Why have professional indemnity cover and how to get the best out of it? Get the answers to these and other questions we have often come across in handling claims for agencies and their insurers here.
Why should I bother with professional indemnityith professional indemnity insurance?
Increasingly, clients are including in advertising services contracts a term obliging the service provider to have professional indemnity insurance in place on standard industry terms at a minimum level of, say, £2m. Even without such a clause, such are the risks commercial communications agencies face in today's global market that professional indemnity cover is essential for any marketing services business that wants to survive and grow. Even an ultimately groundless claim, for example, can involve significant legal costs. A standard industry PI policy will cover the agency, subject of course always to the stipulated excess, for such costs provided the claim is of a type covered by the policy.
How do I obtain P.I. cover?
Speak to your normal insurance broker or contact a specialist broker in the field – your lawyer should know who to recommend if he has true expertise in this area. Cover is not cheap, and you are going to have to pay a significant sum to be protected against global claims on an excess that is below 5 figures per claim. You will also have to be prepared to undergo a rigorous internal audit whereby your potential insurers check out your risk management procedures. Your contracts with suppliers, for instance, will come under scrutiny and you may be required to update these before cover can be put in place. Insurers may well insist, for example, that your supply contracts contain warranties as to the legality and general compliance of all material supplied. That way, if a claim hits as a result of a drop-off on the part of your sub-contractors, insurers get the best chance of recovering from that quarter what they pay out on the claim. This will be by way of insurers exercising what are called their "rights of subrogation."
What if my supplier is a good friend and I do not want insurers to sue him under their rights of subrogation?
Prepare to whistle for your cover. It will be a condition of your policy that you do not stand in the way of insurers' rights of subrogation.
What happens if I decide to handle a claim without claiming under my PI policy?
Check your policy, but even if it does not require you to notify all claims coming within the types of claim covered by the policy, you are likely to find that, when it comes to renewal, you will have to come clean about all relevant types of claim that have been made during the previous year, regardless of whether they have been notified to insurers under the policy. And remember that contracts of insurance are contracts of "utmost good faith". This means that any failure to properly answer all questions put when cover is requested will give insurers the prima facie right to disclaim cover should any non disclosure subsequently come to light.
Presumably I do not have to notify insurers until either a claim gets out of hand or the claimant will not agree to a sensible offer to settle?
Wrong. You will find that your policy requires you to notify insurers just as soon as you have the slightest hint that a qualifying claim might be in the offing. Otherwise, the penalties for late notification can seriously damage your cover! Even worse will be any attempt to negotiate with the claimant without insurer's involvement. Once insurers are notified of any claim they will want the unrestricted right to decide how the claim should be handled. Any offer or concession of any kind made to the claimant without prior authority from insurers (even if it is described as "without prejudice") could give insurers grounds for disclaiming cover. Just as problematic could be telling your claimants that you have insurance cover.
What if I decide to keep the client happy by accepting full responsibility for a claim which I have notified to insurers?
That is your call of course, but be ready to lose some or all of your cover. Insurers are only obliged to indemnify you to the extent that you are legally responsible for any particular claim. There may be cases where the advertiser has initiated the creative idea that has given rise to a copyright infringement claim for example. If so, insurers may argue that the agency is at worst only 50 per cent responsible for the cost of the claim. If it does, then that will be the extent of your cover.
As soon as I have notified a claim, presumably the policy will cover all legal costs I incur from that point on?
Not necessarily. In most cases, cover for legal costs will only cut in once insurers have received full details of the claim and have had the opportunity deciding whether your normal solicitors can handle it or whether the claim should be passed to a law firm on the insurer's panel.
If I have PI insurance, then presumably this means I can stop worrying about agreeing to onerous indemnity clauses in contracts with clients?
Not necessarily. You will find that many PI insurance policies allow insurers to disclaim liability under the policy if the agency has entered into unduly onerous indemnity commitments in its client contracts. If you are in any way concerned about a particular indemnity clause that a client is pressing you to agree to, then check with your insurers before signing on the dotted line. Most will be happy to advise you as to whether, assuming you agree to such a clause, there will be any difficulty with cover should the client make a claim for indemnity under that particular wording. Remember also that there will always be a limit to the amount of cover per claim that a PI policy provides. To avoid the nightmare scenario of the total costs for a claim seriously exceeding the cover that you have in place, do what you can to negotiate with your client a cap on your responsibility under any indemnity clause which equates to the limit of your PI cover.
