Insurance Terminology

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Insurance Terminology

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Get a grasp on professional indemnity insurance terminology with our comprehensive guide. What is an Aggregate Limit of Indemnity, who are the Financial Conduct Authority, what does Reservation of Rights mean? You will hopefully find an answer to your question below.

Aggregate Limit of Indemnity

'Aggregate' limit of indemnity is a term used to describe the type of indemnity limit provided by the professional indemnity policy.

'Aggregate' means that the total amount of financial cover provided is limited to the amount specified in the policy schedule, arising within the specified period of insurance.

For example, if the aggregate limit of indemnity specified in the policy is £ 500,000, that is the maximum amount the policy will pay during its term. One claim for £ 500,000 would exhaust the policy. Some policies may cover legal defence costs and expenses in addition to the aggregate limit of indemnity.

An alternative and more generous basis of cover is an Any One Claim limit of indemnity.

Any One Claim

Any One Claim (also referred to as 'Each and Every' claim), is a term that states the type of limit of indemnity provided under a professional indemnity policy.

It means the number of claims which can be notified within the policy period is unlimited. For example, if the policy provides a limit of indemnity of £ 100,000, you can notify one claim of up to £ 100,000 or multiple claims during the policy period. One claim for £ 100,000 will not exhaust the policy and the amount of claims the policy will cover during the policy period is unlimited.

An alternative but less generous basis of cover is an Aggregate limit of indemnity.

Civil Liability

Civil liability is the legal responsibility for a payment to an aggrieved third party, due to the violation of a civil law, tort, or a breach of contract.

Civil liability differs from criminal liability in that violations of tort or contract terms do not subject the responsible party to punishment for a crime, although civil liability can also include punitive monetary damages or other forms of court enforcement.

In terms of professional indemnity insurance, a 'civil liability' wording is the widest available form of cover and wider than the usual 'negligence' or 'errors and omissions' wordings. This wording will cover situations where a policyholder may be held liable for a loss, without having being found to be negligent.

Claims Made

Claims Made is a term used to describe an insurance policy which only provides cover for claims which are notified during the term of the policy. This is not necessarily the same time period when the actual incident or error causing the claim occurred.

You therefore need to be insured both at the time the incident occurred and also when your client makes their claim against you. 'Claims made' works this way because professional errors can be discovered many months or even years after the mistake was made.

As an example: If you made a costly mistake for a client in 2020 but your client does not discover their loss until 2022, it is your 2022 policy that deals with the ensuing negligence claim against you. Therefore, a valid professional indemnity policy or 'run-off' policy must remain in force at all times for a claim to be met by an insurer.

Please also bear in mind that if you change your limit of indemnity, it is the limit purchased when the claim is notified that applies, not the limit purchased when the work was actually carried out.

Collateral Warranty

Collateral warranty is a term to describe a document normally designed to give contract rights to another party with an interest in a building development, but who has no rights under the main client contract.

The purpose of the collateral warranty is to provide additional security for other parties involved in a construction project, but who are not directly linked to the parties delivering it. The warranty can give a third party the right to sue the warrantor.

Collateral warranties can have significant implications for the coverage provided by professional indemnity insurance policies.

We have a helpful guide that you can read on this subject: Guide To Collateral Warranties (and Professional Indemnity).

Excess

The 'excess' is the first portion of a professional indemnity loss or claim that is borne by the insured.

An excess can be either voluntary to obtain a lower premium or imposed due to underwriting reasons. The intention of the excess is, in part, to give the policyholder a financial stake in minimising the risk of a claim occurring with the financial cost being a reason to avoid the situation happening. It also avoids smaller claims being paid under the policy for amounts which fall within the policy excess.

Financial Conduct Authority

The Financial Conduct Authority (FCA) is the financial regulatory body in the United Kingdom covering banking, insurance and financial services.

It operates independently of the UK government and is financed by charging fees to members of the financial services industry.

The FCA regulates financial firms providing services to consumers and maintains the integrity of the UK’s financial markets. It focuses on the regulation of conduct by both retail and wholesale financial services firms.

Insurance Broker

An Insurance Broker is an insurance intermediary with professional skills and knowledge for the handling of insurance business.

They act as the agent of their client, and they are typically remunerated mainly by a commission paid by an Insurer, or sometimes by a fee agreed with their client.

Some insurance brokers specialise in certain 'niche' classes of insurance such as professional indemnity.

Since January 2005, all insurance brokers and intermediaries must be registered with and regulated by the Financial Conduct Authority (FCA).

Please read our free guidance note on this subject Why You Need An Insurance Broker.

Insurance Premium Tax

Insurance Premium Tax (IPT) is a mandatory UK government tax charged on most insurance policies, including professional indemnity insurance.

Currently set at 12%, it is not the same as VAT. Unfortunately, it can't be claimed back. It is an indirect tax accounted for by insurance companies on most classes of insurance and recovered as a levy against each policy sold. It accounted for almost £ 8 billion in tax receipts in the 2023 fiscal year.

For more information about paying IPT, click here. For a discussion with one of our experts, please call 0345 251 4000.

Limit of Indemnity

The Limit of Indemnity (LOI) is the maximum amount the insurer will pay under a policy during the policy period.

Legal costs may be included within the Limit of Indemnity or may be covered as an additional amount, depending on the policy purchased.

The policy may cover an aggregate sum up to the limit purchased, or it may be an 'any one claim' basis covering multiple claims each up to the limit purchased. Read more in our Guidance Note.

Managing General Agent

A Managing General Agent or MGA is a specialised type of insurance business that has been granted underwriting authority on behalf of an insurance company.

An MGA’s functions can include underwriting those risks falling within their area of expertise and appetite (e.g. professional indemnity), binding cover and issuing documents, settling claims, developing specialist websites and/or appointing a network of brokers to supply new enquiries.

At its core, an MGA manages all or part of the insurance business of an insurance company taking a share of each premium transacted to pay for their specialist service and any additional costs, including broker commission.

There are more than 300 MGAs currently active in the UK insurance market. They underwrite combined premium income exceeding £ 5 billion, which represents around 10% of the general insurance market.

Material Fact

A Material Fact or material information is any fact which would influence the insurance underwriter in accepting or declining a risk or in fixing the premium or terms and conditions of the contract.

All insurance policies rely upon the doctrine of Upmost Good Faith, so all material facts or material information must be fully disclosed by the insured to the insurer and visa versa.

Non Disclosure

Non Disclosure is a term which refers to a failure by an insured to disclose a material fact, material information or circumstances to the underwriter before acceptance of the risk.

Partner's Previous Business

Partner's Previous Business is an extension of the usual policy cover which provides cover for a partner's previous business activities prior to joining the insured firm.

Cover is generally limited to a business of the same profession of which the partner has been engaged to the extent that the partner alone is liable and limited to the extent of such partner's liability.

Professional Negligence

Professional Negligence is conduct, or a failure to act, that breaches a duty to take care and results in a loss. It specifically relates to a situation where someone is professing a particular skill or ability, such as an accountant, a solicitor, or doctor, to name just a few.

Proposal Form

The Proposal Form is a questionnaire sent by an insurer or broker to a person or firm requiring professional indemnity insurance.

It should contain sufficient information to assist the insurance underwriter in deciding whether or not to accept a risk, what premium to charge and the terms and conditions to apply if the risk is accepted.

It is important that the information provided is truthful and sufficient, as required under the terms of the Insurance Act 2015. The information provided in the proposal form will form the basis of the insurance contract.

Qualifying Insurer

'Qualifying Insurer' or 'Participating Insurer' is a term that describes those professional indemnity insurers that have signed-up to a specific agreement with the Solicitors Regulation Authority (SRA).

Under the terms of the agreement, qualifying insurers agree to offer PII policies to law firms which meet the specific Minimum Terms and Conditions set by the SRA. Only these insurers are authorised to insure Solicitors in England and Wales.

The policy wording provided under the SRA's 'minimum terms' is widely regarded as the Rolls Royce of professional indemnity insurance. The cover is broad and the small print generally favours the policyholder rather than the insurance company.

Reservation of Rights

A Reservation of Rights is a notification from an insurer that it has reserved its right to deny cover at a later date. It is normally applied when an insurance company is not sure whether or not a claim is covered under the policy.

A Reservation of Rights is not a notice that a claim is being declined, but is protecting the Insurer’s rights to do so. By putting in place a Reservation of Rights, an insurer is then able to liaise with an Insured and explore whether the claim is covered under the policy.

Reservations of Rights are quite common in the early stages of a claim being notified but are often removed following discussion or further investigation.

Retroactive Date

The term 'retroactive date' applies to any work you have undertaken before the start date of the current professional indemnity insurance policy. Its purpose is to make clear the starting point from which work undertaken is covered by the policy.

The retroactive date is often the same date you began trading or the date you first purchased professional indemnity insurance.

Claims arising from work carried out before the retroactive date are not covered by the policy.

Statement of Fact

Statement of Fact is a term used to describe a short declaration statement provided by the insurer at renewal which is sometimes used as an alternative to completing a full proposal form.

The declaration usually re-states the risk information already provided by the insured who is then asked to confirm that the information (the facts) are still correct by means of signing the document.

Alternatively, the declaration may ask a short series of yes / no questions.

A Statement of Fact reduces the time spent dealing with the renewal of a professional indemnity insurance policy; however, it is important that all material information is still provided to the insurer.

Subjectivity

A subjectivity or subjectivities is an outstanding issue which must be resolved to an insurance underwriter's satisfaction before they can confirm that the terms and conditions of their quotation are valid and can be accepted. This will normally be a question about the risk information seen or a request for more information.

The subjectivity is normally applied when an underwriter is generally satisfied with a risk and happy to indicate terms, 'subject to' more information.

Once they have received and considered the additional information provided, the underwriter will then decide if the subjectivity has been satisfied and can be removed. If so, the terms offer will become valid and can be accepted. If they are not satisfied with the information, they may revise their terms or perhaps even withdraw their terms entirely.

Subrogation

All insurance companies have subrogation rights. These rights can be an important part of the claims settlement process, but outside of the insurance industry, little is known about what it actually means.

Subrogation, subrogation rights, rights of subrogation: These terms are used to describe the legal right of an insurance company to recover its loss from a third party. It is usually triggered where a claim payment is made to a policyholder, but the policyholder's loss was actually caused by another party. The insurer has the right to subrogate directly against the third party or their insurance company.

When is subrogation used in professional indemnity insurance claims?

In the context of professional indemnity insurance, an example is where a sub-contractor or consultant causes a loss while working for a larger client. The client's insurance company pays the claim and then seeks recovery of their payment from the third party who caused the loss.

Territorial limits and jurisdiction limits

All professional indemnity insurance policies will specify the policy Territorial and Jurisdiction Limits. These important clauses work together to specify where in the world the policy is providing cover and where it isn't.

What are territorial limits?

The 'territorial limits' are the countries and territories where the policy will provide cover to the policyholder. For policies issued in the UK, there are normally two available policy options: 'United Kingdom' only or 'Worldwide excluding the USA and Canada'.

Standard professional indemnity insurance policies, almost without exception, will exclude any work undertaken in the USA or Canada. The reason is because professional negligence claims in these countries can be significantly larger than the rest of the world, and they are extremely costly to defend.

What are jurisdiction limits?

The 'jurisdiction limits' are the countries and territories where the policy will accept the serving of formal legal action against the policyholder. For example, if a French client claims against you through the French legal system, 'Worldwide' jurisdiction means that the policy will provide cover in the French courts. Jurisdiction limits are usually the same as territorial limits (but not always), and as with territorial limits, there are normally two available policy options: 'United Kingdom' only or 'Worldwide excluding the USA and Canada'.

Specialist professional indemnity insurance would need to be purchased by firms who operate or who have interests in the USA and Canada.

The Insurance Act 2015

The Insurance Act 2015 came into force in August 2016 and is the most significant update in commercial insurance law in many years.

It is intended to reflect the requirements of a modern insurance market and reflect best practice in the UK insurance industry.

To find out more about this subject, please read our guidance note: The Insurance Act 2015 - Your Duty To Make A Fair Presentation.

Utmost Good Faith

Utmost Good Faith is a term which means both parties to the insurance contract have a duty to act honestly and not mislead or withhold critical information from one another. A breach of this duty by the proposer can entitle the insurer to repudiate liability and reject a claim.

For further reading about the obligation of full disclosure under an insurance contract, please read our free guide A Guide To The Insurance Act.