Yes, past claims impact the premium of a professional indemnity insurance policy. Insurance companies evaluate a firm’s claim records over the past five to ten years as a likely barometer of future incidents. Thus, the size and the frequency of a previous claim is taken into account and has a significant bearing on a firm’s premium in case of a professional indemnity insurance.
Key Takeaways
The 10-Year Window: Insurers typically look back at a firm’s record for five to ten years. A clean record over a long period can act as a buffer, while a recent large claim almost always results in a premium spike.
Severity Matters: If a claim is “not substantial,” the insurer may choose not to raise the premium. However, the definition of “substantial” is at the insurer’s discretion and usually depends on the firm’s total turnover and the “Limit of Indemnity.”
The New Insurer Strategy: If your current insurer raises rates significantly due to a past claim, approaching a new provider might yield a better rate. However, you are legally required to disclose all past claims, and a new insurer will still evaluate the “nature” of those risks.
Risk Management Credits: Firms can actively lower their premiums by participating in risk management initiatives. This includes project selection processes, peer reviews, and ensuring all sub-consultants also carry their own insurance.
The Power of the Written Contract: Insurers strongly prefer firms that use formal contracts for all projects. Verbal contracts are considered high-risk because they turn a legal defense into “your word against the client’s,” which is harder and more expensive to win.
When the claim is very high, the existing professional indemnity insurance company can increase the premium at the time of policy renewal. However, in case a firm approaches a new insurer, the insurance premium might be bit lower, but again it depends on the nature of the past claims.
In any case, if the claim is not substantial, there would be no change in professional indemnity insurance premium rates. The professional indemnity insurance company decides the nature and the substantial weight of a past claim while calculating the premium rate. While getting a new policy or renewing the policy, it is always advisable to ask the insurer and get clarity on types of claims that would increase the premium rates.
Along with the claim history, other factors also impact the premium of the professional indemnity insurance policy. Some of the factors affecting the premium rates are:
Project types:
A firm’s area of practice can affect the cost. The kind of projects that a firm handle, again determines the overall premium rates. For example, a commercial building is given a lower premium rate than a residential family household.
Discipline:
The type of services a firm offers can influence the overall premium. Architects are at a lower risk level than a structural engineer, hence a lower premium.
Read more: How is Indemnity defined under Professional Indemnity Insurance?
Risk management:
Insurers like to see that the firm is participating in risk management initiatives and thus provide a credit for participation. Risk management activities may include, installation of adequate safety measures, peer reviews, project selection process and certificates of insurance from the sub-consultants. These are some of the risk management that insurers ask for.
A contract based business:
Insurers prefer to see that the firm is using a contract for all its projects. If the firm does have a claim, it makes it easier to defend if all the terms of the contact are laid out. Verbal contracts are not favourable because it’s the firm’s word against the client’s word.
Case Study:
Incepted in 2008, ‘Rextas Designing’, a Mumbai-based web designing company was involved in providing user interface and website solutions to its clients. The company was involved in many web designing projects and had a vast base of clients situated in different parts of India.
Considering the nature of its business, Rextas Designing purchased a comprehensive professional indemnity insurance policy. In 2013, the company bagged a major client who wanted a website revamp along with its content and SEO marketing.
Read more: What is libel and slander clause in professional indemnity insurance?
Summary Table: Factors Impacting PI Insurance Premiums
| Factor | Description | Impact on Cost |
| Claim Frequency | The number of claims filed in the last 5–10 years. | High: Multiple small claims suggest a pattern of poor quality control. |
| Claim Severity | The total monetary value of past payouts. | High: Large settlements (like the Rextas case) trigger significant hikes. |
| Project Type | The nature of the work (e.g., Commercial vs. Residential). | Variable: Higher-risk project categories attract higher base rates. |
| Discipline | The specific professional field (e.g., Architect vs. Engineer). | Structural: High-risk technical fields pay more due to complexity. |
| Risk Management | Active measures like peer reviews and safety protocols. | Credit: Insurers often provide discounts for documented risk mitigation. |
| Contract Quality | Using formal written contracts vs. verbal agreements. | Defensibility: Written terms make defense easier and premiums lower. |
The project was massive and took two months to optimise the client’s website. Once the project was complete, the web designers handed over the site to its clients.
However, the web designers had used some unlicensed images on the client’s website due to which the client faced copyright infringement issues. The client, in turn, sued Rextas Designing company for using unauthorised pictures on its website.
Since the company had taken a professional indemnity insurance policy, they were able to cover the losses arisen due to the filed claim. The whole situation was successfully sorted by the insurers, after which the business came on track again.
After few months, Rextas Designing approached the insurers for the renewal of its professional indemnity insurance policy. The insurer took into account the last year claim while calculating the new premium rate.
As the claim amount was high, the insurer increased the premium of the professional indemnity insurance policy at the time of policy renewal. Thus, the past claim of unlicensed image usage on client’s website led to increasing the premium rates for the firm.
Frequently Asked Questions (FAQs)
1. If my claim was “baseless” and eventually dismissed, will it still increase my premium?
A) Usually, no. If the insurer only paid for a minor legal consultation and no compensation was awarded because you were not at fault, it shouldn’t significantly impact your premium. However, if the insurer spent a large sum on a multi-year legal defense, they may still adjust the rate to account for your “litigation exposure.”
2. Why are “Commercial” projects considered lower risk than “Residential” ones?
A) Commercial clients often have their own professional teams and a better understanding of project risks. Residential clients (like individual homeowners) can sometimes be more emotionally driven and “litigious,” leading insurers to perceive them as a higher risk for professional liability claims.
3. Does the premium go back down if I don’t have another claim for a few years?
A) Yes. As the “large claim” moves further into the past, its weight in the insurer’s risk calculation decreases. Most firms see a gradual reduction in premiums after 3 to 5 years of “claim-free” operation.
4. What kind of “Risk Management” activities do insurers value the most?
A) Insurers look for “process-driven” safety. This includes having a standardized project selection process (avoiding high-risk clients), performing internal peer reviews of all designs or advice, and maintaining digital logs of all client communications.
5. Is it better to pay a small claim out of pocket to keep my record clean?
A) This is a calculated risk. While it keeps your insurance record clean, most policies require you to report any incident that “could” lead to a claim. If you settle privately and the client later sues for a larger amount, your insurer might reject the claim entirely because you didn’t notify them immediately.
About The Author
Amit
MBA Finance
Amit is an experienced insurance professional with 7 years in the industry, specializing in Errors & Omissions Insurance. Writing for SecureNow, he provides clear and insightful blogs and articles to help professionals understand the importance and nuances of E&O coverage. His expertise ensures that readers receive practical advice on protecting themselves from potential liabilities and professional risks. Dedicated to making complex insurance topics accessible, Amit stays updated on industry developments, delivering valuable content that empowers professionals to make informed decisions about their E&O insurance needs.
