An Overview of Professional Indemnity Insurance

Professional Indemnity Insurance (PII) policies protect against legal liability and pay damages arising out of negligence and performance of professional duties. Professionals such as doctors, legal professionals, Chartered Accountants, Architects and Engineers (A/E), etc. are covered by PII.

Risks are classified into three broad groups. For doctors, professional negligence may result in bodily injuries. Whereas, for auditors and accounts, professional negligence may result in financial losses. As far as architects and engineers are concerned, the risks associated with professional negligence may result in material damage and/or bodily injury.

So, the basis of liability is negligence. For professionals, there exists a duty of care. Negligence is the breach of that duty and the loss or damage caused by that breach.

In terms of the professional indemnity for architects and engineers, during the design phase, exposure arises due to error, omission and negligence during the preparation of the plans, design drawings and specifications. Whereas, during the supervision phase, this is due to mismanagement.

It is important to keep in mind that PII policies are:
• third part in nature
• do not cover redesign costs
• the Employer is not named

What are the types of liability claims resulting in completed works not being fit for their intended purpose?
• faulty design
• negligent material selection
• negligent plans and specification preparation
• breach of contractual duties and obligations
• failure and supervision of the construction site, or
• non-compliance with specialist recommendations

What are the five criteria or bases for a claim?

  1. a negligent act, negligent error or negligent omission, committed or omitted during the policy period. For this, the policy period could be extended to cover the period stated as a retroactive date excluding the extended reporting period.
  2. a third-party claim is first made against the insured during the policy period. That is, the whole policy period, including the extended reporting period.
  3. it should be compensatory damages. Such indemnity shall include claimant costs and the insured’s approved defense costs and expenses.
  4. it shall be for bodily injury, material damage or construction damage
  5. the claim should arise out of the ordinary course of performance

Note: All of these criteria have to be met for a claim to be considered valid.

Generally, there are three types of claim-based cases: one covering the design period and the supervision period plus the extended reporting period; one covering the design period and supervision period plus the stated period; and, lastly, where the design was not done by the A/E, in this case it covers the retroactive period and the supervision period.

This concludes part one. Part two (to be posted in a fortnight) will examine exclusions in Professional Indemnity Insurance.

This guest post was written by Mansoor Ali, FICCP. It is the first in a two-part series and was originally published as a LinkedIn video, viewable here