Professional Indemnity: Understanding Territorial Limits and Jurisdictional Limits

Professional Indemnity (PI) insurance is designed to cover insureds for their liability to pay compensation for errors and omissions that may arise in relation to professional services they provide. Where an insured provides professional services overseas, it is crucial to understand two key limits that are generally included in a PI insurance policy, specifically:

1. Territorial Limit; and

2. Jurisdiction Limit.

While they may seem similar and do work together to scope what is and is not covered, these limits serve distinct purposes and can significantly impact the scope of cover.

Read on as we explain the differences between Territorial Limit and Jurisdiction Limit.

Territorial Limits

Territorial Limit establishes the geographical area where events must occur for the PI insurance policy to respond. For instance, if a PI insurance policy has a Territorial Limit of “Australia only”, then the error or omission must occur within Australia for the PI insurance policy to respond.

Worked Example

The insured is an architectural company based in Sydney and undertakes a project in Auckland, New Zealand. The insured’s PI insurance policy has a Territorial Limit of “Australia only,”. Accordingly, the PI insurance policy would not respond to any claims arising from the New Zealand project where the error or omission occurred in New Zealand. To ensure the PI insurance policy responds to claims arising in relation to the New Zealand project, the insured would require a Territorial Limit that includes New Zealand. For example, “Australia and New Zealand”.

Jurisdiction Limits

The Jurisdiction Limit establishes the legal jurisdictions where a claim / dispute can be commenced and resolved and covered by the PI insurance policy. For instance, if a PI insurance policy has a Jurisdiction Limit of “Australia only”, then the policy will only respond where legal proceedings are conducted in Australian courts.

Worked Example

The insured is a financial advisory company based in Melbourne and provides services to clients located in London, United Kingdom. The insured has a PI insurance policy with a Jurisdiction Limit of “Australia only”. A customer of the insured files a claim in a London court alleging it suffered loss as a result of the insured’s negligence when providing professional services. The PI insurance policy does not respond to the claim because it has been commenced in London, which is not in the Jurisdiction Limit. For this type of claim to be covered by the PI insurance policy, the insured would require a Jurisdiction Limit that includes United Kingdom. For example, “Worldwide excluding USA and Canada”.

Mismatched Limits

The Territorial Limit and Jurisdiction Limit for a PI insurance policy can be the same (i.e. both “Worldwide excluding USA and Canada”), but this is not always the case. Where there is a mismatch in the limits, it is even more important for brokers advising insureds who operate internationally to understand the difference between Territorial Limit and Jurisdiction Limit. Failing to recognise these distinctions can lead to unexpected gaps in coverage.

Worked Example

The insured operates a construction business based in Brisbane, Australia and undertakes a project in Singapore. A customer of the insured lodges a claim in a Singapore court alleging it suffered loss because of negligent professional services provided by the insured in Singapore. The insured notifies their insurer of the claim. The insurer declines the claim on the basis that PI policy does not respond. This is because while the policy has a Territorial Limit of “Worldwide excluding USA and Canada” (which covers where the service was provided), the Jurisdiction Limit is “Australia and New Zealand only” and a legal proceeding commenced in Singapore is outside this limit.  

Conclusion

In summary, Territorial Limit refers to the geographical area where the error or omission must occur. Jurisdiction Limit refers to where legal proceedings must be commenced. It’s important to review your clients PI insurance policy to ensure that the Territorial Limit and Jurisdiction Limit align with the locations where their services are delivered and legal proceedings in relation to those services could be commenced. This is especially the case where your client engages in international projects or services.