Professional Indemnity Insurance
The purpose of Professional Indemnity (PI) insurance is to provide indemnity to an insured for legal liability to a third party who suffers loss as a result of the provision of the defined and declared professional service. Under the insurance policy, the insured normally also receives indemnity for the costs of investigation and defence of claims.
Importantly, PI insurance can be tailored to the professional group covered. Typically, PI insurance may include optional extensions of cover for a range of matters, including indemnity for consequential loss for an additional premium.
What is Consequential Loss?
Consequential loss is generally considered to be a loss that is beyond the 'normal measure' of damages. In PI insurance, the scope of consequential loss depends on the extent of indemnity the Insurer wants to grant in the event of an indemnified claim.
Ahead of granting coverage for consequential loss, insureds must evidence the following risk management measures:
Liability is limited under contract with clients
All contracts are reviewed legally prior to signing
Details on the legal counsel function i.e. is this in-house or external?
How consequential loss is assessed under contract and under what circumstances it is accepted or rejected under contract
Insurer's view on Consequential Loss Extension
Insurers typically seek to avoid consequential loss coverage, as this extension generally refers to losses that do not flow directly from the professional's error or omission but arise consequently and often indirectly.
Furthermore, consequential losses are difficult to commensurately identify, quantify, and price where there is considerable risk for high-severity claims. Further, consequential losses can be speculative, subjective, and disproportionate to the actual act, error, or omission.
When coverage is granted, typically, the following will apply:
A narrow definition of consequential loss to avoid ambiguity. For example, only covering loss of production, revenue, or profit directly and solely attributable to the professional breach, not third-party chain effects;
Losses must be foreseeable and proximately caused by the insured's act, error or omission. Coverage will not entertain scenarios where losses arise from remote or exaggerated chains of causation;
Losses must arise from the insured's professional services – not from unrelated activities or advice;
No cover for loss of market share, reputational damage or punitive/exemplary damages as these are too speculative or subjective for quantification and causation purposes;
No blanket indemnity via broad contractual indemnities for consequential losses; and
If coverage is provided, it will be on an available limit and will be capped to a lower sub-limit.
Consequential Loss Extension for Engineering Services
Within the engineering services industry, it is typical for a party who has contracted for the design and installation of plant and equipment to rely on the benefit of exclusion clauses in their contracts in defence of claims arising out of the performance of that plant or equipment. Often these exclusions of liability seek to exclude any entitlement by the principal to pursue recovery in relation to what has been generically referred to as 'indirect' or 'consequential' loss.
In situations where the insured seeks cover for the exposure above, a consequential loss exclusion carve back can be negotiated where the exclusion does not apply to loss:
a) Arising directly and solely from a negligent act, error, or omission in the performance of consulting engineering services by the Insured; or
b) That is reasonably foreseeable as a direct consequence of the Insured's professional negligence at the time such services were rendered; or
c) That would attach to the Insured at law, in the absence of any express contractual assumption of liability; or
d) That is subject to a maximum sub-limit of liability which forms part of and not in addition to the Limit of Indemnity stated in the Schedule.
No cover shall be provided for:
Any liquidated damages, penalties, or liabilities assumed under contract, unless the Insurer has agreed in writing to such terms prior to contract execution; and
Any consequential loss arising from the failure of a third party to perform or supply goods, services, or facilities.
Learn more
Lockton focuses on arranging and securing innovative solutions to professional firms that can help to cover the financial consequences of negligence and to meet the cost of defending claims made against them. Contact our Professional Indemnity specialists for assistance.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
