When policyholders receive a PI claim or when they encounter circumstances that may or are likely to give rise to a claim, they are strongly advised to make an early notification to their insurers. Prompt reporting of claims and circumstances not only helps mitigate financial loss but also prevents complications that can affect both the insured and the insurer.
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One of the most frequent causes of late notification is the insured’s failure to recognise a circumstance that could result in a claim. This might begin as a client complaint about a service or product, which the insured may dismiss as minor. However, if the issue escalates, such as a threat of legal action, it becomes reportable under PI policies. To reduce the risk of a declinature, it’s essential to notify your insurer promptly and within the terms of the policy, even if the matter initially seems minor.
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Another common pitfall occurs when policyholders are not fully aware of what their policy covers or does not cover. Some claims may fall outside the scope of coverage due to policy exclusions, limitations, or endorsements. Exclusions typically detail risks or events that are not covered, and, in some policies, these can be claims arising from fraud, dishonesty, certain contractual liabilities, or work performed outside the scope of the contract. Meanwhile, endorsements are modifications to the standard policy terms and conditions that may either broaden or restrict coverage.
A clear understanding of these terms and conditions is critical to ensure your claim falls within the terms of your policy and your broker can assist with this
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Another reason for coverage issues arising with insurers is due to the lack of sufficient evidence or contractual documentation to support the insured’s position. Most policies require the insured to co-operate fully with the insurer during the claims process, which includes providing access to relevant documents including engagement letters, contracts and relevant correspondence.
If key documents cannot be provided, it becomes significantly harder for the insurer to assess and defend the claim. Clients are advised to maintain organised records and documents to ensure that a notification to insurers can be properly evaluated and supported.
Case study: The benefits of prompt reporting
In contrast, another client promptly reported a claim as soon as they became aware of it. The insurer swiftly appointed defence counsel, and the matter was resolved efficiently. As a result:
Case study: The cost of delay
A client received a Letter of Claim under the Pre-Action Protocol but failed to notify their broker or insurer for four months. By the time the claim was reported, the policy had renewed with the same insurer, and legal proceedings had already commenced due to the failure to serve a Letter of Response in time.
Although the insurer could have declined the claim based on the strict notification provisions under the policy, they instead imposed additional costs due to prejudice:
Premium prejudice: Had the claim been disclosed at the time of renewal, the insurer would likely have adjusted the premium to reflect the increased risk. If that is the case, the insurer may seek to retrospectively charge additional premium following receipt of the claim.
Claim prejudice: The insurer lost the opportunity to defend the claim early, resulting in higher settlement costs, interest, and legal fees. This delay also negatively impacted the client’s risk profile, potentially affecting future renewal terms.
Timely and accurate notification of circumstances and claims is more than just a policy obligation; it’s a vital part of protecting your professional and financial position. As demonstrated, late reporting can lead to increased premiums, missed opportunities to defend a claim, and reputational damage, while early notification can significantly reduce costs and preserve favourable terms with insurers at renewal.
To avoid complications, policyholders must:
When in doubt, consult your broker for guidance. A proactive approach to claims notification can make a significant difference in the outcome.
Should you require any further assistance, please reach out to our professional indemnity insurance contacts below.
