Professional indemnity insurance in the aggregate and with reinstatements – a cautionary tale

Your project team members with design responsibility hold professional indemnity insurance in the minimum amount you have requested. So, you can relax knowing that you are covered in the event of a claim, right?  Not necessarily.

You may have noticed that one or more of the policies held by your project team members limits the total amount of cover to ‘in the aggregate’ (during the period of cover). This means that the total that the insurer will pay out for all insurance claims combined during the period of cover (usually a year) is limited to the aggregate stated – let’s call that the ‘pot’. The risk with this type of policy is that if you made a claim after other parties had received payment for their own claims in the same period of cover, the pot will have been reduced by the amount of each of those other claims and you could find that you are not able to recover some, or all, of your claim.

When presented with a professional indemnity policy with an ‘in the aggregate’ limit, you may wish to consider increasing the minimum amount of cover required to mitigate the risk of a reduced pot in the event of other claims during the period of cover.

Some ‘in the aggregate’ policies address this problem by using re-instatement. With re-instatement, the pot is the primary layer of cover. When that primary layer has been used up by claims during the period of cover, the total amount of cover in the aggregate is re-instated as a secondary layer. The policy may provide for re-instatement of the total amount of cover once, twice or more times in the period of cover. Some policies offer unlimited re-instatements.

So, problem solved? Again, not necessarily. The devil is in the detail …

Re-instatement layers may be provided to the primary insurer by other insurers. If the terms of the re-instatement layer and the insurer’s manner of handling claims mirrors the primary layer, then an aggregate limit of indemnity with unlimited reinstatements will essentially operate in the same way as ‘each and every claim’ (which provides indisputable cover).

However, if the reinstatement layers each have different terms attached (such as excess levels, exclusions, additional premiums, etc.) and claims are handled differently, the terms of cover applying to a particular claim will depend on which layer, or layers, that claim engages.  In addition, some unlimited reinstatement policies exclude the use of reinstatements to pay more than one claim arising from the same original cause or event.

It is important, therefore, to seek clear guidance from a specialist construction insurance consultant or lawyer, on whether the terms of each reinstatement layer mirror the terms of the primary layer, or, if they don’t, how the terms applicable to the each layer differ and whether there are any exclusions to the cover provided by each layer.