As the Professional Indemnity market continues to be particularly difficult, organisations may struggle to obtain sufficient indemnity limits through a traditional primary and excess layer placement strategy.
Tim Phillips, Technical Lead for our Public Sector and education business says:-
“An alternative to the traditional placement strategy is to structure the placement using an ‘Aggregate with Round the Clock Reinstatement’ basis of cover which can allow insurers to provide greater capacity on a single risk than they might otherwise do.
This is only an option where there are excess layer policies, in addition to the primary Professional Indemnity policy. The limit of indemnity on the primary policy is in the aggregate. However when the limit on the primary policy is exhausted, the excess layer insurer “drops down” to deal with claims, until its limit of indemnity is exhausted. If there are additional excess layers higher up the programme, this process continues until the entire limit of indemnity is exhausted. Only when the whole limit is exhausted across the programme of insurance policies is the limit of indemnity reinstated, and at this point the primary insurer becomes the first port of call again. An example of how this works in practice is shown below:
£10m Aggregate RTC
Insurer A £5m Aggregate RTC Primary
Insurer B £2m over £5m RTC Excess Layer
Insurer C £3m over £7m RTC Excess Layer
The Insured experiences claims for £250k, £5m, £2.5m and £3m. Insurer A pays the first claim. Insurer A pays £4.75m of the second claim and Insurer B pays £250k of the second claim. Insurer B pays £1.75m of the third claim and Insurer C pays £750km in respect of this third claim also. Insurer C pays £2.25m of the fourth claim and then Insurer A picks up again and pays the remaining £750k of this fourth claim also.
There are some pitfalls to be aware of, however In particular:
- where there are 2 or more insurers on a particular layer, it is important to ensure that they are all using the same reinstatement wording and that this follows the primary and underlying layers.
- all insurers should agree to be providing the same number of reinstatements.
Failure to get insurer agreement on these points can lead to a very complex placement with gaps in cover. As such, it is important that you engage with a broker who has a full understanding of these issues and sufficient knowledge of the market to be able to arrange cover in a way that mitigates these pitfalls.”
Gallagher has recently helped a number of publically funded organisation with the placement of their Professional Indemnity coverage. Please engage with us early to ensure all options are considered in light of stakeholders needs.