What is a Professional?

What is a professional?
Previously clearly defined and distinct, the responsibilities of the professional have changed. Traditionally, people like Accountants, Surveyors, Engineers, Solicitors and Architects, the mainstream professions, were regarded as 'professionals'. Modern reliance upon services provided by others and the increased use by business of outside consultants has increased the scope of this term and a professional is now often regarded as any person who offers 'specialist advice or service'.

What is PI?
Breach of duty.
A typical PI policy will provide indemnity to the insured'...... against loss arising from any claim or claims for breach of duty which may be made and reported to the insurers during the policy period by reason of any neglect, error or omissions committed in the conduct of the insured's professional business...' Some policies are more tightly worded.

Civil liability.
Some PI policies go further than the standard cover and provide indemnity to the insured "for any civil liability whatsoever......" This covers such areas as breach of contract, libel and slander (some standard policies may include libel and slander as extensions to the policy wordings).
Because the operative clause of a "civil liability" policy is so wide, there is normally a long list of exclusions in order to exclude liabilities that should be covered elsewhere - otherwise things like

Employers Liability (EL) and Public Liability (PL) might be covered. Some inexperienced PI insurers have got this very wrong in the past and inadvertently picked up EL cover under a PI policy!

Contractual liability that is not caused by negligence.
This is often excluded from PI policies and occurs when a professional signs up to a contract which might impose a liability that goes beyond what one would normally expect in law. Examples include liquidated damages - e.g. late delivery penalties - or accepting liability for otherwise unforeseeable economic loss - e.g. business interruption.

Contractual liability
is an important issue in highly competitive professions or during times of recession when the insured's client holds all the cards in terms of negotiation - a case of "just sign here and you've got the job". But the professional can pay for it later. In some professions, it becomes a way of life to the extent that PI insurers must offer to cover an element of contractual exposure (such as collateral warranties) in order to meet the insured's basic professional needs.

Legal costs.
These are normally covered by PI policies, subject to the insurers' prior consent. They cover the costs of investigation, defence and settlement of claims. These costs might embrace lawyers for investigation and defence, loss adjusters, experts and court costs. The costs are sometimes included within the limit of indemnity (in which case they erode the cover for damages) and sometimes the excess applies to the costs; this is often the case for hazardous risks or where foreign - particularly North American - jurisdiction is involved.

If the excess (deductible) applies to legal costs there can be policy disputes where an insured disagrees with the expenses being incurred by an insurer, particularly in the event of a successful defence of a spurious claim. Many insurers want the insured to retain a real stake in the successful defence of claims and want to avoid financial involvement in regular small nuisance claims - so they impose the costs inclusive excess. Claimant's legal costs normally form part of the claim against the insured professional.

The professional person must exercise whatever degree of care and skill is reasonably expected of any competent practitioner in that profession at that time. If a person provides advice or a service to another and carries that work out negligently, he can be held legally liable for the consequences. Normally, such advice or services are provided under the terms of a contract. Liability can arise because there has been a breach of duty of care or a breach of contract (the latter normally only covered by a PI policy where there has also been a breach of duty of care).

Other than in breach of contract, for legal liability to be established, the professional must be shown to be in breach of his duty of care - but there is an alarming move towards liability just because things have gone wrong.

Main Bodies with PI Rules
To find out more about the PI rules set by the Professional bodies, simply go to the relevant profession where you will find these listed, or alternatively click on our 'news and links' section.

Usual Cover
In addition to the obvious cover, PI policies often include:

Libel and slander
Loss of documents
Dishonesty of employees
Fidelity
Unintentional breach of confidence
Infringement of copyright and intellectual property rights
Previous firms or previous partners

The Usual Exclusions
Typically, PI policies will exclude things that should have more specific insurance:
Employers liability
Bodily injury/property damage, except where caused by a breach of professional duty
Property owners, etc
Vehicles, etc.
Products liability There are also 'boiler plate' exclusions:
Contractual liability - this is liability assumed under any express warranty, agreement, guarantee or the like unless such liability would have attached anyway.
Insolvency/bankruptcy of insured
Circumstances known at inception
Fines and penalties
Claims by financially associated parties - some insurers will cover these claims if they emanate from a third party
Radioactive contamination, etc.
War
Seepage and pollution - many insurers maintain this exclusion even where there is a clear and insurable environmental exposure
Date recognition

The Usual Extensions
Certain professions need special cover. These are dealt with under the appropriate heading. Some highly dangerous extensions are sometimes offered in soft markets but they often disappear as soon as conditions harden; these include things like extended reporting periods.

Frills
Some "throw away" frills are often added to make a policy look good. Some insureds like them but they are not really essential. They include things like a small daily allowance for the insured's court attendance.

"Claims made" policy form
Professional indemnity, directors & officers, medical malpractice and libel insurance are nearly unique in operating generally on a "claims made" basis. This provides cover for claims made (and reported to the insurer) during the period of insurance only. In contrast, other liability covers normally provide indemnity for "losses occurring" during the policy period. This is not the same across the world - for example in Europe, PI has historically been written on a "losses occurring" basis - but the trend worldwide is towards "claims made". It is almost impossible to get anything else in the UK.

A claim is generally notifiable under a PI policy when the insured first becomes aware of circumstances that could lead to a claim - this could be anything from a verbal criticism to receipt of a statement of claim. The interpretation of when this situation occurs is the source of frequent policy disputes between the insurer and insured.

Notable features on a claims made policy are:
A claim might be made against a policy written now but the act of neglect might have occurred many years previously

It protects the insured against the erosion of the value of cover by inflation. Where latent defects might lead to claims many years after an act of neglect, such as in the construction industry, this can be crucial in times of only modest (let alone high) inflation.

It protects the insurer against the effects of legislative changes, inflationary awards and claims made with new knowledge. It was not so long ago that the market was predicting the disappearance of "losses occurring" policies altogether following the wake of losses arising from US asbestos and environmental claims under policies written decades previously, on terms and conditions prevalent at the time which could not possibly have anticipated the losses to hand.

It allows the insurer to "get off" a risk completely by simply refusing to renew. This is fine for an insurer that discovers a sub-standard insured or where an insurer wants to leave a particular market sector but it leaves the quality insured very exposed to market ups and downs. Some of us can remember a hard market when capacity dried up (and in 2002 it returned) - if cover becomes unavailable the professionals with past cover written on a "claims made" basis are uninsured. Moreover, it allows an insurer to reduce an insured's cover where future problems might be anticipated - just look at the pension review!

If the policy lapses for any reason, there is normally no cover thereafter for any claims that might arise, regardless of when the alleged neglect might have occurred.

Retroactive date.
Many "claims made" policies incorporate a retroactive date, either as part of the wording or by endorsement. This effectively excludes claims arising from things done or that ought to have been done before the retroactive date, or often claims arising out of contracts entered into before the retroactive date. If there is no retroactive date then cover is fully retroactive for all work since commencement of the business. You should be clear that the insured understands the extent of retroactive cover.

It is normal for an insurer to apply a retroactive date of inception of the policy if there has been no prior cover. If retroactive cover is required then most insurers will offer it for a one-off additional premium.

Previous business activity.
Because of the claims made nature of PI policies, special care needs to be taken to ensure that the cover includes predecessor practices or partners' liabilities arising out of former partnerships elsewhere, at least to the extent that your client wants the cover. Many short form proposals only ask for minimum underwriting information and don't address these issues. Brokers should be careful to attend to them in order to avoid tears in the event of a claim.

Limit of indemnity.
This is the maximum amount of money that a PI policy will pay out. It might be eroded by costs and expenses. It frequently operates in the annual aggregate for all claims but often comes with reinstatements or applicable to each and every claim without aggregate limit. Where the limit is not aggregated, careful attention needs to be paid to the definition of a "claim" - for example a series of linked claims is normally deemed to be one claim for policy purposes. Some professions have the nature of their Limit of Indemnity prescribed for them. Sometimes they can't get work without, say, a limit applicable to each and every claim.

Excess.
This is the first amount of every claim that is uninsured (the deductible). It generally applies to each and every claim, but it can occasionally be aggregated or deleted entirely. Insurers need to be careful here depending upon the nature of the insured's business, as the appropriate definition of a "claim" for the purposes of the limit of indemnity (where insurers might expect to aggregate cover for a series of related claims) might not be appropriate for the excess. For example, if one act of neglect leads to 1,000 independent claims of modest value, is it intended that the excess apply to each claimant's action or not? The difference can be enormous and catastrophic to an insurer if a problem affects a large section of a profession, not to mention the insured.

They generally operate "people" businesses rather than make things - so they take things personally, their professional integrity being at stake - a claim is an insult so they can lose sight of the economic realities of dealing with one, for example wanting to fight a tiny claim that would best be settled to avoid costs.

People businesses are very close to their clients. They want to keep them happy. So they can sometimes want to settle claims when they should be fought.

Professionals often practice as sole traders or partnerships. A large successful claim could bankrupt them personally in the absence of adequate insurance. Even limited liability companies have balance sheets to protect and nobody wants to lose a business that they have worked hard to build.

Professions can be very small in terms of the number of participants. Bad news travels quickly - it's much more fun than good news! Reputations are at stake.

So, the handling of claims is crucial. We regularly speak to clients - other brokers, insureds and insurers - and they all want service when they have a claim. It is not an unreasonable expectation but it is frequently unfulfilled.

Soft market, hard market.

In today's market, insurers frequently identify an exposure and then promptly exclude it, but if there is little risk they will look to seduce people into buying the cover. If a claim might be covered, then some insurers frequently scrutinise the policy terms and terms and conditions in an effort to avoid liability - and PI policies give plenty of scope for successful claim rejection. High quality insurers (not necessarily the AAA-rated insurers) know that service leads to business development in the long run but soft markets and inevitable losses frequently lead to inappropriate claims handling.

Another effect of soft markets is the influx of insurers and brokers with little experience in PI. Policies can be badly sold leaving professionals insured with inappropriate cover and inappropriate insurers at the wrong price - a recipe for disaster.

And soft markets harden, eventually. That normally sorts out the sheep from the goats!
Then hard markets soften again.