Under professional indemnity insurance policy, a party or each person is indemnified separately with regards to claims made against the party or person by any other party or person (excluding the insured). This is subject to the insurance company’s total liability’s limit, which should not exceed as specified in the policy terms and conditions.

The insurance company will pay the defence costs (all costs including fees and expenses) which have been incurred in the process of defence or settlement of any claim against the insured. The insurance company will also pay the insured the representation costs at any inquests relating to the claim made or having relevance to the claim made provided that the claims are covered under this policy.

The insurance company’s total liability for the pay out of compensation, costs of the claim, expenses, fees and the costs of defence should not exceed the indemnity’s limit as specified in the policy’s contract. The indemnity limit shall be the insurance company’s liability arising during the policy period.

Whereby a series of losses, bodily injuries, or deaths can be attributed indirectly or directly to the same incident (error or omission of discharging professional services), all these losses, bodily injuries, or death claims will be treated as one claim. It will be deemed to commence when the filing in writing of the first claims was made to the insurance company. But no cover shall be attributable to any claims made after three years of the filing of the first claims relating to same incident (error or omission of discharging professional services).

Further, a professional indemnity policy may give coverage for negligent acts which were committed before the inception of the policy coverage, provided they are not known to the insurer and insured and are notified as soon as possible within the policy tenure. It is known as retroactive coverage.

Case: 1

An engineer offers structural design services to a building complex in May 2010. In October 2010, halfway, it was evident that the construction was not structurally viable and therefore, it required to be demolished and re-designed.

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The engineer has the professional indemnity insurance policy since March 2011 with a retroactive date of 1st Jan 2011. He approached the insurance company in April 2011 after receiving a letter from the developer holding him responsible for losses arising due to the negligent design work.

The insurer refused his claim for legal defence costs on the basis that the retroactive date is after the date the design error was reported.

While buying a professional indemnity insurance, make sure the policy has a retro-active date set as “unlimited” or the date you start your business, in order to ensure that you always stay insured.

Case: 2

Mr. Jayant Narain, a financial advisor, provided advice to his client in relation to a lump-sum investment. The client wanted to invest in that plan which would give him a certain level of income without incurring any loss.

Jayant advised him to invest in a a particular fund, which he believed will meet the client’s requirements.

However, it was found that the client did not receive any income for one full year and also incurred losses during the two years investment tenure. In this situation, Jayant also failed to give any update to the client during the investment tenure. Moreover, at the time of the original investment, it was easy to predict that the fund will behave badly. Therefore, inappropriate advice was given to the client who filed a case against Jayant.

Jayant had bought a professional indemnity insurance offering the coverage of Rs 20 lakhs. He decided the sum insured on the basis of his risk profile. The case was contested in the court who upheld the client’s allegations and asked Jayant to pay Rs 40 lakhs.  As Jayant’s professional indemnity insurance had a coverage of Rs 20 lakhs, the remaining was paid by Jayant from his pocket i.e. 20 lakhs.

While choosing the professional indemnity insurance, make sure the coverage is enough to cover any legal obligation that the policyholder may face at any point in time.