Inquiry Costs and Professional Indemnity Insurance

Regulatory and disciplinary scrutiny is an increasing reality for many professionals. Even where no civil claim is made, enquiries by regulators, licensing bodies or professional associations can result in significant legal costs. Some Professional Indemnity (PI) policies include provisions intended to address this exposure through inquiry costs cover.

Unlike traditional claims cover, inquiry costs are designed to address situations where an insured is required to respond to an investigation or inquiry that does not involve a demand for compensation. The availability and operation of this cover will depend on the specific policy wording and the circumstances of the matter.

What Are Inquiry Costs?

Inquiry costs generally refer to reasonable legal costs and expenses incurred by an insured in responding to a regulatory inquiry, disciplinary proceeding or similar formal investigation arising out of the conduct of the professional business of the insured. Such costs may arise even where no allegation of civil liability has been made.

PI policies may address inquiry costs through a specific extension that operates separately from the main insuring clause. Typically, such extensions are intended to respond where an inquiry is first initiated and first becomes known to the insured during the policy period. The indemnity provided under this extension is generally subject to legal costs being incurred with the prior consent of the insurer.

Inquiry costs are distinct from defence costs, which usually require a “claim” as defined in the policy. An inquiry that does not meet the definition of a claim may still fall for consideration under an inquiry costs extension, depending on the wording of the particular policy.

How the Extension Typically Operates

Inquiry costs are typically addressed through a specific extension within a PI policy, rather than forming part of the core insuring clause. The scope and operation of this extension may vary between policies.

Where provided, inquiry costs cover is often subject to a separate sub‑limit, which may operate on an aggregate basis and usually forms part of the overall limit of indemnity. The applicable limits and how they interact with other policy limits will depend on the policy wording.

In some policy wordings, inquiry costs cover is expressed to operate independently of the main insuring clause. This may assist where an inquiry does not involve allegations that would otherwise trigger the main insuring clause, but this will depend on how the extension is drafted.

If an inquiry later escalates into a claim, indemnity may be assessed under the claims and defence costs provisions of the relevant policy.

Inquiry costs provisions are generally not intended to respond to an insured’s internal business, management or compliance costs. This includes the time and expense of employees, partners or directors involved in dealing with an inquiry, as well as costs associated with internal reviews, governance processes or operational changes.

How Inquiry Costs Might Arise in Practice

An inquiry costs response under a PI policy could arise, for example, where an insured becomes subject to a formal investigation or inquiry by a regulator, licensing body or professional association, but no civil claim for compensation has been made. In such circumstances, the insured may incur legal costs in obtaining advice and preparing submissions as part of the inquiry process.

Another scenario could involve a disciplinary process initiated following a complaint. Even where the matter does not progress to a claim, and no liability to pay compensation for a claim is ultimately established, the insured may still require legal representation to respond appropriately to the inquiry or proceeding.

In each case, whether inquiry costs are covered will depend on the specific facts, the policy wording, compliance with policy conditions (including notification and consent requirements), and applicable law.

Final Thought

Inquiry costs provisions are intended to address a specific category of regulatory and disciplinary exposure under a PI policy. Understanding how these provisions may apply, and how they may operate separately to the main insuring clauses, can help to better assess and manage professional risk.

Important Notice

Berkley Insurance Company (limited company incorporated in Delaware, USA) ABN 53 126 559 706 t/as Berkley Insurance Australia is an APRA authorised general insurer. Information provided is general only, intended for brokers and has been prepared without taking into account any person’s particular objectives, financial situation or needs. Insurance cover is subject to terms, conditions, limits, and exclusions. Underwriting criteria applies. When making a decision to buy or continue to hold a product, you should review the relevant policy documents.