03 June 2024 | Insight
There is often confusion as to whether claims should be presented under Third Party Liability (TPL) or Professional Indemnity (PI) policies. In this article, we clarify the extent of cover under each class of insurance and how best to avoid confusion and duplication at the interface.
TPL policies cover the insureds for their legal liability to third parties for common law claims arising from three liability “perils” as detailed below:
There can also be extensions for contractual liability, financial loss, pollution, products liability and liability arising from completed contract works (which are all the subject of other articles in this series).
PI policies provide cover for third party liabilities arising from a breach of professional activities and duties (PADs). In this context, PADs are normally defined as those activities and duties normally undertaken by a professional or other suitably experienced person for a fee. For construction business, this is generally taken to mean design activities, but it could also encompass other duties such as procurement, specification, surveying, project management and the like.
Crucially for PI insurance, there is no restriction in the operative clause in relation to common law liabilities. As in the vast majority of cases, the claimant will be the principal under a contract entered into by the insured. This is a key difference between TPL and PI cover; TPL is normally restricted to common law liabilities, whereas PI covers contractual liabilities arising from the negligent execution of PADs, albeit that the basis of the cover is negligence on the part of the insured.
With this foundation established, we can see that there is an overlay in the types of losses that could be covered under each policy. This confusion is dealt with differently depending on the nature of the insured business. For example, a consultant, delivering PADs for a fee, will normally have a full PI exclusion on its TPL policy. As a result, any injury or damage liability arising from PADs will be dealt with as under PI insurance.
Policies for contractors undertaking design and build or other professional activities deal with this situation differently. These policies contain a professional indemnity exclusion, but this does not normally apply to liabilities arising from injury or damage. This has the effect of maintaining cover for common law liabilities, including those that are co-extensive in tort as well as in contract, under the TPL policy, irrespective of whether these have arisen from the negligent undertaking of PADs.
In this way, the PI policy is reserved for contractual financial loss claims that arise from PADs. It is a common issue that TPL & PI insurances are not properly aligned and we have seen situations where clients are uninsured as a result. Careful review of the policy drafting is required to ensure that there are no gaps, or indeed duplications, in cover.
If you have any concerns as to how your TPL an PI policies interface with each other, please contact us for a full TPL policy review.
Our insurance experts are always on hand to talk about ways we can join forces to take on the future.
