When assessing risk under a contract, particularly when looking at capping liability, tech clients will often respond with something along the lines of “well, my PI cover is £5 million so why don’t we cap it at that?” Whilst that may be a sensible approach, there is an assumption being made there that the insurance will pick up any potential liability that the client may face under the contract up to the claim limit (subject to any excess, of course).
But a couple of times recently, clients have asked me to take a closer look at the small print of their professional indemnity policy, and they have been quite surprised to discover that their PI cover is not the safety net that they may otherwise have assumed.
How does a company manage risk under a contract?
Before we dig into the detail of Professional Indemnity insurance policies, it is worth recapping on how a company can actually contractually manage risk:
1. Don’t over promise; so you can always fulfil what you are have promised.
2. Limit your liability by capping it in the contract (see my recent post on indemnities)
3. If using a 3rd party provider to help deliver a contract, then flow the risk down to the person or entity actually doing the delivering (making sure as far as possible that they will be around to pick up the liability if and when it arises)
4. Insurance against it or self-insurance.
I want to emphasise again that your PI Insurance is not a ‘catch-all’ safety blanket. All insurers will make sure you have taken sensible decisions with the first 3 ways of contractually managing risk, BEFORE they payout on a claim. Deciding to not take proper legal advice on a contract you are signing could potentially mean giving the insurer the ability to wriggle out of paying up on an otherwise valid claim.
What are you actually covered for?
Not all PI insurance policies are the same. Typically, your PI insurance will cover any sort of consultancy provision and provision of technology, software and hardware. It is designed to be an insurance against negligence and civil liability, e.g. if you have under-performed on a contract. Before you can sign up to a PI insurance policy, you need to know what cover you actually need. For example:
Level of cover required: Every policy will have a limit on what you can claim. £1-5 million is a typical level of cover. Of course with all these things the higher the level of cover you want, the higher the premium you pay. It is also important to look at whether the cover you are getting is per year or per claim. I always recommend that my clients who have a large customer base look to get a ‘per claim’ cover. The likelihood is that if you have one large IP infringement claim to defend, you may have to do this several times for all the other affected customers. This is why the cover per claim is incredibly important.
Geographical limit of the insurance: Most insurance policies will have limitations on the extent of how global they are actually covering you for. This is because different jurisdictions have different rules about the civil liability claims. As a result, for example, most policies will require you to get extra cover for any civil liability claims, which emerge from the USA or Canada. Therefore you need to take careful consideration on those geographical areas you need your PI insurance to cover you for.
What will be your excess: Similar to any normal consumer insurance there will be an excess on your professional indemnity insurance. Once again the lower your excess the higher your premium. Another way of thinking about your PI excess, is how much could your business afford to pay out, before it materially impacts on the operation and financial health of your business?
What are the typical gaps in a PI insurance policy?
I mentioned earlier in this article about the typical gaps that I see regularly in PI policies. These are:
Patent Infringement Issues: There is no commercially available off-the-shelf insurance for patent infringement issues. Being very blunt, if a patent holder sues you, your PI insurance will not cover you! Not wanting to be alarmist, it is expensive to do patent searches, but more expensive to fight a patent infringement claim.
Invalidating the claim: It is very important to read the detail of what you are signing up to on your insurance policy. You must make sure that the detail of your contract with a customer or supplier doesn’t inadvertently invalidate your PI cover. For example, an insurer will almost always want to have the right to step into your shoes to defend the claim. When it comes to IP indemnities, it is not uncommon for the large corporate customers to want the right to defend any claims against them. However, as a supplier, you want to be careful of conceding this since it may mean that the insurer will not pay up.
Your insurer will expect you to keep a ‘commercial head’ and not do anything silly. For example, they will expect you to have a liability cap in place on your commercial contracts. Next time you consider just signing up to a customer’s standard terms and conditions do give it the once over to make sure you are not invalidating your PI cover. This is something we can advise you on.
Most insurers will expect to be involved sooner rather than later. It is often a condition of your policy that you let them know quickly when there is a problem brewing. After all, if they are involved earlier they may be able to help mitigate any losses.
Loss of profits: Unfortunately your PI insurance will not cover you for your loss in profits.
Time to remedy the problem: Your insurer will expect you to have negotiated within your contracts time to remedy a problem and mitigate your potential losses. Without this in your commercial contracts your PI insurance may not pay out.
Liquidated damages: These tend to be payments that are triggered if you fail to meet an availability or service level for a client. Your PI insurance will not cover this.
3rd party products and services: Most policies have a huge amount of qualifications and exclusions. However, most insurers will only cover you for defects on your own products. This has large repercussions if you are a reseller. If you are a reseller, to retain a level of PI cover, you need to make sure that the commercial risks of problems are pushed down to your suppliers.
The devil is always in the detail with your PI insurance policy. The key to peace of mind is to make sure that your PI insurance policy is harmonised with your commercial contracts. This is something we regularly do for our tech and small business clients. If you would like us to help you then please do get in touch here.