Understand insuring clauses to get the best coverage

Insurance policies work very simply in that a claim has to go in the front door, i.e. the insuring clause or operative clause, and not go out the back door, i.e. the exclusions. In this article we focus on understanding how to make sure our front door is as wide as possible.

Originally professional indemnity operative clauses only covered insureds against their own negligence (negligence based wordings). This caused some issues as insured’s didn’t just get sued in negligence but were also sued under contract (or were sued in contract alone). Some insurers would deny indemnity arguing that they only covered negligence in their insuring clause and thus contract wasn’t insured.

The counter argument from the insureds was that the same compensation was payable with or without the contract. That is, the liability arising under the contract was the liability that existed via negligence so the insurer wasn’t disadvantaged. Generally this argument was accepted and contractual liability extensions were brought into wordings. FTA’s standard professional indemnity wording has a contractual liability extension.

Subsequently the government introduced legislation that provided a new cause of action against insureds although the compensation was the same as under negligence. This cause of action was “misleading and deceptive conduct” under the Trade Practices Act (Cth) which is now contained in the Competition and Consumer Act 2010 (Cth).

This meant an insured could now be sued under negligence, contract or under legislation. Sometimes insured’s were sued under all three or just one. In terms of compensation it didn’t matter as the amount payable was more or less the same. So most insurers added a Trade Practices Act ( now Competition and Consumer Act 2010) extension to their policies. FTA’s standard professional indemnity wording has a Competition and Consumer Act 2010 extension.

These three causes of action, negligence, contract and legislation, are referred to as civil liabilities. Civil meaning non criminal, military or religious, However having a negligence based insuring clause and all these extensions can be confusing and difficult to interpret. Some insurers, like FTA, went a step further and introduced a civil liability operative clause. This operative clause provides protection against any and all civil liability that an insured might be sued for. This is very broad as it encompasses all the causes of action such as negligence, contract and legislation.

The civil liability operative clause is also future proof as it includes any future legislation that a government might create or other causes of action that might evolve or be created.

However there were still some sneaky insurers who sort to still get the benefit of calling their operative clause “civil liability” but limit it. These sneaky insurers limited their insuring clause to breach of professional duty.

So the insuring clause would read “for any civil liability arising out of a breach of professional duty”. This now means that an insured has to show that the liability arose from a breach of “professional” duty. What is or is not professional duty? Well that is whole article in itself and has been the subject of many many battles in the courts.  FTA’s standard professional indemnity wording does not have this limitation but many of FTA’s competitors do.

In summary to obtain the broadest coverage make sure the professional indemnity insuring clause covers the insured for civil liability and is not limited by including “breach of professional duty”.  FTA’s standard professional indemnity wording provides this very broad coverage.

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