Professional indemnity – what is it and can you cancel it?

Professional indemnity insurance

Alex Dean, a recruitment specialist at Stackhouse Poland, looks at the key issues in relation to Professional Indemnity Insurance.

For those readers (un)fortunate enough to be responsible for your business’s Insurances you will know that some covers are an absolute requirement, either through legislative provision such as Employers’ Liability or through the necessity of protecting your largest risk exposure- such as Professional Indemnity Insurance (PII).

This blog will focus on PII and why it is such an important insurance for businesses operating in the recruitment industry. We will also explore the importance of keeping the cover in place – even when you may think it may no longer be required.

PII is intended to indemnify the policyholder for legal costs and awards from either breach of service agreement or where the service rendered has been negligent and has caused the end client financial loss.

An example within recruitment might be where a recruiter seeking to fill an IT contractor vacancy requiring a C++ developer supplies a JavaScript specialist instead. If the contractor subsequently corrupts the data that is being developed and the end client has to reinstate it at their cost, the PII policy will pick up the expenses suffered by the end client and for which the policyholder is responsible through their negligence.

It should also be noted that Recruitment PII should include a number of extensions outside of standard PII such as Vicarious Liability (the policy will react where the recruitment business hasn’t been negligent in the placement of the personnel), dishonesty of placed personnel and dishonesty of your own employees.

The circumstances giving rise to a claim under a PII policy can, therefore, be quite amorphous – a programming error by the JavaScript specialist might not be identified until six months after the contract has finished and even then, it may be difficult to ascertain when exactly the error was made.

Given the uncertainty of when the error can actually occur against when it is actually discovered and subsequently reported to the Insurer, the claims ‘trigger’ under a PII policy is called ‘Claims Made’- i.e. the policy reacts to the claim when it is reported to the insurer, rather than when the incident actually occurs.

This is different to almost all other types of insurance policy, where the policy reacts to when an incident occurs because when the incident occurs, it will have a very definite record of when, where and how and will be reported very soon after the event.

Take, for example, Employers’ Liability (EL) insurance. A claim under an EL policy will have a very clear date and will be reported very soon after the incident occurred – an instance of an employee tripping over loose wiring in the office and breaking their wrist will be recorded and the notification made to the insurer almost instantaneously.

Because these types of claim are very clear and reported to the insurer almost as soon as they happen, the insurer at the time agrees to be bound by the claim and will indemnify the policyholder accordingly. We call this trigger ‘Claims Occurring’.

Under ‘Claims Occurring’ the insurer at the time will be liable because the circumstances and causes will generally be known and the claim reported very soon after the incident. The insurer will then factor in the claim within their rating models.

Under ‘Claims Made’ the insurer at the time of the reported claim agrees to be liable, regardless of when the claim occurred. The insurer therefore essentially agrees to be held liable for all work previously undertaken, including any claims that have already happened but are undiscovered.

You can think of the two triggers as mechanisms designed to bring both types of cover in line with each other so that the insurers can better calculate the level of risk and rate their policy accordingly.

If a Claims Occurring policy is cancelled, the cover will still exist for the period that the policy was in place, because any likely claim will be known by the insurer and accounted for in their rating models. This is almost always the case except for long-tail claims where the injury does not present itself for many years after the incident, such as mesothelioma claims (although Asbestos cover is Claims Made for this reason).

If a Claims Made policy is cancelled all past cover is also cancelled because an insurer must be ‘on cover’ at the time the claim is reported. Without an active insurer, there can be no cover under the policy. This is why Insurers request a retroactive date (i.e. the date when the insurance was first taken out) because this is the period they are actually insured.

In circumstances where a policyholder ceases to undertake the work for which they require the PII insurance, it is common practice to place the cover into ‘Runoff’. Runoff recognises that whilst the policy is no longer required the insurer at the time keeps it on standby and ready to react to any claim that might subsequently be notified. A policy in Runoff will only react to claims that have occurred prior to the date of the Runoff cover, not work that has been undertaken after.

The time for which the policy should be kept in Runoff will be determined by a number of factors, however, it is generally dictated by the Statute of Limitations Act 1980. Under the Act, Tort claims are limited to six years from the date that the tortuous incident occurred. Therefore, any PI policy should be kept in place for at least six years.

The limitation under the act can be amended by contract to extend past six years- for example, a contract under seal would extend liability for a period of 12 years.

As one of the major purchasers of PII it is important that recruitment businesses understand the circumstances that the policy will react to and implications of cancelling the policy without retaining the past coverage in place.

If you should be in any doubt over your PII coverage please contact your insurance intermediary.

Call us on 0330 660 0401 or email to get in touch.

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