Introduction
Professional indemnity insurance (PII) is a type of liability insurance held by professionals, which covers them in relation to negligent acts or omissions.
For Claimants, the existence of PII can be the difference between a successful financial recovery and a pyrrhic victory, as without PII the professional may lack the resources to personally satisfy the judgment.
In this article I will set out the importance of PII in professional negligence claims, examining how it influences the litigation process, impacts settlements, and what Claimants should be aware of when dealing with insured professionals.
What is Professional Indemnity Insurance?
Professional indemnity insurance is a type of liability insurance designed to protect professionals against claims made by their Clients for damages arising from any negligent acts, errors, or omissions. This insurance is particularly important in professions where mistakes can lead to significant financial loss for clients, such as law or accounting.
In many professions, PII is a regulatory requirement. Solicitors in England and Wales must maintain a minimum level of PII under the SRA Indemnity Insurance Rules. At the time of writing, these limits are at least £3 million where the insured firm is a relevant recognised body or a relevant licensed body, and in all other cases, at least £2 million.
Other professional bodies also impose the requirement of PII upon professionals, including accountants, financial consultants, surveyors, engineers and healthcare professionals. The reason for this is to protect the public by ensuring that professionals can cover the cost of any claim.
The Impact of PII on Professional Negligence Claims
Whether or not a professional holds PII can influence the viability of a professional negligence claim. For Claimants, PII offers financial certainty as it ensures that, even if the professional themselves are unable to meet the claim from their own resources, the insurer will step in to cover the liability. This is particularly important in high-value claims, where the potential damages could far exceed the professional’s personal assets – without PII, this would result in a pyrrhic victory for the Claimant.
Furthermore, the existence of PII often facilitates quicker and more efficient settlements. Insurers, who are commercial entities and can be keen to avoid the costs and uncertainties associated with litigation, may be more inclined to settle claims early, given they can objectively assess the events that have led to the litigation and the commercial merits of challenging the claim – provided they believe the claim is justified and falls within the terms of the policy. This can lead to a more streamlined process, sparing both parties the time, expense, and stress of a court trial.
The Role of Insurers in Litigation
Insurers often play a key role in the defence of professional negligence claims. Once a claim is made, it is typically the insurer who assumes control of the defence, appointing solicitors and experts to investigate the claim and determine the best course of action. This means that the claim is typically run by a party that was not involved in the events that have led to the action. This can significantly shape the litigation strategy, as insurers will often seek to objectively assess the merits of the claim with a view to minimising their exposure to adverse costs.
Insurers may also influence whether a case goes to trial or is settled out of court. Their decision will often be the result of assessing strength of the evidence, the potential costs of litigation, and the terms of the insurance policy. In some cases, insurers may push for settlement to avoid the unpredictability of a court judgment and the risk of adverse costs, while in others, they may choose to litigate if they believe the claim lacks merit.
The involvement of insurers can be seen in the case of Standard Life Assurance Limited v Oak Dedicated Limited and others [2008] EWHC 222 (COMM), which demonstrates the insurer’s right to control the defence and settlement of a claim. It was held that an insurer is not obliged to cover a settlement made by the insured without the insurer’s consent. This case demonstrates the importance for insured professionals to obtain insurer approval before settling, as failure to do so can lead to a denial of coverage and personal liability. Claimants should be aware of this when conducting settlement negotiations.
Disclosure of Insurance Details During Proceedings
A key strategic consideration for litigators running professional negligence claims is the disclosure of insurance details. For certain professions, there may be a duty to disclose detail. An example of this is Solicitors are required under Rule 9.2 of the SRA Indemnity Insurance Rules to provide to a Claimant or any other person with a legitimate interest: the name of their participating insurer, the policy number and the address and contact details of the insurer.
Additionally, in relation to insolvent Defendants only, it is possible to obtain information regarding a policy via the Third Parties (Rights against Insurers) Act 2010.
Outside of these provisions, it can be a challenge to force disclosure of information. In the case of Peel Port Shareholder Finance Company Ltd v Dornoch Limited, it was held that the court should only consider ordering disclosure of a solvent insured’s insurance details in exceptional circumstances. This can lead to difficulties in obtaining disclosure of the insurance details at a pre-action stage (such as via an application under CPR 31.16 as in this case), which creates uncertainty for the Claimant.
While there is no general obligation for a Defendant to disclose their limit of indemnity, there are situations where such disclosure may be advantageous. For example, if a Claimant knows that a Defendant is insured, it can provide reassurance that any judgment will be satisfied, potentially leading to a more aggressive approach to the litigation strategy or a higher settlement demand. In contrast, disclosure of a limit that is substantially below the value of the claim may lead to the merits of pursuing a claim being re-assessed, which could be advantageous for the Defendant/insurer.
In practice, disclosure of insurance details might be volunteered to encourage a Claimant to accept a reasonable offer, knowing that the insurer has the funds to pay the settlement and to pursue the litigation. However, there are also risks in disclosing such information, as it may lead to inflated demands. Ultimately, the approach differs between different insurance companies.
The Consequences of pursuing Uninsured Professionals
Making a claim against an underinsured or uninsured professional is one of the most significant risks for Claimants in cases of professional negligence. In the event that a professional does not have sufficient insurance, the Claimant may be successful in getting a judgement only to discover that there are insufficient or no assets to cover the award. This can be particularly damaging because it effectively renders the judgement financially meaningless.
To mitigate this risk, Claimants should conduct thorough due diligence before pursuing a claim. This involves requesting confirmation of the insurance coverage or checking with professional regulatory bodies that may hold relevant information. However, as discussed above, the insurer does not always have to disclose the limit of indemnity.
Policy Exclusions and Limitations
While PII provides protection, it is not a guarantee of coverage. PII policies often contain exclusions and limitations that can significantly affect recoverability. Common exclusions include acts of fraud, criminal behaviour, and deliberate breaches of professional codes of conduct. Additionally, some policies may exclude coverage for claims arising from certain high-risk activities or may impose sub-limits on specific types of claims.
It is vital that Claimants understand these exclusions, as they establish the extent of coverage and the likelihood of a favourable outcome. The terms of the PII policy must be thoroughly reviewed in order to identify any potential obstacles to recovery. As this can result in drawn-out legal disputes over the interpretation of policy terms, this review is particularly crucial in cases where the insurer raises exclusions as a defence against liability.
In the case of Zurich Professional Ltd v Karim [2006] EWCH 3355 (QB), the insurer Claimant obtained a declaration that the claims made under the Defendant solicitors’ professional indemnity policy arose “from dishonest or fraudulent acts or omissions committed or condoned by the insured” and accordingly they were not obliged to indemnify the insured.
Insurers’ Right of Subrogation
Subrogation is a fundamental principle that allows an insurer to step into the shoes of the insured after payment of a claim and pursue recovery from third parties who may be responsible for the loss. In professional negligence, subrogation rights can be particularly relevant when multiple professionals are involved in a matter, and one professional’s negligence contributes to the loss.
For example, if an insurer pays a claim on behalf of a negligent solicitor, they may seek to recover those funds from another party, such as a barrister who advised, as they may be liable for the same loss. Subrogation ensures that the loss falls on the party responsible for the negligence, rather than reverting to the insurer or the insured professional.
Conclusion
Professional indemnity insurance is an important consideration in any professional negligence. For professionals, PII offers protection against the financial consequences of a negligence claim, while for Claimants, it provides a source of funds to satisfy a judgment or settlement. However, the presence of PII also creates difficulty for litigators, including issues related to policy exclusions, the role of insurers in litigation, and the strategic considerations surrounding disclosure and settlement. Understanding these factors is crucial in any case.
If you are considering or are involved in a professional negligence claim, understanding the role of professional indemnity insurance is essential. Our experienced team is here to guide you through the complexities of PII and provide tailored advice for your specific case. Contact us today.
