Insolvency Practitioners’ professional indemnity: avoiding the risk of late notification
IPA Insolvency Practitioner newsletter, September 2024
Article by Thomas Fahey, Associate, Lockton
Insolvency practitioners must inform their insurers of any circumstances that could lead to a claim, subject to the terms and conditions of their professional indemnity (PI) insurance policy. Delayed notification can breach these terms, potentially leaving the firm without coverage. Notifying insurers promptly and providing all necessary information ensures that the firm has the best chance of maintaining protection.
Understanding the notification process
Under their PI insurance policy, insolvency practitioners are generally required to notify their insurer or broker of any loss, claim, or circumstances that may give rise to a claim, subject to specific policy wording. Examples of such circumstances include and are not limited to:
- Complaints or criticisms regarding service or performance
- Indications from a client that a claim may be forthcoming, such as a pre-action letter
- Instances where the service provided falls below the required standard, even if clients have not yet raised an issue
Policies specify the timeframe and how the insurer must be notified. As a general rule, and subject to the policy wording, insolvency practitioners should notify insurers as soon as they become aware of any circumstances that might lead to a claim, regardless of their own views on liability or the amounts involved. Any future claims arising from these circumstances may then be covered by the policy.
The risks of late notification
Despite these requirements, firms often delay notifying their insurer, sometimes hoping the issue will not escalate into a claim or mistakenly believing they can wait until their policy is due for renewal. Some firms attempt to resolve the situation independently before notifying their insurer, or they may think that if a potential claim falls within the policy’s excess, notification is unnecessary.
However, policy wording typically stipulates that late notification can have significant implications for a firm’s coverage. PI insurance operates on a “claims made” basis – meaning the policy that is in effect when a claim is made (not when the work was performed) – is the one that responds. Risks associated with late notification include:
- Expiration of the policy – insurers may reject notifications made after the policy has expired or following a change in insurer.
- Prejudicing insurer’s position – if a firm attempts to resolve the matter independently, it could jeopardise the insurer’s ability to manage the claim, potentially resulting in a denial of coverage.
Best practices for timely notification
To reduce the risk of late notification, insolvency practitioners should prioritise transparency by cultivating a culture that encourages team members to report potential issues as soon as they arise. Firms should avoid treating notifications as a once-a-year exercise tied to PI insurance renewal.
Insolvency practitioners should also ensure they provide comprehensive information when notifying insurers. Subject to the policy terms, this should include copies of all relevant correspondence (emails, letters, legal documents), the date the firm first became aware of the issue, and the identities of the potential claimant (and other involved parties). Lastly, firms should also include a brief overview of the issue, the firm’s perspective on liability, and an estimate of the potential financial value of the claim.
Avoid policy breaches
To avoid breaching policy terms, firms should:
- Avoid admitting liability – do not accept responsibility before notifying the insurer, as required by the policy wording.
- Prevent prejudicing the insurer – avoid actions that might impair the insurer’s ability to investigate or manage the claim, such as conducting independent investigations, making statements that could be viewed as an admission of fault, or failing to provide all the relevant information to the insurer.
- Do not correspond without insurer approval – do not engage in discussions or settlements with the claimant without insurer consent.
- Keep insurance details confidential – do not disclose insurer involvement or PI insurance details to claimants.
If a firm receives a claim, it should consult with its broker to discuss the circumstances and share all relevant information. Depending on the terms of their engagement, brokers can guide the firm on whether to notify the insurer and may handle the notification process on the firm’s behalf.
Further information
As a specialist broker operating in the PII market, Lockton can offer advice and assistance with any queries.
For any further information, please visit our Professional Indemnity Insurance page or contact:
Thomas Fahey, Associate
Please note that guest content does not necessarily represent the views of the IPA.