When Does Professional Indemnity Insurance Pay and When Does It Not?

When Does Professional Indemnity Pay?

In general: Professional indemnity insurance takes over when self-employed persons or companies cause damage to someone else (a third party, for example the principal) in the course of their professional activity and the latter therefore demands compensation. In this case, the insurance company will pay the compensation and, if applicable, the costs of defending against unfounded damage.

Special Case of Negligence

But what if I acted negligently? Will the insurance even pay? Many people worry about this when a damage event occurs. However, these are unfounded, because professional indemnity insurance only excludes damage that was caused intentionally.  In other words, when a third party is deliberately (knowingly / willingly) harmed. This is also logical, because self-employed individuals or entrepreneurs can theoretically only cause damage if they make a mistake - i.e. act with either slight or gross negligence from a legal point of view.

The exception: In the case of gross errors, professional indemnity insurance may not or only partially take over the damage (so-called gross negligence ), for example in the event of violation of rights. Self-employed professionals should therefore pay attention to this criterion when choosing an insurance. We can give the all-clear for professional indemnity insurance through exali: They do not exclude gross negligence in the event of infringements of rights (for example, trade mark, domain, license, copyright, name and personal rights).   

Attention: Liability in the event of gross negligence cannot be excluded by the general terms and conditions! It is therefore all the more important that gross negligence is also insured and that the insurance takes over in these cases.

When Does Professional Indemnity Insurance Not Pay?

As with any insurance, there are also reasons with professional indemnity insurance why it may not pay in a damage event.

Risk Exclusions

Possible exclusions - also known as risk exclusions - play an important role. An insurer cannot insure unlimited amounts of damage at a calculable price. The following exclusions can apply:

• Intent

In the event of intent or malice aforethought, i.e. damage caused intentionally, no insurer will pay for damages. The same applies to professional indemnity insurance.

Malice aforethought or intent in civil law is defined as someone knowingly and willingly causing damage. A policyholder is therefore not insured if they deliberately harm a customer, for example by taking a website offline because the customer is in arrears with payment.

• Industry-specific Exclusions

There are also other usual exclusions, depending on the industry in which the insured person works. In the IT industry, for example, personal injuries and property damage caused by deliveries and services for weapon systems are excluded. It is therefore important to take a look at the exclusions in the insurance contract before taking out professional indemnity insurance.

Breach of Obligations

When concluding insurance contracts, there are certain rules of conduct (obligations) that the policyholder must comply with. If they violate these obligations and duties, there is a risk of loss of insurance coverage in the worst case and the insurer may not pay or only partially pay in a damage event.

The most important obligation is to report the damage ‘immediately upon becoming aware of it’. Even if it makes sense to inform the insurer of a claim as early as possible, in practice we often find that claims are only reported months after they have occurred. In some cases, policyholders involve lawyers, incurring high costs and at times even pay for compensation - without the insurer knowing about the damage and being able to provide support with experts and lawyers. It then makes sense if the insurer does not cover unnecessary costs.

We have also found that in the ‘heat of the moment’, policyholders can quickly get carried away by making payments to their plaintiffs (or waiving their fees) which, after a professional examination of the liability situation, turn out to be unjustified.

Coordinate the Appointment of a Lawyer With the Insurer

In this context, one point is very important that is not found in the obligations but in the insurance conditions. According to the motto ‘who pays, decides’, in a damage event, professional indemnity insurance only covers costs that are incurred at the instruction or instigation of the insurer. This particularly concerns the costs of hiring lawyers or experts, which must be agreed with the insurer in advance.  Costs for a lawyer who has been hired without the consent of the insurance company can be rejected. It is also a good idea to coordinate the appointment of a lawyer beforehand with the insurer, since a specialised lawyer is particularly important in IT and media law.