Professional indemnity insurance

Contents
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1 Introduction

2 Proposal form, disclosure and risk

3 Non-disclosure

4 The cover

5 Renewal

6 Run-off cover

7 Disclosure of collateral warranties

8 Find out more

8.1 Related articles on Designing Buildings Wiki

Introduction
Very few professional practices have sufficient
resources within their own organisations to meet
anything other than minor claims brought
against them in respect of
professional negligence. It is for this reason
that professional indemnity insurance is so
important to the construction professions and
to contractors working on design and
build projects.

Professional indemnity insurance (PII), sometimes

known as errors and omissions insurance(E&O),
provides insurance cover
against claims of negligence. It is widely used
where professional services are being provided
to a developer or contractor, and will
provide insuranceup to a specified insured sum
where negligence is proven to have been
committed on the part of the service provider.
For the party taking out the insurance, the policy
will also cover the cost of
defending claims ofnegligence made against it,
subject to the insured party paying the initial
excess set out in the policy. The policy will not
usually provide cover against allegations of
criminal behaviour, nor against allegations of
non-negligent workmanship.
Professional indemnity insurance policies are
provided by a wide range of insurers and
consequently the scope of policies can vary
greatly. Policies are usually renewable annually.
Policy extensions can be provided to provide
cover against employee theft (fiduciary cover)
and breach of duty.
Policies are usually written on a 'claims made'
basis, where the negligent act causing the claim

occurs within the policy period. 'Retroactive'

dates can be written into the policy which allow
forclaims to be insured which pre-date the policy
period but which are subsequent to the
retroactive date. This is particularly relevant
where services are provided over a number of
years and where a professional firm may wish to
change insurers during the contract period.

Proposal form, disclosure and risk

Insurance policies are contracts and so the usual
rules as to the formation of contracts apply
tocontracts of insurance. In practice, the usual
procedure is for the person seeking insurance to
complete a proposal form - each company has
their own standard form. The person
seekinginsurance will sign the proposal form and
by so signing that they are offering to
accept insuranceon the basis of the proposal
form and the insurers' standard conditions (to
which reference will be made in the proposal
form, although the terms will not usually be set
out). Those terms will contain a provision to the
effect that the answers given on the proposal
form are incorporated into and are the basis of
the insurance. As soon as the insurers have

accepted the proposal, they will then issue a

policy.
Contracts of insurance are, however, different to
other contracts in one important respect: they
are based on the principle of the utmost good
faith of the parties (known as the principle of
uberrimae fidii). One of the aspects of this
principle is that the purpose of a proposal form
is to enable the insurer to assess the risk so that
they can decide whether or not to accept the
proposal and, if so, on what terms both as to the
conditions and the premium. Clearly, insurers
cannot make a proper evaluation of those
matters unless full disclosure is made by the
person seeking insurance of every matter that is
relevant to the risk. When making a proposal to
an insurer, it is necessary to disclose all facts
that are material and not to make a statement
that amounts to a misrepresentation of a
material fact. Such non-disclosure or
misrepresentation entitles the insurer to avoid
the policy.

Non-disclosure
Disclosure means disclosing all facts that are
material. Material facts are matters that would

have affected the mind of a prudent insurer in

deciding whether to take the risk and, if so, on
what conditions and at what premium. This
involves disclosing all material facts that are
actually within the knowledge of the person
seeking the insurance and this duty is not
limited by what the person applying for
the insurance thinks is relevant. It is clear that
facts which show that a risk is not an ordinary
risk, but a greater risk than the ordinary, are
material for this purpose.
It is also important to notify insurers at the
earliest possible moment of a potential claim.
This give insurers the chance to advise the
insured and to mitigate risks. A cautious
approach should be taken here, and insurers
should be informed of any direct criticism even if
it appears minor or unjustified.

The cover
The intention of a professional indemnity policy
is to provide an indemnity in respect of
thedesigner's legal liability for damages in
respect of claims brought against
the designer for breach of professional duty. The
policy is therefore written on the basis that it

covers claims made during the period

of insurance. The period of insurance of
professional indemnity policies is usually 12
months. It follows that a
professional indemnity policy will
cover claims made against the insured during
that 12-month period. Indeed difficulties can
arise where the full extent of a claim is not
known during one period of insurance but
becomes known during a subsequent period
of insurance at a time when a different insurer is
on risk: see for example TJwrman and Others v.
New Hampshire Insurance Co (UK) Ltd and the
Home Insurance Company.

Renewal
Professional indemnity policies run for a period
of 12 months and can only be renewed with the
same insurer if the insurer consents. At renewal,
professional indemnity insurers may require the
completion of a fresh proposal form and the
same duty of the utmost good faith arises on the
completion of a proposal form for renewal for
the simple reason that it is in reality a proposal
for a new insurance policy. If there is no new
proposal form at renewal, then the insured has a

duty to notify any material matters to the

insurer before renewal. In any event, a new
insurer may be appointed on renewal.

Run-off cover
When practice comes to an end, that does not
necessarily mean that the possibility
of claimshas come to an end. Claims can arise
for years after projects have been completed
(Seelimitation of action) and it is important that
practitioners maintain professional indemnity
insurance for as long as such a risk exists.
As the likelihood of a claim reduces as time
progresses, so the cost of a run-off policy should
reduce year on year. Some insurers offer run-off
policies payable with a one-off premium. This
can reduce the uncertainty of ongoing premium
payments.

Disclosure of collateral warranties

It is clear from the present position in the law of
tort that in the absence of a collateral warranty,
the tenant of a building put up by
a developer would be unlikely to succeed in a
claim innegligence brought against
the architect or engineer or contractor of

the developer in respect of negligent design.

A collateral warranty entered into between the
tenant and the architect, on the other hand,
would enable that tenant to pursue their claim.
It must follow that the existence ofcollateral
warranties is a material fact that must be
disclosed to insurers prior to professional indemnity
insurance being taken out and at renewal. After
all, against the background of the present law of
tort, the existence of collateral warranties must
be a matter which would affect the mind of a
prudent insurer when considering whether to
take the risk and, if so, on what conditions and
at what premium.
Indeed, the fact that there are so many different
forms of collateral warranty that have been
signed, and are being signed, suggests that
each and every collateral warranty actually
entered into should be produced to insurers at
renewal - at the very least a schedule
of collateral warranties should be appended to
the proposal form with a statement that they will
be produced to insurers if insurers wish to see
them. This is patently a burdensome obligation
both on the insured and on the insurer, but
given the law in relation to material disclosure in

professionalindemnity policies, any other

approach by the insured is clearly dangerous for
the simple reason that it may be that the policy
could be avoided by the insurer if disclosure is
not made of these material circumstances. The
simple fact that many brokers (but not all), most
insurers (but not all) and most underwriters are
not set up to deal with a volume of work of this
sort on renewal is irrelevant to the principle that
full disclosure must be given of material
circumstances. In practice, some insurers are
closely involved in the approval of warranties
(but only from aninsurance point of view) prior
to their finalisation. This may assist in meeting
the insured's duty to give disclosure of
warranties to the insurer.
Another day-to-day problem is this: should the
insured, when asked to sign a new collateral
warranty, obtain their insurer s agreement
before they agree to execute a warranty? The
strict answer to that question is that another
warranty is, vis-a-vis the insurance policy,
another material circumstance that will have to
be disclosed on renewal; if on renewal disclosure
is made and the insurer refuses cover at that
stage, the insured runs the risk of being

uninsured in respect of any claims arising under

or out of that particular warranty. It is for this
reason that a cautious view should be taken and
all proposed collateral warranties should be
shown to insurers, and their agreement to cover
the risk obtained, before the warranty is
executed.
Some standard forms of warranty have been
approved by insurers for general use by people
insured with them, and it will not then be
necessary for the insurer's permission to be
obtained on each and every occasion. Some
insurers have their own suggested form
of collateral warranty. In practice, insurers' own
standard forms are rarely acceptable to
commercial developers in their unamended
form.
It should not be assumed that because some
insurers approve particular standard forms,
other insurers will automatically approve the
same warranties - it is not the case for the
simple reason that each and
every insurance policy is a
separate contract between the particular
insured and the particular insurer. The mere fact
that the Form of Agreement for Collateral

Warranty to be given to a company providing

finance is said to have been agreed 'after
discussion with the Association of British
Insurers' does not mean that every insurer who
is a member of that Association will give cover
in respect of a liability arising under a warranty
in that standard form; whether or not cover is
given is a matter between the particular insured
and the particular insurer by way of agreement
or by way of endorsement on the policy.
Furthermore, such approval as is given to
particular standard forms by particular insurers
is usually limited to cover where the warranty is
entered into in its unamended form.
Another way in which the difficulties of
constantly referring warranties to insurers for
approval can be overcome to some extent, is by
agreeing with the insurer a suitable policy
amendment by way of an endorsement. This
sets out the circumstances in which insurers will
extend cover forcollateral warranties; on that
basis, the designer of contractor can decide,
when faced with a particular collateral warranty,
wither or no that warranty falls within the cover
provided by the insurer, or whether it will have

to be put to the insurer to see whether cover

can be given.

Find out more