Claims and circumstances in professional indemnity and directors' and officers' insurance policies
By Ava Bentley
In brief - What constitutes a claim on a policy? What is the definition of a circumstance?
How claims and circumstances are defined in the context of a professional indemnity or directors' and officers' insurance policy can be a vexed question for insurers and insureds alike.
Definition of a claim in a professional indemnity policy
A 'claim' is defined by the policy of insurance under which it is notified. This was confirmed recently by the Supreme Court in Dimitra Cassidy v Eric J Leslie  NSWSC 742.
The first step to take is to identify if a 'claim' has been made as defined by the policy. This is an important element of 'claims made and notified policies' and is required to trigger the insuring clause or clauses of the policy.
Definitions of claim vary between insurers. A usual definition in a professional indemnity policy can be along the lines of:
Receipt by you of any written notice or demand for compensation made by a third party against you or any writ, statement of claim, summons, notice or any other originating legal or arbitral process, cross claim, counter claim or any third party or similar notice, containing a demand for compensation by a third party against you.
Definition of a claim in a directors' and officers' insurance policy
In the context of a directors' and officers' policy, a usual definition can be along the lines of:
Receipt of any Director or Officer of any written notice or demand for compensation made by a third party against any Director of Officer or any writ, statement of claim, summons, notice or any other originating legal or arbitral process, cross claim, counter claim or any third party or similar notice, containing a demand for compensation by a third party against any Director or Officer including any criminal proceedings.
As an insured, it is important to review the definition of 'claim' in policies of insurance held by you to ensure that it will capture the types of claims that might arise in the context of your business. If you are unsure, seek advice from an insurance broker specialising in professional liability covers.
Notification of circumstances can protect you in future claims
Section 40(3) of the Insurance Contracts Act 1984 (Cth) allows for insureds to notify facts that might give rise to a claim. In simple terms, the section allows for a future claim that arises out of the facts notified to be linked to the earlier notification, even if the claim is made after expiration of the insurance policy.
It is imperative that insureds notify circumstances to their insurer immediately and at least during the period of insurance. This will avoid disputes about late notification and/or operation of policy exclusions for prior knowledge.
Definition of a circumstance in professional liability policies
Examples of circumstances that might be notified in the context of professional liability policies are:
- An employer is in the process of disciplinary action or performance management of an employee for serious employment breaches
- A complaint about poor service or advice is made by a customer or client
- A customer refuses to pay a bill or invoice on the basis that the service or advice provided was stated to be substandard or incorrect
- A notice is received from ASIC seeking information or delivery of books or records of a company
- An accountant fails to lodge a BAS on time with the potential for a penalty being issued against the client
Notify claims and circumstances immediately
If you are uncertain about whether a claim has been made or a circumstance has arisen, seek immediate and early advice from an insurance broker specialising in professional liability covers. If in doubt, notify.