Navigating the hard PI insurance market
For a number of professions – from lawyers to accountants, real estate agents to architects, medical practitioners to miners, fitness instructors to finance brokers, marketing consultants to IT advisors – having professional indemnity (PI) insurance is mandatory. For others, having the cover is not about licence or membership conditions but rather contractual obligations, with the consultant having a scope of advice or retainer agreement.
As any self-employed person or business that provides specialist services or gives advice to a client could be held liable for losses the client suffers as a consequence of that advice, having PI insurance is a necessity.
PI insurance
PI insurance (also known as E&O or Errors & Omissions cover) is designed to protect the insured against claims of malpractice, negligence, professional misconduct or breach of duty made by a client who suffers a financial loss or other damage as a result of receiving professional advice or services from the insured.
Despite utmost care, sometimes mistakes and lapses in judgement can occur, leading to negligence or poor advice being given. A PI claim could arise from any number of circumstances including:
- Breaching a duty (e.g. privacy, confidentiality and fiduciary duty).
- Failing to provide promised services.
- Providing faulty advice.
- Being negligent in rendering professional services.
- Providing poor, incomplete or incorrect work.
- Making mistakes or oversights.
- Accidently making omissions.
- Breaching consumer, competition and Fair Trading acts.
- Defaming a client.
- Failing to follow and meet contractual agreements.
PI insurance covers legal liability for claims arising from an act, error or omission of duty by the insured. Essentially, the insurance covers the insured for errors made in the work or services the insured provides to the client.
A PI policy will generally cover:
- Damage and compensation costs against the insured.
- Legal and court fees.
- Public relations fees (to help protect the insured’s reputation).
- Investigation costs.
Cover is generally excluded for:
- Known claims and circumstances that may have occurred prior to the period of insurance.
- Contractual disputes or liabilities.
- Disputes in relation to professional fees including refunds.
- Personal injury or property damage (unless caused by a breach of the insured’s professional duty). These kinds of claims would typically be covered by public liability insurance.
- Intentional damage or misconduct.
- Acts of fraud and dishonesty.
State of the market
In the last five years, the PI insurance market has undergone considerable transformation. Insurer appetites and terms have been significantly impacted by sustained losses due to surging litigation, heightened scrutiny and tougher regulations.
In simple terms, PI insurance was increasingly unprofitable for insurers. As a result, PI cover was subject to:
- Increased premiums.
- Reduced capacity.
- Less competition among insurers (several exited the market).
- Narrowing of coverage.
- Toughening risk criteria.
- Lower claim limits of indemnity.
- Lower sub-limits.
- Conditions and warranties being more onerous.
- More exclusions.
- Higher excesses.
- Focussed coverage restrictions.
After several years of hard market conditions, a softening for financial and professional (FinPro) lines began in 2022 and has continued (find out more in our latest Insurance Market Summary).
For several FinPro lines, conditions improved for insureds thanks to the introduction of new local insurers and competition from the London market. Overall, FinPro lines have seen premium reductions and more favourable terms for insureds in the last couple of years. However, this has not necessarily been mirrored in the PI line.
While securing PI cover for some insureds has become less challenging, for other professions hard market conditions persist. Insurers remain cautious about covering industries or professions with a higher PI risk exposure such as design and construct, engineering, and financial planning.
The hard market conditions still being experienced are influenced by the current economic climate and legal landscape – with tough economic conditions, higher interest rates, weak business growth, rising costs, high inflation, increasing insolvencies, more and stricter regulations, changes to legislation, and surging litigation. Historically, such dynamics have resulted in an increase in PI-related claims as the advice of consultants or advisors came under greater scrutiny and the potential for litigation increased.
Navigating the hard PI market
In the current conditions, working with an experienced insurance broker is invaluable. Your EBM Account Manager can help you secure the PI insurance you need.
Top tips:
- Start the renewal process early (six months is recommended) – it gives us the best possible chance to formulate a strategy that will provide the best outcomes.
- Discuss your cover options – we’ll explain the variations in covers being offered by different insurers and what they could mean in terms of the amount of risk being retained.
- Map out your key priorities before we approach the market on your behalf.
- Set an agreed strategy with your broker for the coming 12-18 months.
- Help us to craft a compelling risk profile narrative for insurers by providing detailed information about your business operations, including a breakdown of professional fees, contracts and comprehensive retainer agreements.
- Be prepared to provide additional information, especially about your claims history.
- Ensure you understand the policy inclusions and exclusions, e.g. in respect to exclusion wordings.
- Consider your contractual obligations and whether the policy will cover them, e.g. contractual terms such as broadly worded indemnities may not be covered by a PI policy.
- Consider restructuring insurance programs – we’ll help you consider whether the limits are appropriate, whether sub-limits or higher deductibles should be considered or if other structures should be explored.
- Be prepared to demonstrate how your business is actively managing risk and provide detailed information on risk control processes and your risk management program.
- Understand your duty of disclosure obligations, be diligent in notifying your insurer (through your broker) about circumstances that may give rise to a claim.
One of the most important aspects of the business when it comes to PI insurance is contractual obligations. The scope of advice or the retainer agreed upon at the beginning of a project or working relationship needs to reflect the specific advice or full scope of the work which is to be undertaken. When a claim arises, the description of the scope of services provided in the contract is critical information and can determine whether the claim is successful or otherwise. Reviewing and updating the retainer at regular intervals is also important in mitigating potential exposures.
EBM’s contract review service is available to our clients to assist with understanding what insurance cover is required as part of any commercial contract.
Liability obligations can be buried deep in a contract between principals, contractors and sub-contractors, and the exclusions detailed in many PI policies can often mean the insured doesn’t actually have the cover they need. The contractual liability review can help you to understand your contractual indemnity obligations so your EBM Account Manager can seek appropriate cover to meet those requirements. You may also be advised about what changes to the contract are needed to ensure your current insurance program is compliant. Talk to your EBM Account Manager about arranging a contract review.
