How Are Professional Indemnity Claims Different Than Normal Insurance Claims?
Professional indemnity claims are not like your other general insurance claims. Most insurance policies follow the same claims process.
You damage your motor vehicle, call up your insurance company, they appoint an assessor. If it’s accepted, you pay an excess and you get it fixed. What you need to know about handling a PI claim is we need to understand the fundamentals of a PI policy. PI policies are written on a claims made basis.
This means that the claim is notified in the current policy period, not when the act that gave rise to the claim occurred. A very simple example is, an engineer designs a bridge in 2010. In 2017 the bridge collapses, and in the investigation process we find that the collapse was due to a design fault.
So the engineer notifies his insurer in 2017, not the insurer that was on risk in 2010. Now sometimes a formal claim isn’t made against you, and by that I mean a legal proceeding or a letter of demand. Sometimes a complaint is made against you and it’s not for you to be worried.
It’s that feeling that you get when you hold your breath and go “Oh, crap.” This is what we call a circumstance that could give rise to a claim, and it’s important because you also need to notify your insurer of these circumstances.
You must also notify your insurer of these circumstances because if you don’t, it would be excluded from cover in the next policy period, especially if you change insurers. Also, if you…it will also be excluded from cover even if you were covered at the time the circumstance that gave rise to the claim. And lastly, before we get into the claims process, we need to talk about cancellations.
What Happens If I Cancel My Professional Indemnity Insurance?
As PI policies are written on a claims made basis, what you’re effectively buying is a 12-month window of opportunity to notify of a claim. If you cancel your policy, you won’t have cover for that claim even though you may have been covered at the time the event that gave rise to the claim occurred during the policy period. So going back to our engineer who designed the bridge in 2010, say in 2015 he decides he wants to pack up, retire and travel the world. In 2017, the bridge collapses, and during the investigation process it’s found that it was a design fault.
Because the engineer didn’t renew his policy in 2017 or purchase [inaudible] cover, he doesn’t have an insurer to notify the claim to, so that claim is not covered under any policy, and he’ll have to defend the proceedings by himself.
This is what makes a PI policy different from other insurance policies. Many people get caught out by the claims made nature of a PI policy. Just because you finished your contract or don’t need the insurance anymore, it doesn’t mean that you are covered for work that you’ve done in the past.
The statute of limitations is six years. This means that somebody has up to six years to claim for losses that you have caused them. Or if you’re aware of a circumstance that could give rise to a claim, you must notify your PI insurer immediately. You are not penalized for notifying a circumstance.
So the takeaway for today is professional indemnity policies are written on a claims made basis. You must notify your insurer if you are aware of a claim or a circumstance that could give rise to a claim. Don’t cancel your policy or let it lapse without speaking to your broker first, engage legal representation without speaking to your broker and insurer first.