Glossary

Glossary of Professional Indemnity (PI) Insurance Terminology

Circumstance: This is an issue the Insured becomes aware of that, whilst not yet an actual claim, either may or is likely to give rise to an actual claim. A claim under the policy is likely to be declined if Insurers discover that the Insured was aware of a related circumstance under a previous policy period, so it is important to notify circumstances promptly AND IN ANY EVENT WITHIN THE POLICY PERIOD. If in doubt about whether the issue constitutes a circumstance we would always urge the Insured to err on the side of caution and notify insurers to protect their rights under the policy

Claim: This refers to any written or verbal demand for damages or allegations of negligence arising from professional activities. There may be additional definitions of a claim within the policy wording as PI policies can include a number of extensions in addition to the core cover. In any event, as explained in the “Claims Made” section of this glossary it is essential that any such claim is notified to insurers WITHIN THE POLICY PERIOD.

Somewhat confusingly, as well as having a particular definition within a PI policy wording, “claim” is also the generic term used for making a claim against insurers under the policy

Claims Made: A PI policy is different to almost every other type of insurance product. Take a motor policy as an example – this will pay claims only in relation to incidents that occur during the policy period – the vehicle must be stolen or in an accident during the policy period for the policy to respond. A PI policy on the other hand responds to CLAIMS that the Insured becomes aware of and which are MADE during the policy period. The incident that gives rise to the claim could have happened years ago, but it is the policy in force at the time the actual claim is made that will respond to the claim

Example: a surveyor carries out a house survey in 2020 and the clients buy the house. In 2026 substantial cracks appear and the homeowners claim against the surveyor alleging negligence; that obvious signs of subsidence were missed. It is the surveyor’s policy in force in 2026 that will respond to the claim rather than the one that was in force in 2020 when the survey was undertaken

This is fundamental to PI insurance; because the policy only responds to claims made during the policy period it is essential that claims which the Insured knows about, or circumstances they become aware of which may lead to claims, are NOTIFIED DURING THAT POLICY PERIOD. When a PI policy expires it is completely dead – if a claim is notified one day late the policy will not respond

NOTE: for certain legal professions, whilst the policy is expressed as “Claims Made”, it is technically possible to notify claims to subsequent policy periods. However this is not advisable and we recommend that all claims are notified within the policy period in which they arise

Costs and Expenses: PI policies cover claims from third parties. Such claims typically include the extent of any financial loss suffered along with the legal and any other costs the claimant has incurred in bringing a successful claim. In addition the PI policy will cover the Insured’s OWN costs and expenses in investigating and defending against claims and this element of the cover is often more valuable than the core cover for third party claims. Without it an Insured could find themselves severely out of pocket even when they are innocent and a claim is successfully defended

Excess: This is the amount the Insured has to contribute from their own funds in respect of each claim and it can respond in different ways to the Insured’s own costs and expenses:

  1. “Including (or applicable to) Costs and Expenses” – where the core claim is successfully defended the Insured will still have to pay the excess in relation to their own costs and expenses in defending and investigating the claim
  2. “Excluding (or not applicable to) Costs and Expenses” – the Insured will only have to pay the excess where there is a core claim, not in respect of their own costs and expenses in defending and investigating the claim

Note, the term “excess” may also be used to refer to Excess Layer insurance

Excess Layer: PI policies will pay out claims up to the maximum limit specified within the policy. If a greater limit is required additional cover can be provided by an Excess Layer policy that sits on top of the original or “Primary” policy. Further excess layer cover can be arranged as necessary so that, as an example, a PI placement could involve a primary policy for £2m, a first excess layer policy for the next £3m and then a second excess layer policy for a further £5m, thus allowing for a claim of up to £10m in total. Such placements can operate in various different ways and as explained in the “Limit” section of this glossary may be a total aggregate limit for all claims during the policy period or the limit available to pay each claim regardless of the number of claims during the policy period. Policies which sit below an excess layer policy are often referred to as “underlying” so in the example above the primary £2m policy and the first excess layer £3m policy will both be deemed as underlying the second excess layer £5m policy.

Insured: PI policies almost always define the “Insured” party. It is obvious that the person or firm named in the policy is “insured” but the definition may then extend to include principals (and possibly their spouses) along with employees and perhaps even consultants. This definition is not standard however and there will be exceptions. It should not be assumed that subsidiary companies or predecessors in business (even if only a different trading style) are covered unless the policy wording specifically includes them

Jurisdiction / Legal Action: These mean the same thing and relate to the various legal jurisdictions around the world that are covered by the policy. So if the Jurisdiction is “United Kingdom” the policy will only respond to claims that are made against the Insured under the legal jurisdiction of the UK and its courts. Typically Jurisdiction tends to exclude “USA/Canada” because of the relatively harsh and complex nature of their legal jurisdictions. That is not to say that a claim from a USA domiciled client would necessarily be excluded – it would be excluded if brought in a USA court BUT if the claim is brought in a UK court the policy would respond. If possible an Insured should look for the Jurisdiction of their PI policy to match the geographical spread of their client base

Limit: This is the amount available to make payments under the policy and can be expressed in several different ways:

  1. “Any One Claim” or “Each and Every Claim” – the limit is available to pay each claim, regardless of the number of claims during the policy period
  2. “In the Aggregate” or “in Total” or “In All” – the limit is the total amount available to pay all claims arising during the policy period
  3. “Including (or Inclusive of) Costs and Expenses” – this means that the Insured’s own costs and expenses in defending and investigating claims are included within the limit, thus reducing the amount available to pay core claims
  4. “Excluding Costs and Expenses (or Costs and Expenses Exclusive”) or “Costs and Expenses in Addition (or “plus Costs and Expenses”) – this means that the Insured’s own costs and expenses in defending and investigating claims are paid in addition to the limit and so the entire limit is available to pay core claims

So the best limit is 1. B., a limit that applies to each claim and then pays costs and expenses in addition

The worst limit is 2. A., one overall limit that applies to all claims during the policy period and where the limit also has to stretch across both core claims and costs and expenses

For an “Any One Claim” limit it is important to choose a limit that reflects what the likely maximum value of a claim will be and to factor in own costs and expenses depending on how the policy responds

For an “Aggregate” limit this must reflect the likely value of all claims during the policy period (again accounting for own costs and expenses as necessary). Once the aggregate value of all claims (and costs and expenses if applicable) reaches the policy limit, it is then exhausted and the policy essentially shuts down and is no longer available to pay any new claims. In that case cover will need to be reinstated – please see the “Reinstatement” section of this glossary

PI policies are notorious for containing confusing descriptions of Limit. For example “excluding costs” sounds bad but is actually a good thing (because it means costs are paid as an extra amount) and some policies will express the limit as “Any One Claim” but go on to say “and in all” which implies any one claim cover but is actually aggregate

Period of Insurance: This is the period for which cover under the policy is in force. Typically, but not always, this will be for a period of 12 or 18 months and will be expressed in whole days so that a 12-month policy which starts on 1st January 2026 will effectively start at 00.01 hours that day and run through to midnight on the 31st December 2026. As explained in the “Claims Made” section of this glossary, PI policies are completely dead once they expire. As such, in the above example, if the Insured becomes aware of a claim during the Christmas holiday season in 2026 but waits to notify insurers until they return to the office in January 2027, the claim will be declined

Reinstatements: As explained in the “Limit” section of this glossary, some limits are “aggregate” and can be exhausted by the payment of claims. When that happens the limit will need to be reinstated which essentially means that a new policy limit is purchased for the remainder of the policy period. This rarely happens in practice. It is however not uncommon for reinstatement provisions to be agreed in advance so that an aggregate limit may include one, two or potentially even unlimited reinstatements which begins to get close to the cover provided by an “Any One Claim” policy. Reinstatements are a complex issue; they can apply to one policy or to an entire program of primary and excess layer placements where policies pay out and reinstate in turn (known as “Round the Clock”). It is not the intention of this glossary to go into full detail on this subject but it will be clear from the way a Limit is expressed in a policy wording whether or not reinstatements apply, and where they do it is important the way they work is properly understood

Retroactive Date: Because of the “Claims Made” nature of a PI policy (refer to that section of this glossary), cover is provided for claims and circumstances that the Insured becomes aware of “now” but which arise out of professional activities that were undertaken in the past, sometimes years or even decades ago. PI policies tend to restrict cover for these historical activities by virtue of a retroactive date which states the date ON OR AFTER which, the professional activities must be undertaken for the policy to respond. Claims which arise out of professional activities undertaken PRIOR to the retroactive date are excluded. If cover for all past activities is required this can usually be negotiated with insurers

Run-Off Insurance: Because of the “Claims Made” nature of a PI policy (refer to that section of this glossary) PI policies are completely dead once they expire and so to ensure continuing coverage for past acts, cover must be continuously renewed each year. This remains the case when a firm ceases to trade; in order to “sleep at night” and ensure continuing cover for past acts the principals of a firm that is ceasing will need to continue to arrange what is known as Run-Off insurance. This is the same as a normal PI policy but with a run-off date so that cover only applies to claims which arise out of professional activities undertaken PRIOR TO the date on which the firm ceased to trade. Run-off cover will need to be renewed each year for as long as the principals of the firm see fit (many are guided by the statute of limitations and choose to insure for at least another 6 years). In theory run-off insurance should get cheaper each year as the firm moves further and further away from when it was active and so the historical exposure reduces

For some professions run-off insurance is mandated by their regulators such as the SRA, the ICAEW and the RICS for solicitors, accountants and surveyors respectively. For some professions, whilst not strictly mandated, there is still a technical requirement; Architects and Insurance Brokers for instance are two professions that are required by regulators to maintain adequate insurance to meet their past liabilities which effectively imposes a run-off insurance requirement on them when they cease to trade

Irrespective of whether or not run-off cover is mandated, all firms who provide and then cease to provide professional activities, are well advised to arrange such cover

Run-Off cover for solicitors is a subject in itself and is unique, but essentially there is automatic cover under the PI policy for a period of 6 years. For other professions, whilst there may be a requirement or a clear need to arrange such cover there is either limited or no obligation on the part of insurers to provide it and so there is no guarantee of its availability and careful consideration should be given to the issue before a firm ceases to trade

Situation / Territorial Limits / Geographical Limits: these mean the same thing and relate to where in the world the professional activities must be undertaken to be covered by the policy. This does not relate to where the firm is located, but where staff travel in order to undertake professional activities. Situation is often expressed as “United Kingdom” or “Worldwide excluding USA/Canada” or simply “Worldwide”. It is important that the Situation fully encompasses every location staff travel to. As an example, if a firm is located at an office in London and undertakes work for a client in Germany, a Situation of “United Kingdom” will be adequate so long as the work is all undertaken from the office in London. But, if staff travel to see the client in Germany then the Situation will need to cater for this, typically by being extended to “Europe”

This Glossary is a live document so please get in touch with us if there are any other terms you would like explained.