Disclosure and professional indemnity insurance – the nitty gritty

Disclosure and professional indemnity insurance is a subject that should not be under estimated.

When providing your broker or insurer with details of your business, it sometimes seems like they are asking too many probing questions, or it may be that some questions don’t seem relevant. You may also think that getting the odd detail wrong here and there won’t matter. But when it comes to professional indemnity insurance insurance, this is the one time you need to reveal all.

In this guide to the importance of full disclosure in professional indemnity insurance, we explain your responsibilities (according to the Insurance Act 2015) and explain why honesty always creates the best policies.

Why it's so important to be honest when providing details to your insurer about your business

Professional indemnity policies are arranged by the business directly with an insurance provider or through a broker who acts as an intermediary. In both cases, the company must provide essential details about the business (and its people), its operations, size, complexity, and PI claim history.

The information provided enables the insurance company to generate an accurate premium to fully cover you for all risks.

There’s no getting away from it: arranging professional indemnity insurance involves filling out lots of forms. It’s critical that when arranging PI policies, you read and understand every question – and respond accurately.

Failing to disclose information (either accidentally or purposefully) can lead to your insurance policy being invalidated. The impact on your business could be huge. In the event of a claim, you will be responsible for all losses. Having an insurance policy cancelled can also impact your ability to secure insurance in the future and will certainly result in significantly higher premiums for the same levels of coverage.

What is the 'utmost good faith' principle?

Being honest is crucial as insurance relies on “utmost good faith”. The principle of "utmost good faith" has existed since Roman times (in Latin, the term is Uberrima fides) and establishes that each side in a relationship should always act honestly.

The Association of British Insurers defines utmost good faith as: “A term where both the policyholder and the insurer agree not to withhold information or provide false information that could affect the policy.”

Simply put, the principle of utmost good faith requires the insurer and insured (and brokers involved in the process) to act honestly. This means disclosing any and all information (known as material facts) that can impact your insurance agreement.

Withholding information, either intentionally or unintentionally, is considered misrepresentation – and could cause a policy to be cancelled.

What is the Insurance Act and why is it significant?

The Insurance Act 2015 provides clarity for policyholders, insurers, and brokers. The Act provides clear instructions about the expectations of those arranging insurance to thoroughly investigate and disclose all relevant information to the insurer. This is known as the Duty of Fair Presentation, and it applies to all forms of insurance, including professional indemnity cover.

Companies and individuals have a legal duty to present all risks clearly when arranging or renewing an existing policy. Failing to provide details of all "material facts" can cause professional indemnity insurance policies to be cancelled or claims to be refused.

What are “material facts," and why are they important?

When arranging insurance, you have a responsibility (under the Duty of Fair Presentation in the Insurance Act 2015) to tell your provider or broker anything they need to know when pricing your policy and agreeing on terms, conditions, and coverage.

These are called material facts and include:

• Information that you, your senior leadership team, or anyone arranging insurance knows about the business.
• Information that could be accessed through a reasonable search (both externally and internally).

The list of potential material facts is enormous. However, some common material facts that you must declare to a potential insurer include the following:

• Whether anyone senior in the business has convictions, cautions, criminal offences, or prosecutions (unless spent under the Rehabilitation of Offenders Act).
• A Director is disqualified.
• The business is at risk of bankruptcy, administration, receivership, or liquidation.
• The business has any CCJs.
• If the business has previously had insurance declined or cancelled.
• The company has previously made an insurance claim or notification (regardless of fault).

This list isn’t exhaustive and should be used as a guide to potential material facts that could influence your policy or premium. The person (or organisation) is responsible for arranging insurance to identify all material facts and disclose them.

Disclosing material facts enables insurers to accurately calculate a premium with full knowledge of risks. Failing to disclose material facts can invalidate your insurance. Your insurance may be cancelled, or your insurer may refuse to pay out in the event of a claim.

How do I disclose all material facts?

Standard forms are, by their nature, limited and may not provide enough space to include all material facts. However, failing to disclose facts because of a lack of space isn't a good enough excuse. The responsibility is on you to include every relevant piece of information.

When arranging your insurance, you should document the process you follow and record all information somewhere accessible. This ensures that you're able to provide all information to your insurance. It also creates a clear audit trail and should make arranging future professional indemnity insurance policies easier.

How does the Insurance Act benefit policyholders?

Identifying material facts and disclosing them can be time-consuming, but it's critical that you do – as it provides you with a greater chance of a payout if you need to make a claim.

Previously, some insurance companies were accused of arranging insurance without having access to all information and then claiming non-disclosure at the claim stage. The Insurance Act aims to reduce the likelihood of this happening and reduce controversial "underwriting at claim stage" policies.

The Act makes it more difficult for insurers to challenge a claim. While previously, professional indemnity claims could take a long time to settle; the new act aims to accelerate the process.

However, to gain the benefits of the Act, policyholders must play their part and disclose anything and everything the insurer needs. Acting honestly and disclosing everything ensures that your insurance claim should face no delays or challenges.

Is completing a proposal form enough for insurance disclosure?

Proposal forms are primarily used as a basis for populating pricing models. The question set may not fully encompass all material information and so full disclosure may require a combination of fully completing the questions, plus the additional information section (or a separate sheet if the form doesn't have one). So always bear in mind that proposal forms don’t always ask enough questions or provide enough space to enable accurate insurance disclosure.

What role do brokers play in insurance disclosure?

Brokers are insurance experts and play a critical role in interpreting the statutory requirements of the Insurance Act 2015. Good insurance brokers can provide advice and guidance on all aspects of your policy, including what information to disclose and how.

Unfortunately, not all brokers are as considerate. To speed up the process, some brokers use assumed "statements of fact" or use limited standard forms that fail to capture the complexity of the real world and could lead you to fail to disclose material facts.

In many cases, material facts are complicated, with the simple binary of “yes” or “no” failing to capture the nuance. In these circumstances, you’ll need to satisfy yourself that you’ve provided all information and that this has been accepted and understood by the insurer.

Proposal forms are short and straightforward to complete, but they're unsuitable for arranging complex professional indemnity policies. To fit a structure, there are limitations in space that can make it impossible to provide clear information on all material facts. In these cases, it's vital that you provide supplementary information to your broker or insurance provider.

While disclosing all information can take significant amounts of time, it’s essential to arranging suitable insurance coverage at a competitive cost.

How correct disclosure benefits the policyholder

There's no denying that disclosure for professional indemnity policies is challenging. Companies must balance their requirements to meet their duties against the reality of running a business. Many companies benefit from working with a broker that specialises in professional indemnity.

There are no shortcuts to full disclosure, but the payoff is a professional indemnity policy that provides total protection. Your insurance company will have a complete understanding of your business, including the risks you face – and the coverage they are expected to provide. This enables them to calculate an accurate policy premium that covers you in the event of any claims. The Insurance Act strengthens your position and safeguards your policy – meaning you’re less likely to find claims are challenged or refused.

This guidance note is intended for information purposes only. It is not and does not purport to be legal advice or specific insurance advice. Whilst all care was taken to ensure its accuracy at the time of writing it is not to be regarded as a substitute for specific advice. If you require specific advice, please contact your brokers or call us on 0345 251 4000. This guidance note shall not be reproduced in any form without our prior permission. © All copyright is owned by Professional Indemnity Insurance Brokers Ltd.