PI Insurance - the risks of automatic re-instatement
You are a public sector body which has entered into a consultant's appointment or building contract (with design) which says that the consultant/contractor will maintain a Professional Indemnity Insurance Policy of £5m. What is the extent of the cover? This depends of the specific wording of the policy, for example, PI Insurance which refers to:
| "each and every claim" provides £5m cover against each claim intimated in the period of insurance; | ||
| "in the aggregate" provides £5m cover regardless of the number and value of claims intimated in the period of insurance; there is therefore a risk that the "pot" of insurance cover will be used up during the period of insurance; | ||
| - | "automatic reinstatement" provides a second layer of insurance which allows the £5m limit of indemnity to be "reinstated" should the original £5m be depleted by a claim, or series of claims. Depending on the number of reinstatements provided by the policy, this clause can provide indemnity for multiple claims during the insurance period where the total of these claims exceeds the policy limit of indemnity. Check the wording of such policies carefully as they can create the risk of partially uninsured claims e.g. the policy may: | |
| - | restrict the entitlement to "top up" insurance where one claim exceeds the policy limit of indemnity (see Example A below); | |
| - | state that the automatic reinstatement does not come into play until the whole of the limit of indemnity has been used up creating an uninsured black hole (see Example B below). | |
Example A
A firm of architects has PI cover of £5m. The policy contains one automatic reinstatement providing cover for claims aggregating up to £10m during the period of insurance. If this cover contains a restriction that any one claim must be no greater than £5m, this means that if a single claim is made for £7m, £2m of that claim may not be covered under the PI policy. This is regardless of the fact that "top up" insurance is available.
Example B
A firm of architects has PI cover of £5m in the aggregate, subject to one automatic reinstatement in the period of insurance. Company A claims £3m and the claim is settled in that amount. Company B then also claims £3m in the same insurance period. If the automatic reinstatement is not triggered until after the primary layer has been depleted, there is a potential risk that £1m of the £3m claim by Company B would be found to be in excess of the limit of indemnity and as such would not be covered by the policy.
Comment
Remember that the obligation to maintain a policy in a specified amount is not the same as limiting a party's liability under a contract to that amount. That would require a liability cap which is entirely different.
