A professional indemnity insurance policy is also called errors and omissions insurance. It offers financial relief to a policyholder if they are sued for professional negligence or acts of omission/negligence. In such cases, the policy also covers defense costs, i.e., lawyer fees as well as court-awarded compensation for the plaintiff. Notice served to the policyholder triggers the policy. In this article, we’ll get to know about Professional Indemnity insurance and out-of-court settlements.
Are out-of-court settlements covered in Professional Indemnity Insurance?
While professional indemnity insurance is a vital tool for professionals, it usually does not offer coverage for out-of-court settlements. So, if a policyholder negotiates with the plaintiff and settles a case before it reaches court, the insurer can refuse to cover the insured. Moreover, if the policyholder pays compensation to the other party, they cannot claim reimbursement from the insurance company.
However, in some instances, it is possible to inform the insurer of a proposed out-of-court settlement and get approval for the same. In such cases, if the insurance company agrees to the out-of-court settlement, it will also pay the sum. Also, if the policyholder hires a lawyer to assist with the out-of-court settlement, the insurance will pay for legal expenses too.
Case study: No cover for out-of-court settlement
A renowned building firm, KS Construction, bagged a contract for constructing a four-story building in Pune. It hired architect Jayant Kumar to draw up the layout for the office.
Jayant took nearly ten days to complete the task. After he submitted the office layout plan, the construction company started work. However, a few days into construction, the structure collapsed. Subsequently, the construction company initiated an investigation. And its final report concluded that the accident was the result of a faulty layout. Thus, the construction company filed a case against Jayant for professional negligence.
Jayant had a professional indemnity insurance policy. So, when the case took a long time to reach court, he opted for an out-of-court settlement. Accordingly, he agreed to pay KS Construction a compensation of Rs 25 lakh. Thereafter, he approached the insurance company to settle this claim.
However, Jayant had entered into the out-of-court settlement without taking the permission of the insurance company. Therefore, the insurer refused to settle his claim. It refused to reimburse either the compensation amount Jayant had paid or the legal expenses he had incurred.
Case study: Pre-approval for out-of-court settlement
Recently, the family of a patient filed a case of medical negligence against Dr. Shyam Prasad. The patient, Jeevan, had complained of severe chest pain and his family had brought him to the hospital. There, Dr. Shyam, who was on duty at that time, immediately started treatment. He administered some medicines, soon after which Jeevan lost consciousness and died. Later, the investigation revealed that Jeevan was allergic to some medicines. Unfortunately, Dr. Shyam had not checked Jeevan’s medical history before treating him.
When the family filed a case of medical negligence, Dr. Shyam approached his professional indemnity insurance provider. In this case, Dr. Shyam requested the insurer to allow him to opt for an out-of-court settlement. This was because he was planning to move to another country and could not deal with a lengthy judicial process.
Then, the insurer carefully analyzed the situation and consented to an out-of-court settlement. With the help of its lawyer, Dr. Shyam negotiated with the plaintiff’s lawyer and arrived at a compensation amount.
The doctor had taken the consent of the professional indemnity insurer for the out-of-court settlement. Thus, the insurer not only paid the compensation to the plaintiff but also covered Dr. Shyam’s legal fees.