Professional Indemnity Insurance: Reinstatement of Indemnity Limits

In this article, we will unpack the reinstatement of indemnity limits for Professional Indemnity (PI) Insurance. You will get a better understanding of the material role reinstatement can play in boosting the amount available to respond to claims made against the insured during the policy period, and why reinstatement should be on your action list when speaking about and reviewing your client’s requirements.

How does a Reinstatement of Indemnity Limit Work?

The limit of indemnity under a Professional Indemnity Insurance policy is the maximum amount an insurer will pay in respect of any one claim. In some cases, this will also be the maximum an insurer will pay in aggregate (or put another way, in total) during the policy period.

Example: Professional Indemnity Policy without Reinstatement

An insured has a PI Insurance policy with an aggregate indemnity limit of $1m. Shortly after the policy period commences, the insured notifies a claim that is quickly settled for $1m. The indemnity limit is entirely exhausted resulting in no funds being available to pay any further claims that may be notified during the policy period.

The aggregate indemnity limit may be increased if the Professional Indemnity Insurance policy has a reinstatement extension. Generally, a reinstatement will reinstate (or, in other words, replenish) the aggregate indemnity limit back to the limit available at the commencement of the policy period. However, the reinstated aggregate indemnity limit is only available for claims that are entirely unrelated to the claim or claims that initially exhausted the aggregate indemnity limit.

The number of times the indemnity limit can be reinstated depends on the number of reinstatements available under the relevant policy wording or any applicable endorsement. However, it is important to keep in mind that reinstatement does not increase the indemnity limit available for any one claim.

Example: Professional Indemnity Policy with Reinstatement

An insured has a PI Insurance policy with an aggregate indemnity limit of $5m with one (1) reinstatement. Shortly after the policy period commences, the insured notifies a claim that is quickly settled for $5m. The indemnity limit is exhausted. The reinstatement is triggered resulting in the indemnity limit of $5m being reinstated and available to pay claims unrelated to the claim that exhausted the initial indemnity limit.

Limit of Indemnity Protection

Professional Indemnity Insurance policies generally state an aggregate indemnity limit, which represents the maximum amount that will be paid by the insurer for claims during the policy period. However, in complex cases or industries with higher risk exposure, a single claim could exhaust the policy’s indemnity limit.

Reinstatement of the indemnity limit will allow the policy to respond to other claims made against the insured for the remainder of the policy period where the indemnity limit has been exhausted by an earlier claim. This reduces the risk of underinsurance and the prospect of the insured experiencing hardship as a result of it having to use its financial resources to defend and settle a claim. Reinstatement can be especially crucial for insured’s whose business or professional services carries a higher likelihood of frequent claims experience or multiple claims occurring simultaneously.

Importance of Reinstating the Indemnity Limit

Reinstatements of indemnity limits are an important feature of Professional Indemnity Insurance policies that should be considered when discussing your client’s requirements. It is best practice to assess the requirement for reinstatement before the policy period commences. This is because it can be challenging to negotiate a mid-term variation to introduce reinstatement of indemnity limits, especially after a claim occurs.

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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 financial product, you should review the relevant Policy Wording.