Professional Indemnity FAQ

What is a Circumstance?

How is a Circumstance Defined?

The Dictionary often defines a circumstance as “A fact or condition connected with or relevant to an event or action or an event or fact that causes or helps to cause something to happen, typically something undesirable”.

 However, despite insurers choosing not to put a definition of a circumstance into their policies, we are brought up in the Insurance Industry to believe that it means A ‘circumstance’ is a fact, situation or circumstance that the Insured knows about and which the Insured ought to reasonably realise may give rise to a claim in the future.

I don’t know about you but to me this is very subjective.

It would be very easy for you to say, well just report anything that has a sniff of being a circumstance. This is not always practical for three main reasons.

  • You must disclose all circumstances reported, including those closed or those still open to any other prospective insurer. This will usually concern any alternate insurer to the extent they automatically decline to quote locking the client into that one insurer.
  • Some Insured’s believe that they will be reporting huge amounts of matters constantly making administration of such obligations exorbitant.
  • The Insurer that the circumstance has been reported to can deem that they do not consider it a circumstance at this stage, while a different insurer would and have accepted it as a claim.

 

Definition of a circumstance in professional liability policies 

There is a general refusal by insurers to make this clearer in their policy wordings. It is almost like they want this to be a potential “get out of gaol free” card. Instead we are left with examples of circumstances that might be notified in the context of professional liability policies. So let us differentiate between different circumstances that may be open to interpretation of what is a circumstance such as:

  • A complaint about poor service or advice is made by a customer or client – Yes a circumstance
  • A customer refuses to pay a bill or invoice on the basis that the service or advice provided was stated to be substandard or incorrect – Yes a circumstance
  • An Accountant receives a notice from the ATO seeking information or delivery of books or records of a company – if no allegations or facts advised that could lead to a claim, then it should not be seen as a circumstance.
  • An accountant fails to lodge a Business Activity Statement for GST on time with the potential for a penalty being issued against the client – Yes a circumstance
  • Letter of demand from client/client’s solicitor foreshadowing potential litigation – Yes a circumstance
  • Client makes a negative comment in passing about the adequacy of the professional services provided – Yes probably a circumstance
  •  Telephone call from client or client’s solicitor alleging failure of professional services – Yes a circumstance.
  • Insured hears, via another source, about a client’s strong dissatisfaction with service – depends on the source and what facts, but could be a circumstance that should be reported
  • Abusive/angry customer demanding return of paid fees – depends on the reason but if due to wrong advice or failing to advise then probably a circumstance
  •  A client’s continued failure to pay the Insured’s account arouses suspicions of their dissatisfaction of the service provided by the Insured – again depending on the facts but likely to be a circumstance
  • Constant complaints, either  written or verbally, over a period of time about the standard or quality of the professional service provided – likely to be a circumstance
  • Media reports a claim against an Insured’s client for work completed by the Insured – potential for a cross claim against the Insured – likely to be a circumstance
  • Major problem/mishap occurs with a job and Insured can foresee potential financial loss for their client ie a bridge designed by Insured collapses – possible design problem – Yes a circumstance
  • Insured discovers that the professional advice was incorrect and can forsee client suffering an economic loss – Yes a circumstance

 

The common theme to make it clear it is a circumstance is that there are facts that could you to believe there could be a claim and that the claimant would have suffered a financial loss.

 

There are two decisions that impact greatly,

One is the CGU v Porthouse matter and more recently in Dimitra Cassidy v Eric J Leslie [2010] NSWSC 742.

 Both have an impact on what is a circumstance and what becomes a claim.

Notification of circumstances can protect you in future claims

Section 40(3)of the Insurance Contracts Act 1984 (Cth)states the following:

(3)  Where the insured gave notice in writingto the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.

This basically states that Insureds notify a matter to Insurers that might give rise to a claim prior to the policy expiring, this section will allow for a future claim that subsequently arises out of the facts notified to be linked to the earlier notification, even if the “claim” is made after expiration of the insurance policy.

So at the end of the day, the definition of a claim is just a procedural issue on the form you are able to move it from just a circumstance up to a claim. It is essentially still an issue of what actually is a circumstance that should be reported.

The safest thing we advise you should do as an Insured is to notify circumstances to their insurer immediately and at least during the period of insurance. This will avoid disputes about late notification and/or operation of policy exclusions for prior knowledge.

Notify claims and circumstances immediately

If you are uncertain about whether a claim has been made or a circumstance has arisen, seek immediate and early advice from an insurance broker specialising in professional liability covers. The best Insurance Broker to discuss this with is the team at Cooper Professional Risks Pty Ltd 

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