A LEGAL DEFENCE COSTS CLAUSE

Confirming the basis the insurer will respond to provide legal defence costs to investigate and defend a legal and financial demand being made against you from a third party (e.g. customer).

Below is a more technical overview on how each policy will outline the proposed cover by reviewing several documents provided to you by your insurer and/or broker:

• Policy Schedule
• Endorsements (sometimes contained within the Policy Schedule)
• Policy Wording

The above sections are explained further follows below:

POLICY SCHEDULE OUTLINING What does Professional Indemnity Insurance cover:

This is the most important document as it outlines a number of important items:

INSURED NAME

It is critically important to ensure that any company that is providing the professional services is listed as a named insured, including any previous businesses which may have provided services but traded under a different entity. Any claim made against a business that you own that is not listed as an insured will be unlikely to have cover available to them.

Professional Services / Business Description

Again, this is a very important aspect of your policy. You must ensure that the nature of your services are fully described here as the insurer will rely on this part of the policy when reviewing a claim made against your policy. Note that insurers may use one of three methods of describing your business:

• Via the Professional Services listed on the schedule
• Within the policy wording (i.e. some insurers will provide a definition of what the services noted in the professional services are expected to cover)
• By endorsement (i.e. providing an expanded definition of your services separate from the schedule and wording)

Some insurers will use a narrow definition of the services you and other clients in your sector might provide (e.g. Consulting Engineer, Accountant, etc.) and rely on the disclosures you made within the Proposal Form and/or Addendum that advise the insurance company what services you are providing. Other insurers will broadly note the full services within the schedule, or, as a combination including the above methods (endorsement/wording).

Limit of Indemnity / Limit of Liability

The limit of indemnity is the maximum amount an insurer will indemnify you for in the event of a claim. For example, if the limit is shown as $1,000,000 (one million dollars) then this is the total cover. Most products will provide one million dollars increments and within Australia will generally go to a maximum of $20,000,000 (twenty million dollars) unless you are a major corporation or have an extremely high risk exposure.

DEFENCE COSTS (STRUCTURE)

The insurer will offer two forms of defence costs:

Costs in Addition (Costs Exclusive) – the insurer will pay up to the policy limit for any one claim (e.g. for damages) and will also pay the legal defence costs in addition to the policy limit. This means that if a single claim of $1,000,000 (one million dollars) exhausted your available cover the insurer will pay the legal defence costs above this amount proportionately as required but always to a maximum (i.e. an equivalent of the policy limit and no higher). This type of structure for defence costs is considered advantageous as it is providing more cover, however, for some industry segments or risks an insurer may not be prepared to offer it.

Inclusive of Costs (Costs Inclusive) – the insurer will pay up to a maximum of the policy limit which includes legal defence costs. This means your claim could result in a short fall if your policy limit was $1,000,000 (one million dollars) and the allegation against you exhausted this cover but you still had $300,000 in legal costs to pay above this amount. This risk can be managed by considering a higher policy limit, or, reviewing the number of reinstatements available under the policy.

Reinstatements / Aggregate Limit

This the combined amount for all claims made against your policy within the policy period. Many insurers in the market will offer a single (one) reinstatement to a business. Therefore, if a single claim or series of claims exhaust the initial policy limit the policy will reinstate itself one time to respond to additional (unrelated) claims. This is also referred to as the aggregate limit within a policy period available to you. An insurer offering one reinstatement might note this by stating cover is offered as “$1,000,000 any one claim and $2,000,000 in the aggregate).

EXCESS

This is the amount payable or contributed by you when claiming against your insurance. Again, insurers will split the excess into two types:

Costs Exclusive – this excess structure means you only contribute towards the claim if the insurer must pay damages (i.e. whether from a commercial settlement or via the courts) which usually occurs at the very end of the claim. If an insurer successfully defends a claim, or perhaps they only incur legal defence costs then no excess is generally payable. This excess structure can be considered advantageous as it limits the upfront you must contribute and may not be payable at all in some cases.

Costs Inclusive – this excess structure results in an immediate contribution by you towards initial legal defence costs an insurer incurs from a claim. There may be a slight delay in needing to pay the excess until the insurer investigates the matter and confirms coverage is available to you (i.e. that you are indemnified by the policy).

RETROACTIVE DATE

This is a very important section of your policy to review. The retroactive date serves as a potential limitation under your policy as the insurer will not be required to pay any claim or legal defence costs for any matters that occurred prior to the retroactive date, or were known to your business that might eventuate into a claim. There are three scenarios applying to this section:

Inception – the insurer will limit cover and only pay for liabilities and claims that arise after the date the policy is taken out. This is common for any business first taking out this type of product, or for any existing business that may have previously had cover and allowed it to lapse/expire. Once the policy is taken out the insurer will automatically update the word “inception” to a date.

Specific Date – the insurer will note a specific date on the policy (e.g. 1^st January 2020) and only claims made from services provided after this date will be covered, excluding any known claims or circumstances. This date will usually match the first time you took out cover and if you are changing insurers then it is of critical importance to make sure that this date is matched, unless changed to an Unlimited Retroactive Date.

Unlimited – this is the broadest protection available and means there is no limitation (by date) to which the insurer will limit claims. For example, if your business had been trading since the year 2000 (two thousand) and you have an Unlimited Retroactive Date then the insurer will be obligated to review claims from advice/services that might have occurred from that year to the present day.

Note that all insurers will include a reference alongside the Retroactive Date that states “excluding known claims or circumstances”. The intention of this clause serves to limit claims that you knew, or a reasonable person could have known, might eventuate into a claim and that should have been reported within a previous policy period (i.e. before the expiry date) or were otherwise reported to a previous insurer. If the claim being made against the current policy were known to you and you failed to report it previously the insurer can limit or exclude coverage available to you.

Some further examples of how the Retroactice Date operates and switching insurers is available from Avant as a medical indemnity insurer (regardless of the industry the overview is applicable to anyone taking out the cover):

https://avant.org.au/retroactive-cover

ENDORSEMENTS

Any endorsement against your policy has the purpose of changing the cover otherwise provided by the policy schedule and/or policy wording. An endorsement may serve to limit, exclude or expand policy coverage being made available by the insurer. It is important to review all of the endorsements applied to your policy in conjunction with the schedule / wording and discuss these with your broker as is appropriate. 

OPTIONAL EXTENSIONS

This highlights any further extensions an insurer is making available to their clients separate to the standard / automatic extensions. The types of optional extensions being made available may incur an additional premium from the insurer and are usually industry specific to certain occupation classes (i.e. a Proportionate Liability extension for construction professionals) or may be more generic (i.e. the inclusion of Fidelity Cover, Reinstatements, etc.).

THE POLICY WORDING IS AN IMPORTANT DOCUMENT OUTLINING WHAT DOES PROFESSIONAL INDEMNITY INSURANCE COVER:

This document provides detailed information which can be broken down into the following sections on what does Professional Indemnity Insurance cover:

Important Information – this section is first within most wordings and outlines a number of responsibilities between yourself as the customer/client/insured and that of the insurer. It can include references to Duty of Disclosure, Claims Made and Notified Insurance, Subrogation, Average Provisions, Privacy and Contact Details.

Insuring Clauses – as outlined elsewhere, this will normally reference the primary insuring clause (i.e. covering civil liabilities arising from your professional services) and clarification on the legal defence costs.

Automatic Extensions – outlines the individual extensions an insurer provides as part of the policy you are taking out. It may include reference to sub-limits (i.e. a dollar value and maximum amount an insurer is prepared to cover for that extension) and will clarify the intended protection being made available. You will need to review these extensions in conjunction with the Definitions and Exclusions.

Optional Extensions – outlines the expanded coverage normally at an additional premium that an insurer is prepared to offer and is usually industry specific to some businesses.

Exclusions – one of the most important aspects of any policy is reviewing the exclusions. All insurers will include standard exclusions (e.g. War, Terrorism Asbestos, USA/Canada, etc.) which you will notice apply to almost all insurance products in the market. Some insurers however will further limit coverage, and such limitations can be industry specific and/or considered non-standard. It is important to review these and consider them against your own services and discuss with your broker if there are any concerns.

Definitions – any specifically emphasised or capitalised word within an insurance policy will usually direct the reader to review the definition of that word. For example, the insurer may state “We will indemnify the Insured, up to the Indemnity Limit…” in this case both the word “Insured’ and “Indemnity Limits” would be defined in the wording and need to be reviewed further.

Claims Conditions – this outlines the obligations between yourself and the insurer in the event of a claim. It may include the insurer’s contact information for reporting the claim (often sent to your broker first though), restrictions on admitting any liability to a third party, an insurance company’s right to take over conduct of a claim and settlement processes.

General Conditions – this provides an overview of items such as cancellation of an insurance policy, the jurisdiction and laws of where the policy applies, alteration of risk obligations and terms of payment.