Public & Product Liability Insurance vs Professional Liability Insurance: A guide to coverage and claims

In this article we provide a practical guideline as to what to do if and when your business needs to make a claim on professional indemnity and general liability policies.

There is always a risk, that any business may be sued if wrongful advice is given, a person is injured, or another’s property is damaged as a result of its services or products.

If you own or operate a business, you have a legal responsibility to members of the public to take reasonable care to ensure that other people are not injured; that damage is not caused to another’s property; or that you do not cause them economic loss through the negligent provision of services.

If you do not do that, you may be liable to compensate the wronged party for the injury, damage or loss. Should it arise that your business causes (or is alleged to have caused) loss or damage to a third party, there is a chance that you will be sued or receive a demand for compensation from the party who has suffered the loss. This may occur immediately, or there could be delay in a formal demand being made.

The type of claim and the type of policy under which cover is sought will affect how a claim will be handled.

A Public or Product Liability Policy will be triggered when the event that causes injury or damage occurs. The policy that was on foot at the time of the occurrence will be the policy that responds regardless of when a claim is actually bought against your business. In these cases, an event will have physically happened that has caused injury or damage to a person or property. Accordingly, it is important where injury or damage occurs, to preserve as accurate a record as possible, of the event and consequent injury or damage, preferably as soon as possible after the event occurs.

However, under a Professional Indemnity Policy a claim may not actually be made against an insured until several years after the act or omission that gives rise to the claim happened. See our article here on claims made insurance. The act or omission complained about will often relate to intangible advice given or words said. The consequences of the alleged breach of professional duty may not manifest for many years after such advice was given or acted upon. For this reason, it is very important for professionals to have clear terms of engagement and keep accurate and proper business records, documents and file notes. This helps to defend future claims and can minimise the risk of being found liable for any alleged breach of professional duty.

Under these types of policies cover may be lost if professional indemnity policies are not renewed or if a claim falls under a period where there is no policy or run-off period. Or where circumstances known to an insured that could give rise to a claim are not promptly notified to the insurer during the policy period; or are not declared on inception of a new policy.

An obvious “circumstance” is where your business is served with court proceedings or receives a lawyer’s letter of demand which says to the effect, “we are going to sue you for negligence if you do not pay up within X days”. However, matters are often not so obvious and determining whether a particular set of circumstances suggest that a claim might be brought against your business can often be a much more subtle issue. See our article here on duty of disclosure.

Each jurisdiction has a limitation statute which sets out the rules governing the period of time in which a Plaintiff must commence a civil proceeding. Whilst these differ state to state, these limitation periods range from 3, 6 to 12 years. It is not always clear when a limitation period begins to run but ordinarily the limitation period will begin to run when the injury, damage or loss occurs or becomes manifest. There are also variations dependant on the type of loss (such as Personal Injury versus Property Damage). In our experience most litigated claims are made near expiry of the relevant limitation period.

If there is any reason to believe that a claim might be brought against you it is important to discuss this with your broker so that appropriate action can be taken to ensure that the claim or circumstances that might give rise to a claim are properly notified to your insurers as soon as possible.

In this section we set out a practical guide as to actions that should be taken if a third party is injured or a third party’s property is damaged in the course of operating your business.

Following an incident involving a third party, regardless of whether you believe you are responsible or not, your response should be:

Empathetic without guilt
Show that you care that they are injured or that their property is damaged, however do not admit responsibility.

Consistent throughout
It is important that all staff are made aware of the correct way to react and that the information provided to the third party is consistent.  Where possible, have all contact directed to only one or two staff members.

The following is a breakdown of the actions that are recommended or that are not recommended following an incident:

Following the above initial activities above you should take the following steps:

When an incident occurs or you think that you might be sued, it is wise to retain records of all correspondence and other relevant documents or evidentiary records in relation to the matter. Having a specific folder relating to the claim will enable you to quickly reference the event if required in the future. We often see clients who have a lot of detail on the matter at the time of the event but lose track of correspondence or evidence some years later when it may be required. Having this information to hand can be invaluable to your insurer.

In the event of incident or when an actual claim is made against your business, you should immediately speak with your advisor and give them a detailed account of the circumstances and seek instructions as to what you need to do in order notify a claim.

In relation to circumstances that you think might give rise to a claim on a professional indemnity policy it is important to seek advice as to whether those circumstances need to be notified to your insurer or not – in most cases it is prudent to tell your insurer even if you think that this may affect your future premiums – in fact if it is a matter that you think may affect your future premiums it is very likely that this is a matter that an insurer will want to know and that you will be required by law to disclose. Cover may be lost or declined if these matters are not disclosed to your insurer during the current policy period or at the time of renewal for the following period.

Notifying your insurer will usually require completion of some kind of claim form, but it should also include the additional details you have collected as mentioned above. Your broker (if you have one) will be able to advise what information should be provided and will assist you in your submission to the insurer’s claims team.

Your broker should be an active advocate for you during this time and not simply a post box for correspondence. The best Brokers are not just selling you insurance – they are working on your behalf to ensure disputes with insurers are avoided and endeavour to make the insurers pay claims that have been made on your insurance as expected.

Once a notification is made your Insurer will provide you with a claim reference number. The insurer will refer to this number when dealing with the matter. If there are multiple claims, you will obtain multiple claim numbers. All correspondence going forward should include this number once received.

In the event of claim notification, insurance companies can take some time to decide upon whether the circumstances of the claim are covered under your insurance policy. Until such time as the insurer provides a determination in this regard, you will often be told to act as a “Prudent Uninsured”.

A “Prudent Uninsured” is a legal concept which simply means that the Policyholder should act as if they do not have insurance.

To elaborate, just because you may have an insurance policy in force to cover you for loss or damage, this does not mean you can be reckless or act with flagrant disregard to the potential risk.  As is the case in all classes of insurance, it means that reasonable measures and precautions need to be undertaken to minimise and safeguard against the risk of further harm and/or loss or damage.

Examples of being a “Prudent Uninsured” include taking steps to minimise losses, avoiding careless or reckless payments or courses of action. These actions may prejudice the position of the insurer and they may reduce or avoid your claim payment by the amount they can prove you have failed to do so.

Acting as a “Prudent Uninsured” includes taking steps to reduce the financial implications of a loss and/or repeat exposure.

If you act, as a reasonable person in the circumstances would, and take steps to reduce the prospect of a loss occurring, this shows good faith.  Also, if you do suffer a loss, proceeding on the most economical basis to minimise the claim will be appreciated by your insurer but also ensure you do not prejudice your position when the time comes to make a claim for costs incurred.

Once Insurers have carefully considered a claim submission in conjunction with policy terms, conditions and exclusions, and are satisfied that cover is available, they will provide a formal grant of indemnity.

The principle of indemnity is essentially a guarantee to restore an Insured to the position that he or she was in prior to the incident that caused the loss. In the case of liability policies this invariably guarantees the payment of compensation for losses or damages sustained by the Third Party. This can be in the form of payment of compensation or repair / replacement in addition to the payment of any defence costs (such as legal and expert fees and court costs).

Where there is insufficient information for the insurer to decide on whether a claim has been covered, the insurer will issue you with written correspondence reserving their rights. This will set out what further information is required to determine policy coverage. Your broker will be able to assist you with providing that information and with liaising with your insurer regarding outstanding issues.

Your broking partner and Insurers’ allocated claims handler will assist you in resolving the claim. They will also be able to assist in the recommendation of lawyers or/and experts to specifically assist with your claim. Bellrock have extensive experience in claims management and Insurers’ claims handlers/officers are often legally qualified and are very well experienced in expediently resolving claims.

The occurrence of claims brought against your business by third parties are somewhat out of your control. Even businesses with robust risk management policies and procedures can be exposed to third party losses. As such it is vitally important that you consider what insurance you need to protect you and your business. Equally invaluable is a proactive response from your broker to render assistance when your business is exposed to significant potential costs or liabilities.

The team at Bellrock is here to assist you with the knowledge required to better understand your risk from a liability perspective. We possess the depth of relationship to ensure the best possible cover and pricing outcomes and specific expertise in the management of both simple and complex claims from cradle to grave. If you have any questions in relation to your business risk or claims please contact us via the form below.