As a business owner, it's important to understand the difference between ‘Claims Made’ and 'Claims Occurring’ liability insurance policies.

Who Buys Professional Indemnity Insurance?

Architects, engineers, accountants, software engineers, and other professionals providing advice or services, whether individually or through a company or partnership, are generally covered by a Claims Made Professional Indemnity insurance policy.

These types of policies cover actual or alleged financial loss to the customer from the advice.

Claims Made

Claims Made insurance policies require something to happen and you tell your insurer immediately. There is no automatic cover, so if your are delayed in notifying your insurer, you may have a problem notifying a claim later. Issues usually relate to a negligent act, error or omission for: 

• Misleading, inaccurate or negligent advice.
• Breach of confidentiality or privacy.
• Breach of consumer, competition or fair trading laws.
• Infringement of intellectual property rights.
• Malpractice, misdiagnosis, failing to order the appropriate tests.
• Defamation, libel or slander.

Claims Occurrence Policies

Claims Occurrence policies are aimed at retailers or wholesalers, where there is a risk of personal injury or property damage from the products they sell or produce or someone fall over. The policy cover is automatically triggered at the time of the injury of damage to property, with no need to notify the insurer as soon as the incident occurs.

Knowing the difference between Claims Made and Claims Occurring is essential, so you’re not left with a gap in cover and have to pay expensive legal bills and potentially large damages awarded by a court out of your own pocket.

What Does a Professional Indemnity Policy Cover?

Claims Made policies will pay both the legal defence costs and any court awarded damages for a breach of the professional duty.

As mentioned, a Claims Made insurance policy provides cover only if both the following occur during the policy period:

1. You become aware of an incident that could result in a claim under your insurance policy or you are notified of a claim or a lawsuit.
2. You notify your insurer within the current policy period.

What is a Circumstance?

A ‘circumstance’ is ordinarily a situation which creates a reasonable and likely possibility that the issue or complaints will result in a claim or legal action against your firm.

Examples of what might constitute a ‘circumstance’ include:

• A complaint from a customer about the quality of advice causing a financial loss.
• Failure to pay an invoice because the client is very unhappy, as they feel they have lost money after following advice.
• A realisation that a mistake has been made in relation to advice provided to a client.
• An internal audit identifies a systemic error in how a group of clients have been managed.

A claim made by a client is easier to identify than an incident or circumstance, as a claim is usually a letter of demand for compensation or legal action.

When Should the Insurer be Notified of a Circumstance?

Talk to your insurance adviser as soon as you become aware of facts, matters or circumstances which may give rise to a claim against the client.

Breaking down the elements of a ‘notifiable circumstance’ can assist. Think of it this way:

• “Becomes aware” refers to the actual knowledge of the client.
• “Circumstance” is an objective matter rather than a subjective state of mind or belief.
• “May give rise to a claim” requires the ‘circumstance’ to be more than the mere existence of a legal liability, rather the bringing of a claim against the client must be a definite risk, a real possibility, or on the cards.

There is no need for the claim to be reasonable. It is the potential for a claim to be made that needs to be addressed – not the potential for it to be reasonable to succeed.

In relation to when to notify, the best practice is to notify early and often.

As each policy and insurer has different requirements, talk to your insurance adviser about issues that your are aware of, they will be able to assist you to identify the point at which a ‘circumstance’ becomes a ‘notifiable circumstance’.

General Advice Warning

This communication including any weblinks or attachments is for information purposes only. It is not a recommendation or opinion, your personal or individual objectives, financial situation or needs have not been taken into account. This communication is not intended to be a constitute personal advice. We strongly recommend that you consider the suitability of this information, in respect of your own personal objectives, financial situation and needs before acting on it. This document is also not a Product Disclosure Statement (PDS) or a policy wording, nor is it a summary of a particular product’s features or terms of any insurance product. If you are interested in discussing this information or acquiring an insurance product, you should contact your insurance adviser to obtain and carefully consider any relevant PDS or policy wording before deciding whether to purchase any insurance product.