In recent times, COVID-19 has strained many professional service businesses financially. In order to survive these unprecedented times, many businesses are looking for relief from their financial products in order to preserve cash flow. This includes professional indemnity insurance.
It is important to understand that professional indemnity insurance policies operate on a ‘claims made’ basis, and cancelling cover now can have major financial implications for any future claims that arise.
What is a ‘claims made’ insurance policy?
Professional Indemnity insurance is a claims made policy. A claims made policy means that your current policy will respond to claims made during the policy period that arise out of retrospective exposures and professional activities that occurred prior to the current policy period.
An architect designed the roofing of an industrial building 5 years ago. This year, the building and it’s contents experienced major water damage in a significant storm event. The architect’s client who owns and occupies the building, alleged the architect’s roof design caused excess water to enter the building, leading to significant damages. A claim was brought against the architect 5 years after the initial work, alleging negligence in their professional duty, seeking reparations for $200,000 of damage to the property and $100,000 for roofing rectification works to ensure this didn’t happen again.
As a claims made policy, the insurance policy that responds, is the architects current PI policy in place, at the time when they were notified of the claim, not the policy in place 5 years ago when the alleged act of negligence occurred.
Note: This scenario is an example only. Please refer to your specific policy wording to understand retrospective cover limitations in accordance with your circumstances.
Why shouldn’t I cancel my PI Insurance policy?
We urge you to consider these important factors in maintaining your PI Insurance cover:
Covering Your Past Work
Cancelling your professional indemnity cover will mean there is no insurance protection in place for any claims that come to light as a result of your past work. This is a significant financial exposure, where you will be left to foot the bill for your own legal defence costs and any damages payable for a breach in professional duty. Aside from putting your business at financial risk, your personal assets can also be affected if unable to afford the costs of a claim.
Your Contractual Obligations
Do you have any contracts in place (past or present) that require you to hold a certain level of PI Insurance? Be mindful of this when looking to make any changes to your PI insurance policy, or cancel cover.
Some professions require professional indemnity insurance to carry out their work as part of licence e.g. Architects, Design Engineers. Without cover, or sufficient cover in place, you may need to cease operations so not to breach legal requirements.
Break in Cover
If you end coverage at renewal, or cancel your professional indemnity insurance and re-purchase it in the future, there could be constraints around retroactive cover and continuous cover that could limit your coverage in the long term. For example, if you cancel your PI cover, and then repurchase in 12 months time, two scenarios are likely:
- You may only be covered for your professional work from the date you repurchase cover. There will be no covered for any of your past work, which leave a significant exposure if you have been working for a number of years.
- You may have no cover for the 12 month period where you did not have a policy in place.
What are my options?
Here are some alternative options to consider.
- Run-Off Cover – Has your business closed? If so, consider run-off cover. Run-of cover protects you from claims made from your past work only.
- Review your sum insured – If your business / profession is not restricted by contractual obligations or licencing requirements, there may be the option to reduce your limit of indemnity. This should always be done with caution.
- Review on renewal – as Professional Indemnity premiums are calculated on actual income and projected income, some relief in your premium might be achieved if your business is experiencing a decline in income.
- Excess Adjustments – Talk to your insurer about adjusting your excess. In some instances increasing your excess can reduce the premium.
- Consider Premium Funding – Premium funding is designed to make insurance more affordable by spreading the cost of an annual premium evenly across 10 monthly payments. Premium funding can remove the need for large lump sum insurance payments, and free up your cashflow for more pressing investments / expenses.
For professional insurance advice, connect with a CBN Authorised Broker.
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