Loss Prevention Alerts

ALERT 39: The risks for a professional when operating without insurance

Introduction

A professional indemnity policy is no more than a contract between a professional and an insurer. Through a professional indemnity insurance policy, an insurer will (subject to the policy terms and payment of any uninsured excess) meet the insured professional’s ascertained liabilities when they fall due. Essentially then, professional indemnity insurance is a form of risk transfer - the insured transfers his possible future liabilities into a current, certain and quantifiable obligation to pay an insurance premium.

Informed clients regard an adequate level of professional insurance as a prerequisite, and increasingly laboratories and other providers of advisory services are expected to have insurance in place.

In recent years professional indemnity premiums have risen as have the levels set for uninsured excesses while at the same time the levels of indemnity offered by insurers have generally fallen. As a result of this, some professionals may be tempted to operate without professional indemnity insurance cover.

The obvious risk

Without professional indemnity insurance the professional (whether incorporated as a company, a partnership or an individual) will have to fund, out of its own assets, the whole of its liability to any client or third party.

In English law, any person who breaks a contract will be liable for the properly mitigated loss suffered by the innocent party provided the type of damage suffered is within the contemplation of the contract breaker at the time he enters into the contract. In a professional context this can create a real disparity between the fee earned for undertaking professional work and the losses that might be suffered by the client.

For example, for a few thousand pounds, a consultant might conduct a survey of a site and conclude, in breach of contract, that the site will support particular buildings or foundation design. The losses to the client might run into millions or even tens of millions of pounds. To some extent, the risk of such a circumstance can be ameliorated by agreeing reasonable contract terms and appropriate limits and exclusions on liability in the contract of appointment.

Another consequence of the work undertaken by professionals who are members of the AGS is the possibility that their negligent advice can cause damage to third parties with whom they have no contractual relationship and so have had no opportunity to limit or exclude their liabilities. In such a situation, good contracting practices provide very little safeguard and for most professionals their ultimate comfort is that they have what they believe to be appropriate insurance arrangements.

The long term risk

It is hugely important to note that professional indemnity policies are written on what is termed a “claims made” basis. This means that it is the policy in force when a claim is actually made that triggers to provide indemnity. For these purposes, it is irrelevant when the contract was entered into, when damage was suffered, when the claim was settled or when any legal action was fought to judgment. The result of this is that even when a professional organisation decides to cease providing professional services it will often be important that it maintains professional indemnity insurance for a period of years in order to protect it from errors that have been made in the past, about which it might not even know, but which may crystallise as claims some time in the future.

The danger for sole practitioners and partners in a partnership

For companies the risks can be relatively limited. If a professional undertaking is incorporated as a company and ceases to trade often the company will be wound up and so, irrespective of whether or not there is insurance cover, the client in our example will find it difficult to identify sufficient assets to meet any sizeable liability. The position can be much more drastic where the professional is an individual or partner in a firm who (or whose firm) ceases to have insurance. In such a case, that individual will have to meet any liability out of his or her personal assets. Situations such as these can ruin a person’s professional and private life.

Sometimes a client may seek to assure a sole practitioner that he/she will be covered by the client’s insurance. In such a case, as well as obtaining the assurance in writing, the sole practitioner should seek proof that this is the case, for example by asking to see the policy or cover note. 

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS.  It highlights issues that the LPWG considers may be of relevance to members.  It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

Prepared for the Members of the AGS by Steven Francis, Eversheds  

Date of Issue:  19th March 2007

Applicability in Scotland  

This advice is applicable in Scotland.