What is professional indemnity insurance?

Over a series of articles, we have been looking at professional negligence claims and how to bring them.

As with any type of action for money, it is important to consider whether the proposed Defendant has the money to pay you any award of damages. If they do not, then it may make little sense to pursue a claim against them. However, many professions require people and companies to take out Professional Indemnity Insurance, which can assist in these cases.

What is Professional Indemnity Insurance?

Professional Indemnity Insurance (“PII”) gives a professional (an “Insured”) protection against liability for compensation arising out of any neglect, error or omission committed (or alleged to have been committed) by the Insured or an employee of the Insured.

While it is designed to protect an Insured in order that it doesn’t necessarily have to pay out of its own pocket if someone brings a claim, it also ensures that those people with claims should get paid out, even if the Insured itself is no longer trading or is insolvent.

What does PII cover?

Unfortunately, there is no easy answer to this – it will depend upon the terms of the policy that the Insured has taken out. A typical policy will provide for an indemnity in respect of civil claims made against the Insured, during the period of insurance, in connection with the Insured’s business. Depending on the Insured’s business, policies can also cover specific items such as:

  • Loss or damage to documents held on behalf of a client
    • Infringement of intellectual property rights such as copyrights or trademarks
    • Defamation claims
What does PII not cover?

There are often matters excluded from cover under a policy, but again these will depend upon the terms of the policy itself. Examples include:

    • Circumstances already known to the Insured – if, when applying for a policy, the Insured is aware of a potential claim, that claim will usually be excluded from the policy
    • Fraud and dishonesty by an employee where the Insured was aware
    • Liabilities covered by other insurance – eg liability to employees, liability for bodily injury and damage to property
    • Criminal fines or regulatory penalties
Who do I claim against? The Insured or the Insurer?

If you have a professional negligence claim, this will be brought against the Insured itself. The Insured should inform their Insurer, who will ordinarily take control of the matter and appoint solicitors.

Should settlement be reached, or judgment obtained against the Insured, the Insurer will ordinarily make the payment.

The Professional had insurance but is no longer trading

Even after a professional has stopped trading, there remains the possibility that claims will be made against him. Some claims are made shortly after the alleged error or omission by the firm because the mistake is obvious. In other cases, it can take many years before the problem comes to light.

As a result, most professionals obtain what is known as “run-off” cover to ensure that any claims made after the Insured has ceased trading are covered.

The professional bodies for solicitors, surveyors and architects and others oblige their members to take out run-off cover.

The Professional was insured, but is now insolvent. What can I do?

Depending upon the terms of the policy, it is likely that the Insurer (whether during the policy period or in run-off) will cover the Insured even in the event that the Insured is declared insolvent.

Earlier this year, the Third Party (Rights Against Insurers) Act 2010 came into force, changing the position on claims against insolvent Insureds. A Claimant can now issue proceedings directly against the Insurer and a potential Claimant can also request information about the insurance contract before issuing proceedings, giving him the opportunity to make an early and informed decision as to whether it is worthwhile issuing proceedings.

If you have a claim against a professional as a result of his negligence or breach of contract, our experienced professional negligence team is here to help. Please contact Steven Newdall, our managing partner and head of our professional negligence team on 0113 297 3187.

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