Professional indemnity insurance policies contain clauses which say you have to report any ‘circumstances’ which may give rise to a loss or claim against you or your firm.
While this sounds simple in theory, just how serious does a problem have to be before it becomes a circumstance and what are the risks you face if you fail to tell your insurer?
Identifying a claim is easy, you may receive a formal claim in writing or a notice to commence legal proceedings against your firm, but deciding what constitutes a circumstance is rather more subtle. It may be no more than a verbal complaint from a client, a job that simply hasn’t ‘worked out’ as well as it might, or spotting a mistake in some work about which the client is completely unaware. Equally you don’t need to report every minor hiccough in a normal professional relationship to your insurers, so getting the balance right in reporting is essential.
In deciding what constitutes a circumstance, it is worth thinking about why an insurer wants these events reported. Where there is an insurance claim the insurer is allowed to take over and ‘stand in the shoes’ of the insured, a right known as ‘subrogation’. This gives them the insured’s rights and remedies in law and the opportunity to settle claims early on a commercial basis. Failure to report a circumstance which turns into a claim could affect this ability and mean that the final settlement becomes more complex or costly.
Sometimes professional firms can be reluctant to report circumstances as they fear that it may affect their claims record and impact their insurance premiums, but in reality insurers do expect to see some circumstances from their insureds. It would be far more of a problem to fail to report a circumstance that subsequently turned into a claim as your firm could potentially find itself uninsured for failing to keep to the policy terms.
On the other hand, if you find you are identifying issues that could be regarded as circumstances on a regular basis, it could be that your firm has a problem which can be addressed with risk management. Here a thorough review of risk management procedures could prevent claims and make your firm more attractive to insurers in the future. Click here to find out more about Brunel’s risk management services for professional firms.
If you have any doubt at all about whether an issue might be termed a ‘circumstance’ let your broker know immediately. We are able to give you guidance on whether the issue needs reporting and will present the facts to the insurer in a clear and unambiguous manner. The golden rule is ‘if in doubt – set it out’.
(NB – Some policies contain a more diluted requirement to notify “circumstances” which are likely to give rise to a loss or claim against you or your firm. Whilst a less onerous reporting requirement, the above comments do apply to these policies also!)