When advising clients on professional indemnity (PI) insurance one detail that often causes confusion is the structure of the excess, particularly whether it is costs inclusive or costs exclusive. This seemingly minor distinction can impact when and how much an insured is required to pay in the event of a claim.
What Is an Excess?
In a PI policy, the excess (or deductible) is the amount the insured must contribute towards a claim before the insurer begins to pay. It generally applies per claim, unless stated otherwise in the policy schedule or wording.
How this excess is applied depends on whether it is structured as costs inclusive or costs exclusive.
Costs Inclusive Excess
With a costs inclusive excess, the insured must contribute towards both defence costs and any settlement or judgment. This means legal fees incurred in defending a claim erode the excess, and the excess may be fully expended before any indemnity is even paid.
Example:
- Excess: $20,000 (costs inclusive)
- Defence costs: $15,000
- Settlement amount: $50,000
Outcome:
- The insured pays $15,000 in defence costs.
- The remaining $5,000 of the excess is applied to the settlement.
- The insurer pays $45,000 toward the settlement.
Implications:
Defence costs are typically incurred early in the claim process. As a result, the insured may need to pay the excess well before any resolution is reached. This can place financial pressure on smaller businesses. However, a costs inclusive excess can reduce premiums, particularly where claims are frequent but low in value or result in no liability. Since the insurer isn’t bearing the cost of these low-level claims, pricing may be more favourable.
Costs Exclusive Excess
With a costs exclusive excess, the excess applies only to settlements or judgments, not to defence costs. The insurer pays 100% of defence costs, even if the claim is ultimately unsuccessful, up to the policy limit.
Example:
- Excess: $20,000 (costs exclusive)
- Defence costs: $15,000
- Settlement amount: $50,000
Outcome:
- The insurer pays the full $15,000 in defence costs.
- The insured pays $20,000 toward the settlement.
- The insurer pays the remaining $30,000.
Implications:
A costs exclusive excess provides stronger upfront protection and can be particularly helpful in frivolous or heavily contested claims, where legal expenses may be incurred but no liability arises. It also allows the insured to retain liquidity during the early stages of a claim.
Why It Matters
This distinction typically comes to light at claim time, when clients are least equipped to manage unexpected costs. Helping clients understand the difference between the two can:
- Prevent disputes and dissatisfaction at claim time
- Enable smarter financial planning and risk management
- Inform better purchasing decisions based on their cash flow and risk profile
Broker Tip
When placing PI cover, always review the policy wording and excess clause carefully. These details are often buried in definitions or schedules. Look for terms like “inclusive of defence costs” or “exclusive of defence costs.” If the wording is ambiguous, seek written clarification from the underwriter before binding.
Final Thoughts
A costs inclusive excess increases the insured’s contribution earlier in the claims process but may come with a lower premium. A costs exclusive excess offers greater peace of mind and protection, often preferred by clients with high exposure or limited liquidity, albeit at a slightly higher cost.
As a broker, guiding your clients through these options with clarity and examples helps them make the right choice for their business circumstances.
FTA Difference
At FTA, we make this distinction transparent in every quote. Whether the excess is costs inclusive or costs exclusive is clearly noted, removing ambiguity and helping brokers explain the cover confidently.
In addition to standard structures, FTA can offer a franchised excess where appropriate—particularly for certain professions or larger insureds. A franchised excess acts like a threshold: if a claim is below the excess, the insured pays 100%. But once the claim exceeds the excess, the insurer pays the entire amount, including the excess. This can offer clients a balance between risk retention and certainty once serious claims arise.
Depending on the client’s profile, FTA can also consider nil excess options, providing maximum upfront protection for well-managed or low-risk firms.
Get a quote and see how we compare, or contact with our friendly team on (02) 9003 1660.