A general introduction to Professional Indemnity Insurance (PII)
We are all familiar with purchasing insurances such as motor, holiday, home contents and buildings insurance and understand the basis upon which they are written.

In return for a premium, the insurance company will pay if a loss occurs within 12 months from the commencement date of the insurance.

Professional indemnity insurance, however, is not written on the same basis. It is written on a ‘claims made’ basis, which means that it is the insurer in place when a claim is received that will respond rather than the insurer in place when the negligent act occurred.

For example, if a member was insured on 1 January 2000 for a period of 12 months with the XYZ insurance company, that insurance company would, subject to the terms of the policy, meet and pay all claims that were made during that period, as a result of any surveying activity which the member had undertaken in the past.

If on 1 January 2001 the member were to change insurers and take out a policy with ABC Insurance Company, then that insurer will, subject to the terms of the policy, meet and pay all claims arising during the period 1 January 2001 to 31 December 2001.

If a claim were to arise in 2001 as a result of work undertaken by a member some time during 2000 it would be to the ABC Insurance Company that the claim should be made, rather than to the XYZ Insurance Company.

• Because of this claims made basis of the insurance your policy will contain conditions that you notify all claims and circumstances to insurers as soon as possible. In respect of circumstances an RICS policy contains a special clause so that if you innocently fail to notify a circumstance (you don’t recognise it is one for example) the insurers will not avoid the policy. 
• Where you receive a ‘claim’ (a letter formally advising you of legal action, or an indication to the effect – I’m going to sue you) you must notify this to insurers as soon as practicable. Where the requirement to notify falls towards the end of the policy it is vitally important that you notify before the policy expiry date. This is onerous on you but you should ensure your firm has systems in place to deal with this eventuality or you risk your cover being avoided.

Members changing insurers should be especially careful in not delaying  notifying circumstances or claims should any occur.  Further details of this will be found in the forthcoming guide ‘Notification of Claims' which is due to be published shortly.

Retirement

Where a member has retired or ceased trading the Institution’s Regulations require that ‘run-off’ insurance is maintained for a period of at least 6 years.

This insurance is professional indemnity insurance, but is usually cheaper, subject to market conditions, than full insurance, at least after the first year, with the premiums reducing over a period of time as the member is no longer practising.

The run-off requirement of the insurance regulations require Partners (including members of Limited Liability Partnerships) and Directors of a firm to ensure run-off is maintained for ex Partners, Directors, Consultants and Employees. The need for run-off insurance arises because professional indemnity insurance is claims made.

Claims can arise at any time up to 15 years after the work complained of was undertaken by the member. RICS recommends that run-off insurance should be purchased for at least 15 years and that members should make certain that their executors are made aware of this requirement in order that they can ensure adequate provision after the death of the member.

Liability dissipates with time and brokers can advise on whether there is the necessity to maintain run-off for the full 15 years, but, as a minimum you will need to comply with the 6 year RICS requirement.

Run-off insurance can be a severe burden for sole practitioners. Those in partnership or practising as directors of companies where the partnership or company continues, will be able to ensure that their liability is covered by the continuing partners’ or directors’ insurance.

 If there are no member partners or directors in the practice, however, then there may be no guarantee that the practice will continue to purchase insurance that complies with the RICS’ Rules.

Partners, consultants, directors and indeed employees who retire should make sure that they obtain satisfactory undertakings from the continuing partners or directors that they will continue to be covered by the practice and that if for any reason insurance is not continued, they are given notice.

The primary obligation to effect insurance is on the individual member, but so long as the member is covered by compliant insurance the Institution is not concerned whether this is effected by the member or by the member’s former practice. If, for some reason, the practice ceases to insure the member then it is for the member to try to take out personal insurance.

It is therefore important that the member should be notified if the practice ceases to effect insurance. In practical terms, however, individual insurance is very difficult, if not impossible, for members to buy. By being notified, however, you are at least on notice that you may have a problem.