When should a possible claim be notified in order to comply with the requirements of your professional indemnity policy?
In every Professional Indemnity proposal form, the following question or something similar, is asked:
“Are any of the partners/directors after enquiry, aware of any circumstances which are likely to give rise to claims against the firm or their predecessors in business or any of the present or former partners/directors whether you consider yourselves liable or not?”
Claims Made Basis of Cover
Professional indemnity policies are written on a “claims made” basis. This means that regardless of when the “circumstances”, “error” or “possible negligent matter” occurred, when it becomes apparent that an error has been made, is the point of time when the member should make a notification of a possible claim to the insurer.
Although a notification of a possible claim in such circumstances may be regarded as cautious, the act of notifying enables the member to subsequently correctly answer the above question in the proposal form.
If an indication of a possible claim has been given to a member and he does not notify the insurer and subsequently answers the above question “no”, then he gives the insurer grounds for rejecting the claim when subsequently received on the basis that the member has not correctly answered the question in the proposal form.
It is absolutely essential that members do not put themselves in this situation.
What to Notify
It may be the simple realisation that you have done something wrong, interpreted something incorrectly, omitted some material matter, made a mistake in timing or merely made a mathematical error that requires a cautionary notification to be made.
Of course the client may never make a claim against you but at least if he does not then nothing will be lost. It is not normal for a premium to be “loaded” because of one cautious notification. If the client does make a claim when the matter is drawn to his attention, then the member is covered under the policy.
A further point emerges here. The member has an obligation under the ethical requirements of the professional accounting bodies, to bring the matter to the client’s notice if the member has made an error, even if it causes the client to make a claim against him.
It could be that a client, his staff or relative advises the member or merely mentions that the client believes that the member has erred or been negligent. Such notice would of course require notification. It is suggested very strongly that no matter how vague or oblique that it is in the interests of the member to make a notification.
In contrast to the above, if a writ is served on the member, or if he receives a letter from a client, former client or third party or such party’s solicitor or agent, then there is no doubt that notification of such claim should be made immediately to the insurers through the brokers or Abacus.
It could even be where a third party takes action or threatens to take action against your client in respect of work performed by you, then it may be appropriate to make a notification in case you are subsequently joined in any action.
Two Points to Watch
There are two points that have emerged from our involvement with notifications by members since Abacus was formed.
Where a member seeks to enforce payment of outstanding fees, there have been many instances where a counter-claim has been made by the client (or usually a former client) to delay payment or to try and negotiate a reduction in the outstanding fees.
Members should be alert to this position possibly eventuating.
It is becoming increasingly likely that because members of our profession are known to carry professional indemnity insurance, that clients or others are likely to make claims against us.
It should be remembered that a member is obligated under the policy to mitigate the loss and generally do anything to minimise the loss.
Further, where a claim is properly admitted by the insurer, the insurer will bear the legal costs in defending the claim.
These suggestions were put together by the members of the claims committee of Abacus Australia Ltd.