In the current difficult trading environment, insurers are seeing an increase in the level of claims and notifications being made under professional liability insurance policies, according to BREEGE LYNN and KEVIN FINGLETON.
Many professional firms often raise the question of when they should report claims or matters involving customers’ complaints under their professional indemnity (PI) coverage.
- Professional indemnity policies are written on a ‘claims made’ basis. This means that the policy that will respond to a claim and govern the terms of cover, will be the policy in force when the claim is first made against you and notified to insurers – or when a circumstance that might give rise to a claim is first notified to insurers and accepted.
- It is important to understand that it is the existence of (i) a claim or (ii) circumstance that is important – and not whether the claim or potential claim has any merit. Whether you will ultimately be liable in respect of the claim is not important for notification purposes. PI policies cover legal costs to defend you, so it is crucial to advise insurers at an early stage of becoming aware of a potential circumstance that might give rise later to an actual legal claim developing.
- Insurers closely monitor the issue of date of awareness and reporting requirements as part of their due diligence in investigating a notified matter submitted to them.
- Most policies will define what constitutes a ‘claim’, and claims are not usually difficult to identify, e.g., a letter from a solicitor or a letter containing a threat of legal action from a client. A ‘circumstance’, however, is not typically defined and is left to the firm’s own judgement. A circumstance can be – – an indication or intimation of an intention to make a claim against the firm; – direct or indirect criticism about the firm’s performance or services provided, or a dispute about performance or services; – an awareness by the firm of a failure in performance or services; or, – a real doubt about the efficacy of the firm’s performance or services that might impact on their clients.
- The requirement to notify is ‘condition precedent’ to liability under the policy – that is, if you do not comply with the condition, the insurer can deny any liability it might have solely because the condition has been breached.
- Therefore, if you delay in notifying insurers of a circumstance or claim, it is possible that you will be denied cover under the policy entirely. In other cases, if the delay has caused ‘prejudice’ to the insurers, they might be entitled to reduce their indemnity to the extent of that prejudice. It is therefore important to implement ‘notification procedures’ within your practice.
- If you are uncertain about whether you ought to notify a circumstance (or claim) you should contact your insurance advisers to discuss in more detail.
Communication with third parties
- It will always be a condition of your PI policy that you do not admit liability to, or enter into any settlement with, a third party without the consent of your insurers. It is important, therefore, to avoid becoming involved in discussions with any third party – or potential claimant – about the merits of a claim against you.
- Any formal letters of demand should be merely acknowledged, with a statement that the matter will be investigated and that a further response will follow. Any correspondence between you and the (potential) claimant should be given to your insurance broker when notifying a claim or circumstance.
- Until solicitors are appointed by insurers to act on your behalf, insurers might require you to communicate directly with a claimant. Insurers should, however, approve any correspondence you propose sending. Draft correspondence should be sent to your insurer or your insurance broker, who will seek such consent on your behalf.
All policies contain a condition related to the insured having to co-operate with insurers in relation to any matter notified under the policy. This continual obligation includes providing additional information, meeting with appointed solicitors and experts, and access to files, etc. – all within a reasonable time of the request.
The scale of information required by insurers can be extensive, as their background research and assessment of paperwork and procedures can be lengthy.
We have seen claims fail to be covered or delayed where insured parties have not assisted insurers or have delayed in their response to queries. It is difficult to understand why a firm, having paid the premium for the arrangement of insurance, will then, when that insurance is required, deny themselves the benefit of the cover by failing to co-operate with their insurers.
Once a case has gone down the legal route, the issue of continued service for the client may be problematical. A careful discussion with insurer’s solicitors will often be required to assess the issue.
In our experience, notifying a circumstance does not lead to an increase in premium. However, delay in notification of either a claim or circumstance can create undue worry and concern down the road as insurers assess their coverage position.
A key standard to apply in the firm is ‘Notify, Notify, Notify’. This is the gold standard that will serve you and your firm well in the future.