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29 August 2018

The Different Insurance Policies

A consultant operating a business in the construction industry requires numerous different types of insurances to assist in managing the risks associated with professional practice.

Why the distinction is so important to understand:

Although the operation of insurance policies is often similar in many respects despite covering different types of losses, the trigger for a policy to respond to a claim differs between types of policies.

One vital form of cover for a professional is professional indemnity insurance. Professional indemnity insurance policies respond to claims brought by others against you arising out of negligent acts, errors and omissions in the provision of your professional services.

Generally, professional indemnity policies can be characterised as ‘claims made’ or ‘claims made and notified’ policies.

Claims Made Policies

‘Claims made’ insurance policies respond to claims made against you and reported by you to the insurer during the policy period (usually twelve months), even if those claims relate to projects you worked on in previous years. This is subject to any retroactive date on your cover and provided you were not aware at any time prior to the policy inception of circumstances, which would put a reasonable person in your position on notice that a claim may be made against you. For professional indemnity claims, it is the insurer on risk when the matter is notified that will respond to a claim made against you, and not necessarily the insurer on risk at the time you did the work on the project. Given the nature of ‘claims made’ insurance, it is important to maintain professional indemnity insurance even after you cease to practice.

It is important to note that you must notify your insurer as soon as possible if you become aware of a potential claim against your claims made policy, regardless of whether you believe the claim will actually arise or has any merit. That said, most (but not all) professional indemnity policies offer ‘continuous cover’ which means that if you renew your claims made policies in unbroken successive periods and notify your insurer of a claim or circumstance in the subsequent policy period which should have been notified in the earlier period, then that claim will be covered. However, the conditions upon which you are extended cover may be at the discretion of your insurer.

It is prudent to notify all claims promptly as ‘continuous cover’ will not always offer protection and, in a worst-case scenario, you can wind up with a claim being wholly uninsured purely because of failing to notify the claim in the same policy year, and this is one of the most common reasons for insurers denying cover under claims-made insurance policies.

Occurrence Based Policies

‘Claims made’ policies can be compared with ‘occurrence’ based policies which cover you for claims brought by third parties for damage to property or injury to persons. Claims under ‘occurrence’ based policies are triggered by the happening of an event. Typically, public liability insurance, another essential type of insurance for many professionals operating a business, is written on an ‘occurrence’ basis. With ‘occurrence’ based policies, the insurer that is ‘on risk’ at the time of the occurrence of the incident responds to the claim, irrespective of when the claim is actually lodged, which may be years after incident occurred. Occurrence based policies provide cover for claims resulting from incidents arising during the insured period even if you do not have a policy in place at the time the claim is made against you.

Confused? Let’s consider an example to clarify the differences between claims made and occurrence based policies.

Case Study Example

In 2012, an architect was retained for his design services which included specifying the tiles for a shopping centre. Construction was completed in 2014 and in 2015, Jack slipped on some tiles in the shopping centre and suffered an injury to his foot. In 2018, a claim was made by Jack against the shopping centre. The shopping centre joined the architect to the claim.

As the claim against the shopping centre arose from its ownership and occupation of the centre, the shopping centre sought cover for the claim from its public liability insurer. At the time of the incident (2015), the shopping centre held a public liability policy with ABC Insurance which had not been renewed or replaced in 2016 or following years. However, as this was an occurrence based policy, ABC Insurance responded to cover the claim under the terms of the 2015 policy.

The claim against the architect alleged negligence in his specification of the tiles in the shopping centre on which Jack slipped, so the architect sought cover for the claim from his professional indemnity insurer. As the architect had no prior knowledge of the incident before being joined to the proceedings in 2018, the architect’s current insurer responded to the claim.

Kathryn Budd
Risk Manager- informed