The limit of indemnity (LOI) is the monetary amount of cover provided under a professional indemnity insurance policy and it's a policyholders responsibilityto decide theamount which is adequate to fully protect theirbusiness.
Regulatory requirements aside, calculating the right limitof indemnity for abusiness isn’tan exact science. Whether it's £ 50,000, £ 10million or more, getting the limit rightiscriticalto avoid the disastrous consequences of being under-insured.
So, how much is enough? Here are some points which should help guideyoutoan adequate level of coverfor your business.
We recommend this guide is circulated to Partners, Directors and Senior Managers for general awareness and risk management purposes.
- What's your risk?
- Claimant legal costs
- Regulatory requirements
- Don't forget yourhistoric work
- Inflation
- Statutory interest
- Expect the unexpected
- Minimum limit of indemnity
- How much does it cost?
- 'Claims made' insurance
What's your risk?
You know your clients better than your PI insurer. Therefore you are in the best position to assessthe risks to which you are exposed.
When assessing these risks,consider them in the context of your worst-case scenarios or catastrophes and not just the most common or likely things that can go wrong.
Major claims are almost alwaysunexpected and thecirc*mstances usually unforeseen - their size will often catch people unawares.
Bear in mind that as a professional services firm grows, itcan become a bigger monetary target for litigation. Lawyers may factor the size of a firm when assessingthe compensation they are going to claim on behalf of their client/s.
Being under-insured can destroy afirmso it'simportant to spend some time discussing possible major claim scenariosat Board or Partner level.
The claimant's legal costs
The third-party (the claimants') legal costs can double the amount of the PI claim against you. These legal costs will be a major part of the claim and you need to ensure that your level of cover not only factors in the client lossbut also factors in a significant amount for their legal costs.
What are your regulatory or customer requirements?
If you are a regulated business, check the mandatory insurance requirements of your regulator to ensure you fully comply with the minimum level of cover they require you to carry. But do bear in mind that this minimum requirement will be a simplearbitrary figure, without any consideration of the specific risks toyour business. Also, your customers could specify a minimumlevel of cover they require you to carry in order to be able to undertake work for them.
Consider historic work
This is ‘claims made’ insurance cover. It’s the level of cover purchased today which will apply to all of your historic work. So, if you reduce your cover because a project or piece of work has been completed and you feel you no longer need that higher level of cover, bear in mind that it will be the lower level that now applies if a claim comes in, NOT the level you were purchasing when you carried out the work.
Inflation
Professional indemnity claims can take years to reach settlement. In some cases, for larger claims it can take fiveyears or more! But the level of the insurance cover is fixed at the limit purchased when the claim is first notified. Would that limit still be enough to cover the claim and costs at the time of settlement in fiveyears? You should factor in inflation.
Statutory interest
PI claims usually include an amount for statutory interest on the loss, incurred over several years. This can significantly increase the amount of the claim eventually paid. Factor in an amount for this part of a potential claim against you.
Expecting the unexpected
There’s no exact formula for calculating an accurate level of PI cover andmany professionals do not always appreciate or even imagine the scale of the worst-case scenario risks to their business. In the event that this does happen, they find themselves under-insured and the main reasons for this are:
- They wanted to spend the minimum amount possible on insurance.
- They only boughtthe minimum amount of cover required by their regulator.
- They didn't believe a catastrophe scenario could ever happen to them.
- They didn't fully appreciate the full extent of the risks they face.
Minimum limit of indemnity
Although most Institutes and Associations provide their member firms with specific requirements for the level of PI insurance cover they must carry, this is only a minimum requirement and cannot possibly take account of each firm's individual risk. Based only on our experience, we recommend the following as a minimum guide:
- Sole Trader - Insure for at least four times fee income (£ 250,000 minimum)
- Limited Company - Insure for at least three times fee income (£ 500,000 minimum)
- Partnership - Insure for at least four times fee income (£ 1 million minimum)
How much does it cost?
The cost of increasing the level ofcover reduces as the LOIincreases, making itextremely good value. If you would like todiscuss your level of insurance cover or require indications of the cost of increasing your cover please contact us.
Claims madecover
It's important to know that professional indemnity falls into the 'claims made' type of insurance. This means thatthe policy LOIin force when the claim is first notified will apply to the claim, not the LOIin force when the work causing the claim was carried out. This is particularly relevant if the limit of indemnity is ever reduced as the lower limit wouldapply to all futureclaims.
DISCLAIMERThis guidance note is intended for information purposes only. It is not and does not purport to be legal advice or specific insurance advice. Whilst all care has been taken to ensure itsaccuracy at the time of writingit is not to be regarded as a substitute for specific advice. If you require specific advice, please contact your brokers or call us on 0345 251 4000.This guidance note shall not be reproduced in any form without our prior permission. © All copyright is owned by Professional Indemnity Insurance Brokers Ltd.
