What limits of indemnity should I buy?

‘What limits of indemnity should I buy?’ is an often-asked question with no simple single sentence answer.

The most straightforward answer an insurance broker will provide is probably ‘as much as you can afford to buy’. However, your thoughts might be quite the contrast.

Many customers buy only the essential amount of cover, especially if the insurance is a contractual requirement, which makes it all the more important for you to have some appreciation of what can erode a limit or contribute to a substantial claim settlement.

Before we assess what a limit of indemnity is there to pay-out upon or protect you from, it’s helpful to remember that most businesses buy at the very least 3 core insurances, namely:

• Employers Liability – for death or injury from work related accidents affecting employees;
• Public Liability – for death or injury to anyone other than employee as well as third party property damage arising in respect of the insured business activities;
• Professional Indemnity – for defending against allegations of not doing your job well enough / to a reasonable standard of care & compensating for financial loss and paying damages to a third party where liability is conceded.

The 3 covers above do not cover every business risk and additional policies can be bought including Management Liability, Cyber, and Business Interruption Insurance. These covers are not specifically addressed in this article.

From my 20 years of insurance experience I can tell you that:

1. The size of your business’ turnover doesn’t in itself determine the severity of a claim. A policyholder with quite modest turnover can (and has) delivered quite sizeable claims in the millions of pounds;
2. The type of claimant does not wholly determine the severity of a claim. Private limited companies as well as individuals have alleged against policyholders claiming of millions of pounds of losses and public / quoted companies make those allegations as well;
3. You cannot control what a claimant is told by their legal advisers and your ability to negotiate with them can be hampered or conflict with their legal advisors.

Some businesses will have more exposure to Public or Employers’ Liability claims. Other businesses will have propensity to claims for Professional indemnity.

• Liability is orientated toward claims for injury death or property damage – typically the firms with active placements in industry such as construction, manufacturing, rail, waste or energy. The HSE lists workplace fatalities and the list for 2020/2021 are dominated by construction including scaffolders and agriculture including farmers, falls from height and those working with machinery https://www.hse.gov.uk/foi/fatalities/2020-21.htm.
• Professional indemnity is orientated toward claims for shortcomings in service or advice – if your business is oriented toward professionals who are ‘white collar’ then negligence claims tend to be more costly – digital/ IT engineers as well as finance all being active areas for negligence claims.

Some recruitment or payroll businesses will be multi-discipline and have a blended exposure, so should buy high limits of indemnity for both their liability and indemnity risks as they are equally exposed to injury claims as they are negligence claims.

In the past couple of years, the way the Government has mandated change to the way in which compensation for severe life-changing injury claims be calculated. In 2018 the Ogden rates changed and, in most instances, the cost of those life-changing injury claims saw the cost of settlement double.

What was a £4m claim became an £8m claim. What was a £8m claim became a £15m+ claim.

Whilst many insurers still offer Public Liability limits as low as £2m or £5m, it is hard to make a convincing argument that those remain adequate and won’t be breached in the event of a severe life changing injury claim. £10m limits are usually affordable.

The severity of Professional indemnity claims are also affected by some quite specific factors:

Third party legal costs against you, which you can’t control and can be uplifted with success awards etc;

• Minimum limits of indemnity imposed upon the firm by a regulator, affinity group or any quality assurance accreditation scheme;
• Past work. Current work. Future work. The policy you hold at the time of the allegations of failings first arising is the one which responds to a notification. Put another way, work from 2 or 3 years ago which you thought long ago was satisfactorily concluded – if an allegation arises tomorrow then it is tomorrow’s policy you notify it under. So if past work was deemed riskier (or you plan to work with different clients tomorrow that pose more risk) then it is tomorrow’s policy that needs to be set at a sufficient limit of indemnity;
• Inflation – the limit of indemnity you buy and deem appropriate today needs to be adequate for the settlement reached several years or more into the future. If you set your limit of indemnity too low then inflation will erode it;
• Until 2008 interest rates were around 5%. Complex negligence claims usually take several years to determine. Awards for damages will be uplifted by interest;
• Contract terms – contracts will mandate the ‘minimum required limit of indemnity’ which is not the same as a maximum liability cap and doesn’t restrict a claimant from suing you for losses in excess of the minimum insurance requirements. They will likely impose an ongoing requirement to maintain insurance after completion of assignment;
• Indemnity – ‘any one claim’ or ‘any one claim and all claims in the aggregate’. Ensure you fully understand the basis of insurance cover. Any policy providing ‘aggregated’ cover is inferior to that of ‘any one claim’ cover;
• Cover basis – ‘civil liability’ is superior to negligence or ‘wrongful act only’ cover. Most professions are required and able to arrange the broader of the two covers;
• Mandatory cover requirements – you may have specific cover requirements – recruiters’ are often asked to buy ‘vicarious liability cover’ and accountants who belong to a professional body should buy compliant cover which matches the ICAEW minimum terms. Similarly RICS Surveyors have specific insurance requirements. Check with your broker that your requirements are met;
• Policy enhancements – some insurance policies come with additional covers – loss of documents for professional indemnity or compensation for court attendance by a partner or employee. Other extensions in cover are highly beneficial and will fund defence costs in relation to specific legislation such as the ‘Corporate Manslaughter and Corporate Homicide Act 2007’ whereby directors can receive custodial sentences or fines levied against the organisation (which are linked closely to the organisation’s turnover).

Holding a high limit of indemnity may assist with responses to tender exercises.

There is something to be said for ‘being able to sleep soundly at night’. The limit of indemnity might not be exhausted at settlement or mediation, but knowing that you’ve sufficient cover for the worst case scenario is an awful lot more appealing than considering exhaustion of the insurance where the loss comes back to the company balance sheet.

Some disciplines, trades or professionals may struggle to buy high limits at affordable rates. If your broker identifies a complicating factor, then they should work with you to assess mitigating steps and risk management techniques to improve your risk.

Article by Philip Horner