There’s nothing worse than stumping up for insurance only to find the insurer doesn’t pay out when there’s a claim.
“I don’t know why I bothered” is a common customer response, as is “What a waste of money” and “I hate insurance companies”. We’ve all been there.
But contrary to what you might think, not all insurers actively avoid paying claims. When it’s your livelihood at stake, most business insurers (at least the ones we deal with) take their responsibilities seriously and do their utmost to help.
But sometimes, of course, there’s no option. Insurers have to draw the line somewhere and if a claim simply isn’t covered, there’s not much anyone can do about it.
Know your enemy
As always, there are two sides to every story.
We’ve already looked at when’s best to let your broker know you might have a claim.
And now, without wishing to be the voice of doom, we’re going to explain why, having done that, your insurer might not pay it.
It’s useful to know this because it can help you avoid problems in the first place, and it’ll give you an insight into how insurers work.
Obviously we can’t be definitive here. Every claim is different and evaluated on its own merits or otherwise. However, the most common reasons professional indemnity claims aren’t paid include:
Late notification. Not telling your insurer you think you have a claim early enough is, unfortunately, all too easy. But it’s always best to keep them in the loop, even if the problem turns out to be nothing. You won’t be penalised or judged for doing so and it means they can prepare for the worst before it happens.
Don’t try and fix the problem yourself either – you might inadvertently admit liability or promise something your insurer can’t deliver. Neither goes down well. Insurers don’t like surprises.
Pre start-date work. Professional indemnity insurance is a claims made policy. For claims to be covered, your policy has to be in force when the work was done and when the claim is notified. If you’re sued for work you did before the start date of your insurance, it’s not covered.
So, if you take out a new policy and you need to cover work you’ve already done, make sure you tick the ‘retroactive cover’ box – it extends cover backwards to a date you choose.
The same principal applies to post expiry/cancellation date work. If you’re hit with a claim after your policy’s stopped, it’s not covered – even if it relates to work you did when your insurance was up and running.
It’s that claims made thing again you see. To make sure your past work is covered, either keep your policy going or stop it and buy some run-off cover.
Business activity. Insurers can only cover the work you do, and that which they’re aware of. For example, if you’ve declared you do IT consultancy but you also do a bit of accountancy on the side, and you’re sued for making a hash of a client’s books, your policy won’t cover it.
If you do have to diversify, let your insurer know first.
Geographical/jurisdictional limits. Your insurance schedule tells you where you can work (‘geographical limits’) and what laws your contracts must be subject to (‘jurisdiction’ or ‘applicable courts’). If you’re restricted to the EU for both, for example, and a US-based client sues you under their local laws, you’re not covered.
Always check your client’s contracts carefully before you sign, just to be sure you know your insurance covers it. If you need a temporary extension, insurers are usually happy to do this.
Wording exclusion. Quite a big one this, but only because most decent professional indemnity policies give industry-specific cover (and therefore industry-specific exclusions).
It’s impossible to be exhaustive but a good example might be an estate agent’s policy excluding claims arising from survey and valuation work. It’s feasible that an estate agent could be asked to do a survey but, because it’s a high risk area, their insurer excludes cover for it.
They key is to read your policy wording, ideally before you buy it, and make sure you’re comfortable with what the insurance covers. Some exclusions can be written back in but it usually costs a fair bit and will likely mean a higher excess too.
As usual, our best advice is to talk to your broker or insurer if you’re not sure about any part of your policy.
After all, if you’ve spent good money on it, it makes to know it’s going to help if the worst happens.