Professional indemnity insurance PII

This article provides an overview of professional indemnity insurance (PII) in England & Wales.

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1 Introduction
2 Things to be considered when arranging professional indemnity insurance
3 Related articles on Designing Buildings

Introduction

Practitioners looking to set up their own practice after being employed by others or starting out with their own practice need to consider professional indemnity insurance (PII).

Where practitioners are offering services to clients, there will be an expectation that those services will be provided with reasonable skill and care and will achieve the client’s objectives. While the majority of projects are likely to be completed to the satisfaction of all parties, sometimes problems will be encountered during the provision of the services or mistakes will be made.

Whatever the case may be, when a project becomes difficult or a client feels aggrieved, there is always a risk that the client may look to make a claim against practitioners for wasted costs, remedial work or any other losses they believe they have suffered. A claim against a practice can be daunting, especially when the client is alleging that they have suffered a loss, but in these cases practitioners can turn to professional indemnity insurance. This is a type of insurance specifically designed to provide cover for claims which arise out of the conduct of professional business.

However, the cover goes further and will also provide assistance when dealing with circumstances that could give rise to a claim. Insurers will provide advice and assistance when dealing with any claims and, should it be necessary, will be there to cover financial losses claimed by the client, subject to the policy excess.

Some practitioners will be required to have adequate professional indemnity insurance by institutes or associations of which they are a member.

Things to be considered when arranging professional indemnity insurance

Cost vs. benefit

While it can often be tempting to go for the cheapest option on the market, especially for practices that are just starting out, it is important to bear the old adage ‘you get what you pay for’ in mind.

It is possible to go on-line and purchase a cheap professional indemnity policy, but it is important to take care to ensure that the product will actually provide the level of cover and support required. Insurers should be able to discuss requirements and provide clear and concise details of the nature of the cover being provided together with details of the services offered.

How much cover is required?

A common question relates to the level of cover that should be purchased, as this can vary from £100,000 to £10,000,000 and will determine the cost of the cover. Unfortunately, as there is no hard and fast rule, it is recommended that practitioners contact insurers to discuss requirements in detail. However, as a starting point, it is important to consider the following:

What is the value of the project?
What is the absolute worst case scenario for a project and what would this cost to fix?
What are the clients asking for as part of the appointment?

These can be daunting questions, but it can have serious ramifications for a practice if they select a level of insurance that may not fully cover any potential claims. As a result, it is a subject that needs to be considered carefully.

How long is it necessary to maintain cover or a certain level of cover?

One of the key differences between professional indemnity insurance and other insurance policies is that it is written on what is called a ‘claims made’ basis. What this means is that it is the policy in force at the time the claim is made that deals with it, rather than the policy in force at the time the work was done.

As an example, a practice is asked to complete a project in 2015, but the client doesn’t make a claim until 2018. As a result, it is the policy in force in 2018 that deals with the claim rather than the cover in place in 2015. It is important to realise therefore that the need to maintain cover will continue long after any projects are completed and may even extend beyond a practitioner’s retirement.

In view of this, it is recommended that cover is maintained throughout the career of a practitioner or operation of a practice, with provisions made to cover any potential liabilities.

When can a claim be made?

Another factor to be considered when selecting the level of cover and the future renewals of the policy is the period within which a claim can be made.

The starting point when considering the period within which a claim can be made is the Limitation Act 1980 and the Latent Damage Act 1986, which provide that a claim can be brought up to six years after the work was completed or three years after the client could reasonably be expected to know they had a claim. This is also subject to an absolute time-bar of fifteen years, often referred to as the ‘long stop’, which prevents any claims being made after this point.

So, as a starting point, it is possible to be liable for any work for at least 6 years.

However, when considering the period of liability, it is also important to remember the terms of any appointments with the clients as they can also set out clear time limits within which claims can be made or obligations to maintain cover for a certain period of time.

By way of an example, any contract signed ‘under deed’ will create a liability period of 12 years and will often state that the agreed limit of indemnity will be maintained for the same period.

In addition to the implications for professional indemnity insurance, it is important to note that if the level of cover changes, or is not maintained for the agreed period, this may constitute a breach of the contract.

There are likely to be a number of other factors that need to be considered when taking out or renewing professional indemnity insurance and insurers should be happy to answer any questions.

--CIAT Insurance Services