Professional Indemnity Insurance – the Hidden Details

This is a guest blog from our partner Marsh Commercial (previously Jelf). 

A recruiter will generally need professional indemnity insurance to cover their own risk of errors and omissions, which could result in costing clients’ money. In addition, they also need cover for errors and omissions of the workers supplied. This is often required by hirers, under more non-standard contract terms and conditions.

Failure to insure either circumstance could prove costly, therefore it is important to understand exactly how claims can arise, and what cover is required. Will you be covered for not only defence costs but also damage awards payable to hirers, should you, the recruiter, become legally liable?

In our latest blog, we take a closer look at the common differences found in a professional indemnity policy, and share our top recommendations.

1. Each and every claim limit vs aggregate limit

The limit of indemnity can apply either to ‘each and every claim’ or in the aggregate. Each and every claim means that each claim will benefit from the full limit of indemnity, whereas an aggregate limit is the maximum that an insurer will pay in any one period.

Top tip: Always look for an each and every claim limit to ensure that your insurance cannot be exhausted.

2. Costs inclusive limits vs cost in addition limits

The limit of indemnity can either include the costs of defending an action or give these in addition to the limit.

Top tip: We recommend that you look to obtain a policy which gives a cost in addition limit. Often the cost of defending a claim can actually be more than the damages awarded.

Common pitfalls: Sometimes to offer a cheaper policy, an insurer will restrict the cover offered by only giving a costs inclusive limit of indemnity. Whilst these limits may seem the same they will only offer you a lower level of protection. 

3. Excess applies to defence costs

Most policies will have a policy excess known as an Insured’s contribution. In order to cut costs, some insurers will apply the excess to the defence costs of a claim. This means that should an allegation be made against you, you will be required to pay a proportion of those costs.

Top tip: Always look for a policy where the excess or Insured’s contribution do not apply to defence costs.

4. Civil liability policy wordings VS Errors and Omissions (E&O)

The basis of the policy wording is very important, and it is vital to understand the differences between an errors’ only wording and a civil liability wording. A civil liability wording not only covers errors and omissions but also other civil liabilities such as libel and slander, loss of documents and dishonesty. In opposition to an errors and omissions wording, a civil liability wording is defined by its exclusion rather than its inclusions, meaning that if something is not excluded then generally it is deemed to be included.

Top tip: We recommend that you always opt for a full civil liability wording, and read the exclusions very carefully.

Common pitfalls: Not all civil liability policies offer the full range of covers and often things which may seem to be offered at the beginning of the policy, are taken away or reduced significantly in the exclusions section.

5. Claims notification

Insurance policies will always contain a clause which refers to the notification of claims. Because professional indemnity insurance is offered on a “claims made” basis, claims must be notified within the policy period and without delay.

Top tip: Always look for a policy which allows a reasonable period of notification and be wary of any policy which stipulates a tight or strict time frame i.e. claims must be notified within 7 days.

Common pitfalls: Failure to notify a claim may lead to an insurer declining to provide indemnity. Each insurer handles notification of claims differently.

6.Retroactive cover

Professional indemnity insurance is underwritten on a “claims made” basis rather than a “claims occurring” basis. This means that a person must hold a valid insurance policy at the time when a claim or complaint is made, irrespective of when the allegedly incorrect advice was given or document drafted.

Insurers will apply a retroactive date to a policy which stipulates how far back advice can be given, or documents drafted in order for a claim to be valid under the policy.

Example:

If a business commenced trading in January 2018 but did not buy professional indemnity insurance until January 2019, an insurer would most likely apply a retroactive date of the 1^st January 2019. This means that if a claim occurs, in March 2009 for advice that was given prior to the 1^st January 2019 this would not be covered as it precedes the retroactive date of the policy.

Top tip: It is beneficial for you if you can have unlimited retroactive cover, although this will only apply if you have had a professional indemnity policy in force at all times.

Insurance can prove a minefield when it comes to jargon-filled exclusions and inclusions, so our advice would always be to speak with a professional broker such as Jelf who can ensure you know what you are and are not covered for.