Professional indemnity - when ‘claims are made’
As most of you will be aware the majority of domestic insurance policies of Professional Indemnity (PI) are written on a claims made basis which means that, regardless of when the work to which a claim relates was carried out*, it is the insurers subscribing to the policy current at the time that the claim is made (or intimated) for whose consideration the claim will fall, and those are the policy terms to which the claim will be applied.
*A retroactive date is usually stated on a PI policy schedule. If stated this is the date from which work commencing will be covered by the policy otherwise if stated as ‘none’ the policy has no date restriction for responding to claims arising from past work undertaken.
A claims made policy differs from a conventional liability policy written on a matters arising basis which pays out for claims that arise out of loss or damage that actually happens during a typical 12 month period of cover. Employers and public liability covers are normally written on this basis.
Utmost good faith
A unifying factor in all insurance policies is that they must be based on a mutual duty of utmost good faith between insurer and insured. At the time the risk is written, insurers are wholly dependent upon the accuracy of its presentation by or on behalf of the insured. Similarly, when a problem becomes manifest, insurers' response will in the first instance be conditioned by how the problem or potential problem is relayed to them. On the other side of the equation, insureds need to have the confidence that insurers will apply policy terms fairly and will provide them with the protection that they have paid for.
The Insurance Act 2015
The Insurance Act 2015, which comes into force on 12th August 2016 was the result of a joint review by the English and Scottish Law Commissions, and introduces a number of changes including to the law governing disclosure. In part in response to the capability created by technology of "information-dump" (supplying a large and unmanageable volume of information) the Act introduced the duty of fair presentation, obliging the parties to engage meaningfully with each other. On the insured's part, a fair presentation constitutes disclosure of matters which might influence an insurer either in the extent of its further enquiries, or in whether, and on what terms, to write the proposed risk. On the insurers' side fair presentation constitutes making further enquiries in to the material circumstances. All of this encourages closer co-operation between insurer and insured, in recognition of the common commercial purpose for an insured consultant to be able to proceed confidently in providing its professional services, thereby generating more activity for which insurance is required.
That same co-operation is encouraged both in the Insurance Act provisions relating to insurer remedies for breaches of disclosure obligations and in typical innocent non disclosure provisions which have been relatively common in consultant policies for many years. Under the Act, there are grades of response from insurers in the event of an insured having failed to make proper pre-contract disclosure. These grades depend on whether such failure was deliberate and reckless and/or whether insurers would have entered into the contract of insurance on different terms, had proper disclosure been made. Similarly, with innocent non-disclosure provisions in professional indemnity policies, where an insured is in breach of a policy condition which puts in jeopardy their insurance protection.
In claims made policies, and as part of the insured's overriding duty of good faith, disclosure must be made to insurers current at that time, upon receipt by the insured of any declared intention to bring a claim, or of any circumstance which may/is likely (depending on the particular wording) to give rise to a claim. Assuming that those current insurers accept that this is a notifiable circumstance or claim (as the case may be) it is that policy which will be on risk. However in the same way that the Insurance Act reforms seek to provide some codified rules to establishing what should be notified, special provisions in many policies recognise the somewhat subjective nature of notification. It is not always easy, for example, for an architect to differentiate between the everyday "rough and tumble" of an overbearing and demanding client simply seeking completion of its project on the one hand and an embryonic compensation claim on the other. It may be that under the notification rules of the insurance policy, notification should in fact have been made at an earlier point. In that eventuality, special conditions may be included within the policy which state that- provided insurers are satisfied that the failure to make earlier disclosure was innocent and free from any intent to deceive, and that no prejudice has accrued to insurers in the interim- protection under the policy and in respect of the specific incident will be available (albeit perhaps on different terms, if those would have applied had proper disclosure been made).
We will watch with interest how the application of the new Insurance Act impacts on any contentious claim notifications going forward along with any interaction of innocent non-disclosure clauses included within professional indemnity policies.
This article was written by Bluefin Professions in association with DWF, a law firm that works closely with Bluefin and its clients in relation to professional risks, including construction.
Any views or opinions expressed in this briefing are for guidance only and are not intended as a substitute for appropriate professional guidance. We have taken all reasonable steps to ensure the information contained herein is accurate at the time of writing but it should not be regarded as a complete or authoritative statement of law.