A Client’s Guide to Professional Indemnity Insurance
By The Association of Geotechnical & Geoenvironmental Specialists
The Association of Geotechnical & Geoenvironmental Specialists (AGS) is a non-profit making trade association established to improve the profile and quality of geotechnical and geoenvironmental engineering. Consultants (including contractors undertaking design work) hold Professional Indemnity Insurance in order to protect themselves against negligence claims. Clients do not always appreciate that PI insurance is in place primarily to protect the interests of the insured and not those of his client.
This guidance has been prepared by the AGS to assist clients to better understand PI Insurance issues and the need or agreement with their geotechnical and geoenvironmental advisors and designers on the most sensible allocation of financial risk.
In order for any PI policy to be triggered the claimant (usually the client) has to establish the advisor’s legal liability for the losses that he has incurred but the legal process can be lengthy, uncertain and expensive. Although many potential clients believe otherwise, it is not an insurance policy that can be called upon directly to cover the client’s ‘first party’ losses.
A client has only effectively transferred a risk when he can be properly reimbursed for any financial loss that flows from that risk. A risk transferred through a contract of appointment where the financial consequences cannot be borne by the recipient is not a managed risk.
As advisors and designers, the majority of AGS Members have few liquid assets and are, in the main, dependent on their PI policy to pay out on liabilities for their advice or design. If they breach their policy conditions or if the settlement is greater than the amount insured then it is the client as claimant that suffers.
This guide aims to assist clients to better understand PI insurance issues and the need for agreement with their advisors and designers on the most sensible allocation of financial risk.
Professional Indemnity Insurance: Some Basic Principles There are a number of important aspects of PI insurance which can act against the recovery of loss under a PI policy.
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• The claimant needs to prove the insured’s legal liability for the loss suffered. Losses can occur even when no liability attaches to the advisor.
• PI insurance is generally only available for periods of twelve months so the advisors need to renew their cover arrangements on an annual basis. A failure to do so would leave the advisor uninsured.
• In common law countries, PI policies generally operate on what is known as a "claims made" basis. This means that it is the policy in force when the insured party first notifies a claim (or a circumstance that might give rise to a claim) to his insurers which applies. The policy, if any, that may have been in place when the appointment was made, or when the alleged breach of contract or negligence arose, is irrelevant.
• Policies will either be on a ‘costs inclusive’ or on a ‘costs in addition’ basis. The former means that the legal costs have to be paid out of the insured sum before paying the claimant, while in the latter the full amount of the insured sum is available to the claimant with all legal costs being paid by the insurer ‘in addition’ to the sum insured. This latter basis is therefore of greater potential benefit to clients who could be inadequately reimbursed for their losses if the insured had his PI on the former ‘costs inclusive’ basis.
• Advisor appointments may involve periods of potential liability over a number of years. Therefore, should an advisor fail to renew its annual cover, it is effectively uninsured for any work undertaken at any time in the past, leaving the potential claimant unable to recover their loss through PI Insurance.
• PI policies in the future may not be available at commercially acceptable premiums or may not be available at all to cover the type of work originally carried out by the advisor.
• An insurance company may not be able to pay a settled claim if it goes into liquidation prior to the date of settlement despite the claim having been properly notified within the policy conditions. It would then fall to the insured to settle the claim from their assets.
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