PII: potential pitfalls
In a word
1 October 2018
James Burgoyne cautions that you should always check the terms of professional indemnity insurance to be aware of possible pitfalls
When looking for gaps in professional indemnity insurance (PII) cover, it is perhaps natural to turn immediately to the exclusions section.
However, there are more subtle restrictions that are inherent in the terms of the cover itself. If a problem or loss does not fall under the insuring clauses of the policy, then the cover is not triggered. As such the terms of the cover itself form boundaries, and matters outside of these are not covered, regardless of whether the exclusion section is otherwise silent on the issue.
This is an area that is fertile with misunderstandings and assumptions, so it is worth spending a little time considering the ambit of and triggers for a PII policy.
Definition of cover
PII might be defined as a policy to cover liability for a claim against the professional for negligent provision of professional services in the course of their business. This is a simplified version of a typical PII clause, and much turns on individual words in such definitions.
The wordings of PII policies vary, and even those that are all RICS-compliant may differ significantly in the breadth of cover offered
The first to consider is 'claim': in straightforward terms, if there is no claim then the cover is not triggered.
If a potential problem is discovered by a practitioner and mitigation is possible, it is natural for them to want to take such steps to avoid a legal claim. Often, the concern in such a situation is not only the increased costs of a legal claim but also a further deterioration in commercial relations between the parties due to the escalation of the matter.
But indemnity under a PII policy for mitigation is conceptually awkward because it precedes any claim that the insurance would cover. While the policy allows notification of potential claims – 'circumstances' – it does not automatically provide indemnity for any further steps taken immediately. By definition, a circumstance is something that hasn’t yet become a claim.
In practice, the common sense of dealing with issues early in order to reduce costs and maintain commercial relations often prevails, and insurers reimburse the policyholder for the cost of mitigation. But what is often not understood is that they are not obliged to do so.
This becomes most apparent when a policyholder proceeds with a mitigation measure in a short timescale but does not discuss the action they are taking with the insurer and obtain its agreement to these arrangements. Policyholders sometimes become caught up in the logic of the situation, and are so convinced they have the obvious, most cost-effective solution for all concerned that they press on and deal with the matter independently.
This is a breach of a basic claim condition – costs cannot be incurred without an insurer’s consent – but the problem is actually more fundamental because the insurer is not obliged to pay for the steps taken in the first place. If the policyholder’s logic was flawed and their enthusiastic solution does not prove to be the optimal or the only one, then the problem becomes compounded.
Drafting of rights
The drafting of rights in a contract can sometimes prevent a claim becoming necessary. For example, if the contract recasts a liability issue as a debt owed to the other party then it removes their need to bring a claim – but potentially thereby has unforeseen consequences for PII. Similarly, indemnities under a contract are separate obligations, and therefore are not the same as damages claims.
The reality is that insurers are often very good about such issues, but fundamentally these are settled at their discretion because the ambit of typical cover does not include them.
Regulatory problems are a further example of such issues. Many practitioners think immediately of their PII cover for any professional issue, but investigations by regulators or tribunals that are unrelated to a damages claim from a client would not fall under the core PII cover.
Better PII policies sometimes contain extensions that deal with such issues, but if a practitioner is not alive to the differences then they may not be checking their insurance to ensure they have such an extension.
The term 'professional business' gives rise to another set of issues: this will be defined in the PII policy, and anything outside of that definition will not be covered. The narrowest PII policies refer to the professional business described in the schedule, so with these it is very important that the description is broad enough and has not left anything out.
The RICS-approved minimum wording provides a broad definition of professional business: 'those services ... which are undertaken by members of the RICS'. Problems arise, however, for any multidisciplinary firm that also provides other services, and whose PII policy does not sufficiently address the broader nature of the business. Consequently, in the wrong circumstances, the definition of 'professional business' can operate as one of the most general exclusions in the policy, which is often not appreciated.
The way that the term is used in the insuring clause is also important. Cover for claims 'arising out of' professional business carried on by the professional is not as broad as cover 'for claims arising out of or in connection with' that business. The former is concerned with the provision of professional services to clients; the latter is also concerned with activities around this provision.
As a practical example of the distinction, a professional received a solicitor’s letter out of the blue alleging infringement of copyright in connection with the use of an image on the professional’s website advertising their services. Under the former definition there may be no cover as the breach is not related to a job performed for a client. However, under the latter definition, the issue can be considered as arising 'in connection with' the provision of professional services.
The RICS-approved wording uses the form of words 'which arises in consequence of the conduct of professional business by the insured', which may provide some reassurance.
Difference in condition
These are not the only examples of favourable terms in the RICS-approved wording, but to what extent will this apply? It is usually the case that a particular insurer will draft its own policy wording as it cannot simply use RICS’ own text.
Many insurers therefore include a 'difference in condition' (DIC) clause in favour of the RICS policy, which states that in the event of a contradiction between their wording and this policy the RICS terms will take precedence.
On the one hand, this is a belt and braces measure to make sure that any inadvertent discrepancies are appropriately resolved, and on the other it is an immediate and easily verifiable element in the policy wording providing reassurance that the required RICS cover is in fact in place.
Certain DIC clauses, though, do not apply to the entirety of the cover under the policy: some are stated as applying only to the minimum required by RICS. Hence while the policyholder may buy cover for a substantial limit – £2m for example – the terms of the insurer’s policy will apply to the majority of that cover, and the extended RICS cover only applies to a much smaller amount based on the limit of indemnity it requires. For a consultant on their own, this is not a large financial amount at all. As such, it is not just a case of checking that the policy has a DIC clause but checking what this clause actually says.
To conclude, as this handful of examples has demonstrated, the wordings of PII policies vary, and even those that are all RICS-compliant may differ significantly in the breadth of cover offered.
Insurance is usually a fundamental component of a firm’s risk management strategy, and therefore it is important that the appropriate policy is chosen. Better policies contain additional elements that address issues discussed above, such as explicit mitigation costs extensions, or more comprehensive forms of words in insuring clauses and definitions.
Insurance should be not be seen as the only component of a risk management strategy, however, and a proper understanding of the issues outside PII allows further risk management steps to be taken, such as in the agreement of client or lender contracts to avoid insurance issues arising later.
James Burgoyne is Director – Claims and Technical at Brunel Professions