PROFESSIONAL INDEMNITY – Why Claims Don’t Get Paid
Professional Indemnity policies are written on a claims – made basis. The insured seeking indemnity is required to lodge a matter or notification that may give rise to a claim within the policy period that the notification is received. Difficulties can arise in the claims process where the insured:
- Does not notify the insurer within the policy period of an act, error or omission they become aware of which may give rise to a claim.
- Does not notify the insurer of a claim in the policy period when they are first contacted by a third party, whether by phone or email, a letter of demand or subpoena.
If a claim is actually made against the insured by a third party during the period of insurance but is not notified to the insurer until after the policy has expired, the insurer may refuse to pay or may reduce its payment under the policy if it has suffered any financial prejudice as a result of the late notification.
Example:
An Insured receives a subpoena in 2012, complies with the production of documents requested, but does not make their broker aware of it. This would be considered by the insurer a circumstance that should have been notified at that time.
Three years later in 2015,the insured receives the Statement of Claim from the plaintiff’s solicitor and, at that time, they notify their Broker who in turn notifies the Insurer. As part of the claim process, the Insurer will establish that you were aware of the circumstance in 2012 and then determine whether its rights have been prejudiced.
In certain circumstances, new unrelated claims that occur post 2015 may be affected because the 2012 incident
was not notified when the Insured first became aware of it.
Examples where matters are often overlooked:
- Experience shows that employees can sometimes be aware of incidents but form an opinion that there is no need to notify their employer because nothing is likely to come of it, only to find that it does become an issue, sometimes years later. For this reason we recommend you conduct enquiries with all parties within your organisation, to ensure that all known circumstances that could give rise to a claim, are identified and reported to insurers prior to the expiry date.
- A fee dispute with a client may arise to trigger the termination of the contract and may have nothing to do with the service or advice provided, they simply want out of the contract. We often find that these types of disputes result in a potential claim further down the track and therefore recommend that you notify the circumstance at the time. There could be defence costs accrued over time.
- Business activities can change but the Insured fails to notify the broker and therefore the occupation covered by your policy may not include the changed business activities.
- Previous business names may no longer be relevant and have therefore been deleted from the policy. Whilst the entity may have no assets, the previous directors become personally liable and should therefore remain as an insured entity.
- New entity names are not notified and therefore not included as named insureds. Only the entity names on the policy are insured.
As you can see, there are many reasons why claims may not be paid. If in doubt always seek the advice of your BJS Account Manager who is there to support you through these potential minefields.
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