insurance Brokers’ Association

BIBA House, 14 Bevis Marks, London EC3A 7NT

www.biba.org.uk