The insurance industry uses some specific terminology, sometimes using different phrases to describe the same thing.  To assist we have compiled the following list of commonly used professional indemnity insurance terms.

Aggregation of claims

This refers to a clause that combines two or more interrelated claims covered by the policy, to enable them to be treated as a single loss for the purposes of applying the policy limit of liability and excess. Typically an aggregation of claims clause would provide that all claims arising out of, based upon or attributable to a single act, error or omission or series of acts, errors or omissions attributable to the one source or original cause will be considered a single claim and only one excess and one limit of liability will be applied.

Note: Not all professional indemnity insurance policies include this clause. 

Australian consumer law

The Australian Consumer Law refers to harmonised consumer protection legislation across jurisdictions. These reforms include renaming and amendment to the Trade Practices Act 1974 (TPA) which is now named the Competition and Consumer Act 2010.  Professional Indemnity policies often contain extensions covering certain types of claims under The Australian Consumer Law.

Automatic reinstatement (increased aggregate limit of Indemnity)

Professional indemnity policies typically provide a limit of indemnity for any one claim.  Insurers also limit the maximum amount they will pay for all claims under the policy.

There are two different mechanisms to achieve a similar outcome: one is referred to as reinstatement of the limit and the other as increased aggregate limit.  These mechanisms provide that the policy covers up to a specified limit for any one claim and an aggregate limit for all claims under the policy.

For example: You have a policy with a $1,000,000 limit of indemnity and the policy contains one automatic reinstatement.  If a $1,000,000 claim was paid the insurer would reinstate the limit back to $1,000,000 for any subsequent claim.  Therefore, you could effectively have two $1,000,000 claims paid, or ten $200,000 claims, or any other combination up to the $2,000,000 aggregate, provided that the insurer will not pay more than $1,000,000 for any one claim.

Average provision

This refers to a policy clause that limits the insurer’s liability if a payable claim exceeds the policy limit. Where the total amount of a claim (including the claimant’s costs and expenses) exceeds the limit of indemnity, then the insured costs covered under the policy will be reduced on the basis of the proportion which the limit of indemnity bears to the total amount of the claim.

Cancellation

Cancellation is the termination of an insurance policy before the expiry date. Most professional indemnity insurance policies include a cancellation clause allowing the insured to cancel the policy.  These clauses may also outline the calculation of a return premium in the event of cancellation.

The insurer may only cancel a professional indemnity insurance policy in accordance with the provisions of the Insurance Contracts Act 1984 (Cth).

Claim

A claim is usually defined in the policy wording, often as any demand or notice seeking compensation from the insured.

Note: The definition of ‘claim’ varies across policies; some definitions require the issue of legal proceedings whereas others include a verbal claim for compensation.  The definition of claim is important because it usually forms part of the insuring clause which is the principal policy trigger.

Claims made

‘Claims made’ refers to a policy that provides indemnity for claims made against the insured and reported to the insurer during the policy period. All professional indemnity policies operate on this basis which requires the insured to notify claims or circumstances that may give rise to a claim to their insurer during the current policy period in order for their policy to respond.

Continuous cover

These types of clauses provide significant benefits for maintaining a relationship with one insurer.

Claims made policies typically exclude claims arising from facts and circumstances known to the insured before the start of the policy period.

Continuous Cover clauses extend cover under the policy to a claim arising out of a fact or circumstance which could have been (but was not) notified under a previous policy.

For a continuous cover clause to apply, usually the insured must have been insured under a professional indemnity insurance policy issued by the insurer at the time they first became aware of the fact or circumstance that gives rise to the claim. The clause provides a significant benefit of maintaining a long-term relationship with one insurer.

Contractual liability

Refers to liability assumed by the insured by contract through clauses such as express warranties, guarantees, hold harmless clauses or indemnities.  Professional indemnity policies generally contain exclusions in relation to liability assumed under contract; however, some insurers provide extensions to cover certain types of assumed liabilities including novation and contracting out of proportionate liability legislation.

Contributory negligence

Contributory negligence refers to where a claimant also caused or contributed to a loss or liability.  It is a common defence to reduce liability under a professional negligence claim.

Costs exclusive limit of indemnity

The limit of indemnity is the maximum amount the insurer will pay in respect of any one claim covered by the policy. A costs exclusive limit does not include defence costs within this limit; therefore, these costs are paid in addition to the limit of liability.

Costs inclusive limit of indemnity

The limit of indemnity is the maximum amount the insurer will pay in respect of any one claim covered by the policy. A costs inclusive limit of indemnity includes defence costs within this limit of indemnity. This means that costs incurred in defending a claim erode the limit available to settle a claim.

Criminal prosecution defence costs

Some professional indemnity policies include cover for criminal prosecution defence costs for matters arising out of the provision of professional services.  These extensions provide protection for professionals that may be exposed to criminal prosecutions because of their professional activities, such as under safety in design legislation.

Excess

An excess is the first amount of a claim payable by the insured with the insurer paying the balance over that amount up to the limit of indemnity.

Costs exclusive excess

Means the excess does not apply to costs and expenses incurred in defending or settling a claim. The insured only pays the excess on the compensatory amount of a claim.

Costs inclusive excess

Means the excess applies to costs and expenses incurred in defending or settling a claim.  The insured pays the excess whether it relates to defence costs or the compensatory amount of a claim.

Fraud and dishonesty

Professional indemnity policies generally contain exclusions in relation to claims arising from fraudulent, dishonest or criminal conduct.  However, policies typically contain a clause that writes back this cover for innocent parties.

Governing law

Professional indemnity policies typically contain a clause that specifies the jurisdiction under which disputes between the insured and insurer will be determined.

Indemnity and hold harmless clauses

Clauses that require one party to indemnify (protect) and therefore shift liability from one party to another.  They are common features of client drafted consultancy agreements. Professional indemnity policies typically exclude liability assumed under contract (including indemnity and hold harmless clauses) unless that liability would have existed in the absence of the contract.  Some insurers can provide extensions to cover liability assumed through indemnity and hold harmless clauses.

Inquiry costs

Professional indemnity policies often contain extensions that provide cover for costs incurred by an insured in attending an inquiry conducted by a professional or regulatory body.

Insured costs

Refers to costs and expenses incurred in defending, investigating or settling a claim, that are covered by a policy.

Insuring clause

This clause sets out in generally broad and basic terms what the policy will cover and who is insured.  The use of definitions, extensions, exclusions and conditions then broaden or restrict the cover provided.

Intellectual property rights

Refers to rights enshrined in law to protect original creative and intellectual effort including laws on copyright, design, patent, circuit layouts, plant varieties, confidential information and trademarks.

Professional Indemnity policies often contain extensions to cover claims arising out of breach of intellectual property rights.

Joint venture liability

Some professional indemnity policies cover claims arising out of joint ventures.  Under some policies the cover is an optional extension; further, some policies will only cover liability arising from unincorporated joint ventures. If you are or have been part of a joint venture, it is important to check that the cover provided matches your exposure and joint venture structure.

Jurisdictional limits

Refer to the jurisdictions and countries where the policy will respond to claims being made against the insured. Some policies will only respond to claims brought in certain specified jurisdictions, whereas other policies cover worldwide jurisdictions. Most insurers impose restrictions on North American jurisdictions; this may be subject to change by negotiation.

Libel and slander (defamation)

Professional indemnity policies often contain extensions to cover claims arising from unintentional defamation (libel and slander).

Limit of indemnity

Is the maximum the insurer will pay for any one claim covered by a policy.  Refer also to automatic reinstatement.

Liquidated damages

Damages which have been contractually pre-determined in the event of a breach of a contract. Professional indemnity policies typically contain exclusions in relation to liability assumed under contract (including liquidated damages) unless the liability would have existed in the absence of the contract.

Lost documents

Professional indemnity policies often contain a lost documents extension to cover costs associated with the replacement or restoration of documents that have been lost or destroyed.

Novation

Novation is a mechanism whereby liability for services provided by one party can be assumed by another; it is a common feature of construction projects.  Professional indemnity policies typically exclude liability assumed under contract (including by novation) unless that liability would have existed in the absence of the contract.  Some insurers can provide extensions that cover liability assumed by novation.

Principal’s previous business

Principal’s previous business clauses provide cover for claims arising out a business previously conducted by a principal of the insured firm.  Some insurers cover the previous entity whereas others limit cover to claims against the individual.

Prior claims or known circumstances

Claims made policies generally exclude claims made prior to the period of insurance as well as claims arising from facts and circumstances known to the insured before the policy period.

Professional duty

A professional being a person who exercises and professes to have a special skill owes a duty of care to a client in the performance of their professional services.  The principal purpose of a professional indemnity policy is to cover claims arising from a breach of this duty.

Professional services

Professional indemnity policies cover claims arising out the provision of professional services as specified in the policy.  The policy wording is usually drafted so that it will only respond to claims arising out of the services or business specified; therefore, it is critical that they encompass all the professional services deliverables of the insured.

Proportionate liability

Where loss, liability or damage was caused by multiple parties, proportionate liability legislation apportions liability to the extent each party caused or contributed to the issue.

Some client-drafted contracts require the consultant to ‘contract out’ of this legislative protection; this may leave the consultant 100% liable for something that they were only partly responsible for.

Professional indemnity policies generally contain exclusions in relation to liability assumed under contract; however, some insurers provide extensions to cover certain types of assumed liabilities including contracting out of proportionate liability legislation.

Retroactive date

Is a date specified in professional indemnity policies; claims arising out of an act, error or omission occurring before that date will not be covered by the policy. Policies will typically note a specific date or where the insurer does not intend to limit retroactivity the retroactive date will be specified as ‘unlimited’.

Run-off cover

Professional indemnity policies operate on the ‘claims made’ basis which requires that a policy is continually maintained into the future to maintain insurance protection.  Some insurers provide run-off cover which is ongoing insurance for a business that is no longer trading.  Run-off cover can be purchased annually and in some instances on a multi-year basis.

Severability and non-imputation

When there is more than one insured under a policy a severability and non-imputation clause protects an innocent party where another insured party has failed to comply with:

• their duty of disclosure under the Insurance Contracts Act 1984 (Cth); or
• comply with any obligation, term or condition of the policy.

Sub consultants

Professional Indemnity insurance policies usually cover the insured principal consultant’s vicarious liability arising out of the professional services provided by sub consultants. Policies typically do not automatically extend to insure the sub-consultant.  Some insurers will agree to extend the protection provided by a policy to include sub-consultants.

Territorial limits

Territorial limit clauses restrict cover to claims resulting from the conduct by the insured of professional services in certain countries.   Insurers often exclude claims arising from services provided in North America.

The information provided here is general advice only and has been prepared without considering your objectives, financial situation or needs.  If you would like specific advice, please call 03 9059 4000 to speak to one of our specialist consultants