Question 1

What is a claims-made policy and how does it differ from an occurrence-based policy?

Accepted Answer

A claims-made policy covers claims that are made (or reported) to the insurer during the policy period or an extended reporting period. The key factor is when the claim is reported, not when the incident occurred. On the other hand, an occurrence-based policy covers claims that arise from incidents or events that occur during the policy period, regardless of when the claim is reported. The key factor in this case is when the incident took place and not when it is reported.

Question 2

What is a retroactive date?

Accepted Answer

A retroactive date is applied to claims-made policies and defines how far back in time a breach of professional duty can occur for your policy to respond. As an example, consider that a professional purchases a PI policy on January 1, 2023, and a retroactive date of Inception is applied (i.e., January 1, 2023). This means that the insurance policy will cover claims or legal actions arising out of professional services provided on or after January 1, 2023.

Question 3

What is meant by costs inclusive versus costs exclusive (limit/excess)

Accepted Answer

Where a limit of liability is described as costs inclusive, this means the limit afforded includes both the indemnity (the compensation amount paid to a claimant) as well as the costs and expenses incurred in defending the claim. Conversely, a costs exclusive limit of liability applies to the amount paid to the injured party only (indemnification), and costs and expenses are paid in addition by the insurance company (often capped).

A “costs inclusive excess” (or deductible) means that the excess amount applies to the total costs associated with a claim, including legal expenses, damages, and other related costs. In this case, the policyholder is responsible for covering these costs up to the excess amount, and the insurance company will start paying once the costs exceed the excess.

Under a “costs exclusive excess”, the deductible or excess amount only applies to the indemnity portion of a claim. Legal defence costs are typically covered separately, and the policyholder doesn't need to pay the excess for these costs. Instead, they are covered by the insurance company from the outset.

Question 4

What is contractual liability and why is it important?

Accepted Answer

Contractual liability in professional indemnity insurance refers to the responsibility that professionals might take on through contracts with their clients. This includes how this liability is covered in a professional indemnity insurance policy.

Professionals often sign contracts with their clients when they provide services. These contracts spell out the professional's duties, the work's scope, deadlines, and even clauses about protection. When professionals buy professional indemnity insurance, it can cover them for contractual liabilities, as long as these liabilities come from events listed in the insurance policy. This coverage can be broad or limited to professional mistakes or negligence.

It's crucial to understand the terms and conditions of your insurance policy. Some policies might not cover certain types of contract-related liabilities. If a client or someone else sues the professional, claiming a contract breach or professional error, the professional indemnity insurance policy comes into play. The insurance company will typically investigate the claim and, if it's valid, provide coverage for legal expenses. If necessary, it can also cover any settlements or damages awarded.

Question 5

What are territorial and jurisdictional limits and how are they different?

Accepted Answer

Territorial limits define the geographical area or region where the insurance policy provides coverage for work performed. This means the insurance policy specifies the locations or countries within or from which services can be supplied.

Jurisdictional limits relate to geographical area or regions the policy will respond to claims brought within the court system. This means the insurance policy specifies the locations or countries within which legal action can be heard.

In summary, territorial and jurisdictional limits relate to the physical locations or regions where the insurance coverage is valid, and you should ensure these extend to all locations where you carry out work or clients are based.

Question 6

What is the difference between a limit reinstatement and aggregate limit:

Accepted Answer

On face value, a limit of indemnity with 1 reinstatement and a limit of indemnity with an aggregate of double the limit may seem the same, but they work differently.

• Reinstatement: If you have a policy with a reinstatement, the insurer restores the full limit of indemnity after a claim, even if it's partially used. The limit will only be reinstated the number of times specified on the policy.
 •  Aggregate Limit: With an aggregate limit, your coverage is reduced by the actual claims made. It provides unlimited reinstatements it is fully exhausted, providing more certainty of the level of coverage afforded.

Question 7

Can an additional insured be added to the policy?

Accepted Answer

In many cases, it is necessary to include an additional insured on your insurance policy, thereby extending liability coverage to this party. Such requests frequently originate from parties with a vested interest in your operations, including contract manufacturers, subcontractors, vendors, and other partners within your supply chain. This practice is common in business relationships where one party seeks protection from the potential liabilities of the other party.

Question 8

What are the implications for adding an additional insured party?

Accepted Answer

Adding an additional insured party to an insurance policy carries certain implications that are important to understand. An additional insured typically enjoys similar rights and responsibilities as the primary policyholder. This means that they can often file a claim directly against the policy and have access to the policy's coverage limit. However, it's crucial to note that if a claim is made against both the primary insured and an additional insured, it can deplete the liability limit more rapidly, potentially leaving the primary policyholder with insufficient protection.

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