Professional Indemnity Insurance: Full Disclosure

10 Jul 2024

The purpose of professional indemnity insurance is to protect you against loss or damage claims made by third parties in connection with your services or advice. 

Your broker or insurer may seem to ask too many probing questions when you provide details about your business, or some questions may seem irrelevant. A few details here and there might not matter, you may think. However, when it comes to professional indemnity insurance, you need to be completely transparent.

We explain why full disclosure is essential in professional indemnity insurance and why honest conduct is always the best policy.

Businesses may arrange professional indemnity policies directly through insurance providers or through brokers who act as intermediaries. The company must provide information about its operation (and its people), size, complexity, and history of PI claims in both cases.

Based on the information provided, the insurance company is able to generate an accurate premium to cover all risks.

There's no getting around it: arranging professional indemnity insurance involves much form filling. Reading and understanding every question - as well as responding accurately - is essential when arranging PI policies.

Insurance policies can be invalidated if information is not disclosed (either accidentally or purposefully). It could have a huge impact on your business. All losses will be your responsibility if a claim is made. In the future, cancellation can make it harder for you to obtain insurance, and you will most likely have to pay significantly higher premiums.

How does the principle of 'utmost good faith' work?

Honesty is crucial in insurance, which relies on "utmost good faith". Known in Latin as "Uberrima fides", the principle of utmost good faith requires each side in a relationship to act honestly at all times.

In accordance with the Association of British Insurers, utmost good faith means both the insurer and the policyholder committing not to withhold information.

In essence, the principle of utmost good faith requires honest behaviour on the part of both insurer and insured (and any brokers involved in the process). Your insurance agreement requires full disclosure of all relevant information (known as material facts). Misrepresentation, whether intentional or unintentional, may lead to cancellation of a policy.

In what ways does the Insurance Act affect things?

Insurers, brokers, and policyholders all benefit from the Insurance Act 2015. Under the Act, insurance arrangers are required to investigate all relevant information thoroughly and disclose it to insurers. This ‘Duty of Fair Presentation’ applies to all forms of insurance, including professional indemnity insurance.

A company or individual has a legal duty to present all risks clearly when arranging or renewing an insurance policy. If all "material facts" are not provided, professional indemnity insurance policies can be cancelled or claims denied.

How and why do "material facts" matter?

The Insurance Act 2015 requires you to tell your agent or broker everything they need to know when arranging insurance.

Material facts include the following:

  • Business-related information that you, your senior leadership team, or anyone arranging insurance knows.
  • Accessible information (both internally and externally) that can be found through a reasonable search.

A few common material facts that you should disclose to a potential insurer are as follows:

  • Convictions, cautions, criminal offenses, or prosecutions (unless spent under the Rehabilitation of Offenders Act) of senior employees.
  • Director disqualification.
  • Insolvency, administration, receivership, or liquidation could be imminent.
  • CCJs have been issued to the business.
  • The business's insurance has previously been declined or cancelled.
  • There has been a previous insurance claim or notification (regardless of fault) made by the company.

This list is by no means exhaustive and should only be used as a general guide to potential material facts that could influence your policy. All material facts must be identified and disclosed by the individual or organisation.

The disclosure of material facts allows insurers to calculate premiums accurately with a full understanding of risks. It is possible to lose your insurance if you fail to disclose material facts. In the event of a claim, your insurer might not pay out, or your insurance might be cancelled.

Disclosure of all material facts: how do I do it?

Due to their nature, standard forms may not be able to accommodate all material facts. Lack of space, however, is not an excuse for not disclosing facts. Inclusion of all relevant information is your responsibility.

Whenever you arrange insurance, you should document the process and store all information easily accessible. You can then provide your insurance company with all necessary information. As a result, a clear audit trail is created, which should facilitate future professional indemnity insurance arrangements.

In what ways does the Insurance Act benefit policyholders?

If you need to make a claim, identifying and disclosing material facts is critical as it increases your chances of receiving a payout.

It was previously claimed that some insurance companies arranged insurance without having access to all information and then claimed non-disclosure at the time of a claim. By reducing the possibility of this occurring and eliminating controversial policies that require underwriting at the time of a claim, the Insurance Act aims to prevent the issue from occurring.

The Act makes it harder for insurers to challenge claims. It previously took a long time to settle professional indemnity claims; the new act aims to speed things up.

It is important for policyholders to play their part in the Act by disclosing any and all information needed by the insurer. The more honestly you act and disclose everything, the less likely your insurance claim will be delayed or challenged.

How do brokers contribute to the disclosure of insurance information?

A broker is an expert in insurance and interprets the statutory requirements of the Insurance Act 2015. A good insurance broker can offer advice and guidance on all aspects of your policy, including how and what information to disclose.

Some brokers are less considerate than others. Brokers often use assumed "statements of fact" or limited standard forms to speed up the process, but this can result in material facts not being disclosed.

There are often complex material facts that cannot be summarized simply with "yes" or "no". If you are in this situation, you must be sure that you have provided all possible information and that the insurer has accepted and understood it. Although it may take significant time to disclose all information, it is essential for arranging suitable insurance coverage at a competitive price.

Benefits of correct disclosure for policyholders

It's no secret that disclosure for professional indemnity policies is challenging. Businesses must balance their obligations against the realities of running a business. Having a broker who specializes in professional indemnity insurance can benefit many companies.

Disclosure has no shortcuts, but it pays off in the form of a professional indemnity policy providing total protection. Insurers will understand your business well - including your risks and the coverage they should provide. As a result, they are able to calculate an accurate premium that covers you if you make a claim. Your position is strengthened and your policy is protected - so you're less likely to find claims being challenged or denied.

Legal Ex Plus are experts in providing law firms with tailored insurance products that suit specific organisational requirements. By drawing on our vast experience and applying our in depth knowledge of professional services, we are able to design innovative insurance programmes for each of our valued clients. Call us today on 0800 180 4203 for the perfect solution for you and your business.