A professional indemnity insurance policy plays a crucial role by offering the financial coverage to the policyholder against professional negligence and acts of omission or negligence. The policy also covers defence costs, i.e., lawyer fees and compensation awarded by the court to the plaintiff. Also called, errors & omissions insurance, the policy, gets triggered as soon as the notice is served on to the policyholder.

While the insurer covers a series of acts, it will not offer coverage in case of out-of-court settlements. It means, if the policyholder negotiates and settles the case with the other party before it reaches the court, the insurer has all rights to refuse to cover the insured. Moreover, if the policyholder has paid compensation to the other party, then he/she can’t approach the insurer for the claim settlement. It means a policyholder can’t settle the case with the plaintiff and then later approach the insurer for reimbursement.

However, in some instances, the insurer will cover out-of-court settlement if it is authorised by the professional insurance company itself. Depending on the nature and progress of the case, the insurer may allow out- of-court-settlement as well and thus, pay for the compensation which is decided outside the court premises. Also, in this situation, though, the case doesn’t reach the court, the policyholder may have incurred expenses in appointing a lawyer who further assists during out of court settlement. Therefore, the professional indemnity insurance may also pay legal expenses along with the compensation.

Case: 1

Since 1999, K.S Construction is known in the real estate sector as a leading player. Last year, the company bagged a contract of constructing a four-storey building in Pune. The company decided to hire Jayant Kumar, architecture, to make office layout plan for it who took nearly ten days to complete the task.

Once Jayant submitted the office layout plan, the construction company started the work. However, when the work was underway, the under-construction building fell. The construction company initiated an investigation, and its final report concluded that the accident happened because of the faulty office layout plan. Now, the construction company filed a case against Jayant for professional negligence.

Here, Jayant had a professional indemnity insurance policy and therefore, as soon as the case was filed against him, he approached the insurer for the claim settlement.

However, the case took a long time in reaching the court and in the meantime, Jayant opted for the out-of-the-court settlement with the construction company and agreed to pay the compensation of Rs 25 lakh. Once Jayant paid the compensation, he approached the professional indemnity insurance company for the claim settlement.

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However, as Jayant had entered into the out-of-the-court settlement without taking the permission of the insurance company, the insurer refused to settle his claim. Here, the insurer did not reimburse the compensation amount which Jayant had paid to the construction company as an out-of-court settlement along with the legal expenses incurred by him.

Case: 2

Last month, a medical negligence case was filed against Dr Shyam Prasad when the family of one of his patients, Jeevan, charged him with negligence case.

Jeevan was admitted to the hospital after he is compliant with severe chest pain. Dr Shyam was on duty at that time, and he immediately started the treatment. To stabilise his condition, the doctor gave some medicines and injections. However, soon Jeevan fell unconscious and died. Later it was found that Jeevan was allergic to certain medicines, and the doctor gave him medicines without checking his medical history.

Being a breadwinner of the family, Jeevan’s family got a big financial shock also. The family filed a case against the doctor, Shyam for professional negligence. As the doctor had a professional indemnity insurance policy, he approached the insurer for the claim settlement. In this case, Shyam requested the insurer to allow him to go for out-of-the-court settlement as he was soon going to shift to another county, and the case would take several months to reach the court.

Read more: How is Insurer’s liability decided under Professional Indemnity Insurance?

Here, the insurer carefully analysed the situation and gave its consent for out-of-the-court settlement. With the help of its lawyer, Dr Shyam negotiated with the plaintiff’s lawyer and arrived at the out-of-the-court compensation amount.

As the doctor had taken the consent of the professional indemnity insurer for the out-of-the-court settlement, here the insurer not only paid compensation to the plaintiff on behalf of Shyam but also covered legal fees which the doctor paid to his lawyer.