Some questions to consider when considering sum insured

by Prof Cover on Tuesday, 26 March 2013
  • In a worst-case scenario, if something went wrong, what would be the financial loss to third parties?
  • What is the potential for bodily injury claims, and even multiple injuries?
  • What is the potential for consequential economic loss to any third party?
  • What is the potential for multiple claims in any one policy year? (Note: the policy limit is in the aggregate but normally with an automatic reinstatement for PI policies.)
  • What is the level of potential legal and investigation costs which may be incurred by a successful claimant or claimants over the life of the claim?
  • What is the level of potential defence and investigation costs incurred by or on the insured’s behalf over the life of the claim?
  • Is the policy limit inclusive of defence costs or not?
  • How long may a claim take to settle? Sometimes this can be eight to ten years or longer, which means the legal costs and interest liability will mount, as will the effect of inflation.
  • How many parties are likely to be implicated in any claim or action? The more parties there are, the more difficult and costlier it is to settle a claim.
  • What is the nature, scale, and complexity of work done in the past and during the policy period? (Note: a policy covers exposure from past work where the retroactive date has been extended to do so.)
  • What is the overall contract/project value the insured works on? The insured may have a small part and only earn a small amount of fees, but their acts, errors or emissions could delay the entire contract/project.
  • How many prior years are there where risk exposure may arise? In some cases it may take years before a liability becomes apparent to the Insured.
  • What is the exposure from ‘incoming principals’ risks at prior corporate entities, or merged or acquired entities?

In general, a sum insured of less than $5 million is unlikely to be adequate for even a small practice which assesses its exposure as low.

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