When looking for a professional indemnity insurance quote, you may be confused by the different levels of, and types of cover provided.
Unlike material property, ie a house, car or building, you cannot insurer for how much it would cost to replace. You need to arrange insurance for the potential loss that you could face. Professional indemnity, is a form of liability insurance. Through your actions, advice or services (whether you charge a fee or not) you could be faced with a potential claim.
Similar to public liability insurance, you will usually only see a professional indemnity claim when things have gone really bad. Usually, before it gets to the stage of insurers having to deal with a claim, an amicable solution is agreed.
Professional indemnity policies cover claims made (and reported to insurers) during the period of the policy. Therefore, the event that caused the claim, ie you advising XYZ Inc to buy a new £500,000 computer system, may have happened prior to your current policy starting.
Normal liability, public, products and employers liability insurance, operate in the opposite manner. The policy that was in force at the time of the event that caused the damage, ie the policy that was in force when an extension to a house was built, which fell down three years later and crushed a car, is the one that would be liable.
A claim is notified under, or against, a professional indemnity policy when the insured first becomes aware of a circumstance that could lead to a claim. This does not have to be a formal, written letter of claim from a third party or a solicitor. It could be anything from verbal criticism to a more formal written claim.
The decision as to whether a situation is going to be a claim, or could be a claim, can be difficult for the customer to appreciate.
For this reason, all insurers state that any event which may give rise to a claim needs to be notified to them.
A claims made policy protects the insured against the erosion of cover due to inflation. In the public liability example above, it could be that the policy in force at the time of the loss, had a low limit of indemnity which is insufficient at the time of the loss years later.
The downside of a claims made policy is that, if for any reason the policy lapses then there is no cover in place. Even a business that ceases to trade or ceases to be involved in a particular area, should ideally continue cover in case there is a claim in the future.
If the policy is not renewed at the end of the annual cover, there is normally no cover beyond that date for any claims that might arise, regardless of when the alleged event, which caused the financial loss, might have occurred.
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