Selecting the right Limit of Indemnity
The issue of selecting the correct limit of indemnity for
Professional Liability insurance can be a difficult one,
particularly when it’s your livelihood that’s at stake if things go
wrong.
The past 20 years has seen society in the UK become much less
tolerant when things don’t go their way - and a greater willingness
to find someone – anyone – to blame. This, combined with greater
access to on-line information and the abundance of solicitors only
too willing to take on speculative cases on a no-win no-fee basis,
means that claims against businesses are on the increase. As well
as increasing numbers of claims, the amounts awarded as damages by
the courts are also increasing even faster than RPI inflation (what
is termed ‘claim inflation’).
The record in the UK for damages being awarded for injury to a
single individual stands at £9.3m, paid out to a 28 year-old
investment banker following a motor accident – and that was paid
over 10 years ago, in 1998. Professional Liability insurance does
not of course cater for motor accidents, but the principle is still
relevant – if you negligently injure someone in the course of your
activities any damages awarded will reflect the victim’s
circumstances.
Towergate Professional Risks has seen a corresponding rise in
claims costs. In 2009, its insurers paid out £1.2m including costs
for a successful claim against one of its clients. Even
unsuccessful cases can be expensive; because it is rare for
insurers to recover their costs even when they successfully defend
the claim. A complaint which lasted 5 years which originated in
2004 cost over £500,000, comprising almost entirely of costs.
Businesses need to consider higher and higher limits of indemnity
to ensure that they are keeping pace with the modern world and its
impact on how much a complaint that leads to an insurance claim
might eventually cost.
Barbara Hart is Towergate Professional Risks’ Underwriting
Manager: “In 1988 the limit of indemnity we offered started as low
as at £250,000 of cover. Just 20 years later the minimum we offer
is £1m, and we are currently reviewing whether another increase is
now overdue. Similarly, 20 years ago, the maximum limit we offered
was £1m; we now offer £5m and for some clients have arranged limits
of £10m or even higher”.
So what indemnity limit is the right one to select?
If things go wrong, the stakes can be high. It’s the business
owner’s livelihood and reputation that’s on the line, not to
mention the house, the car, and life savings. The advice would
therefore seem to be to buy as much as the business can afford, in
return for the peace of mind that comes from knowing that in the
event of an insured claim occurring, there is adequate cover in
place.
There are of course individual circumstances to consider. The
following are a few factors which should have a bearing on how much
cover to buy: -
- What claims have been made against other businesses that you
are aware of, and how did they arise? Do you have a membership body
that can provide any examples of what could potentially happen to
your business under similar circumstances?
- Listen to the news and read the press. What’s happening to
court costs? How long are cases lasting? Cases that run any length
of time in court can be as expensive as £10,000 per day for Counsel
alone – and that’s at today’s prices (and, of course, the losing
side pays both sets of legal costs as well as the damages awarded).
What will the cost be in five or six years from now when the case
finally comes to court?
- Most complex claims last more than just a few days in court and
by the time they eventually commence you may need witnesses or
experts who might not even be based in the UK. What is the cost for
ensuring you have the support you need for your defence to be as
robust as possible?
- Even additional covers which may be regarded as ancillary to
the core covers of Professional Indemnity and Public Liability can
produce sizeable claims. Towergate’s Professional Liability cover
also includes Libel & Slander, which so far has produced a
claim costing the insurers £133,000, and Breach of Copyright, which
has resulted in a claim totaling £107,000.
- Professional Liability insurance includes Public Liability –
death of or injury to other people or loss of or damage to their
property. If a client’s building sustained significant fire damage
as a result of the practitioner’s actions or inactions – does the
limit of indemnity in place reflect the likely cost of the
reparation? Public Liability claims tend to be larger in cost.
- Claims by younger people (although probably not children), if
successful, will usually have greater awards made to them.
Cost inevitably has a strong influence when selecting indemnity
limits although the cost of doubling the limit of indemnity cover
from £1m to £2m does not mean that the cost of the premium doubles.
The increase usually equates to around 20% more than the premium
for £1m. When considering the cost of Professional Liability
insurance it can sometimes be useful to compare the cost with your
own charges. Is it not worth the equivalent of the cost of one or
two hours of your practice to secure peace of mind?
Claims, whilst undoubtedly on the increase, continue to be rare,
although the “It’ll never happen to me” approach isn’t always the
wisest approach when there’s so much at stake.
The final decision comes down to the individual who’s buying the
protection. Ultimately, the business needs to have the peace of
mind that, if something does go wrong, that it has adequate cover
in place to protect its livelihood.