08 Aug Frequently Asked Questions – Professional Indemnity
Are sub-contractors covered by the Professional Indemnity (PI) policy?
In many Professional Indemnity policies sub-contractors themselves will not be included within the scope of cover. The Insured is typically covered for their vicarious liability due to the actions that the sub-contractors undertake on their behalf.
What this means in the event of a claim is that if the claim is brought against the Insured then the policy should respond to cover the Insured. However, no cover would be afforded to the sub-contractor. The insurer would then seek to make a recovery against the sub-contractor, who was ultimately responsible for the claim
Is this the same if the sub-contractor is similar to an employee?
In scenarios where the sub-contractor is similar to an employee, some policies will provide an extension of cover.
The policy usually has certain criteria that must be met in order for the cover to automatically extend to the sub-contractor, such as 90% of their income being derived from work being performed for the Insured for the last 6 or 12 months.
Where an extension applies, it will usually only extend to work that the sub-contractor performs on behalf of the Insured.
Can sub-contractors be endorsed to a PI policy?
Yes, sub-contractors can be specifically endorsed onto a PI policy and thereby treated as an insured for the work they are performing on behalf of the Insured. Depending on the policy, this often has an additional premium associated with it.
What happens in the event of an Insured needing to use various sub-contractors?
In cases where an Insured uses many sub-contractors, it may be possible to acquire a blanket sub-contractor endorsement that provides cover for all sub-contractors engaged by the Insured.
What else should be considered with covering sub-contractors?
An area that can be missed when dealing with sub-contractor cover is in relation to the Professional Business description. Cover under the policy is still subject to the insuring clause within the wording which will make reference to the Professional Business description in the schedule.
Why is it a good idea to ask for sub-contractors to hold their own PI cover?
Following from the previous question, if the sub-contractors that are engaged do not fall under the description used in the schedule, it is unlikely that the policy will respond. For this reason and to protect the Insured it is always a good idea to ensure you are requesting that their sub-contractors and consultants hold their own insurance policies, and that they provide you with a Certificate of Currency to keep on file and refer to in the event of a claim.
Why is run-off cover so important?
The PI policy is a ‘claims made’ policy. If the Insured ceases to hold a current policy even though they have held policies during their trading days, then they likely won’t have any cover should they find out about a claim once their policy has been cancelled – What clients don’t always understand is that regardless of when the work has been completed by the Insured, if no policy is held, then no cover is in place (check your specific policy for late notification concessions or automatic run-off options).
If the Insured has previously been required to hold a PI policy for contractual reasons – usually in the construction industry but not limited to any industry, then they likely have a similar contractual requirement to hold a PI policy for a number of years after the project has been completed. The most common time frame required by contracts is 7 years after the completion date. This requirement not only applies to holding a policy for this time but also to the limit that they were required to hold for the contract.
What is the most important aspect of the PI policy?
Potentially the most important part of placing a Professional Indemnity policy is ensuring the correct Professional Business description is used.
In most policies this is what is noted on the schedule, but in some policy wordings there is a standard definition for what is considered within the scope of professional services. This type of definition is more common in occupation-specific wordings such as accountants.
Why is having the correct business description so important?
A clear understanding of the Professional Business description is key to understanding the intention of cover under a policy, as well as understanding what is not included.
The insuring clause within policy wordings will refer back to the Professional Business description/activity, which is the key clause that must be triggered before considering if other exclusions or extensions apply.
If there is ambiguity as to whether the claim has arisen due to the provision of activities that are included within the Professional Business description, this can be a reason for either declining a claim or reducing the liability for a matter and only responding to the proportion of the liability that relates to what is included within the Professional Business description.
What if we do not have a professional aspect to our role but require PI for contractual reasons?
State and Federal Governments sometimes stipulate businesses with NO professional services hold a PI policy – it is very common in the SME space. A good example of this is tradespeople. Blue collar trades people are the typical example that we discuss with on a regular basis. If we are unable to identify a suitable Professional Business description to put on a policy, then it can create confusion in the event of a claim.
The source of this confusion is an inability to identify where a professional service or advice is included within some descriptions that are put on schedules (if any at all).
Insureds can be left in a difficult situation when they have a different understanding to what is covered under a Professional Indemnity policy than the underwriter does. These types of situations can be avoided by ensuring a suitable Professional Business description is agreed at the inception of a contract, and that all parties have a clear agreement on the intention of the policy and the extent of the cover.
CRM Brokers would like to thank Ross Chambers from Solution Underwriting for his responses to these Questions. As always, please refer to the specific policy wording as they are all different.
If you have any further questions regarding Professional Indemnity, please contact CRM Brokers on 1300 880 494.
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