A solicitor's letter lands in your inbox. A former client says your business made a professional mistake, that it has cost them £85,000, and that they want compensation, legal costs and a response within 14 days.

You send the letter to your professional indemnity insurer expecting the insurance to do exactly what you bought it to do.

Instead, you receive another letter:

Or:

The business owner now has a considerably more complicated problem.

The first is the professional negligence allegation being made against the business.

The second is whether the professional indemnity insurer is actually required to protect the business from it.

That distinction matters.

The Financial Conduct Authority describes professional indemnity insurance as liability insurance that covers firms when a third party claims to have suffered a loss, usually due to professional negligence.^[1]

But holding a policy does not mean every allegation will automatically be accepted.

A professional indemnity matter can become a coverage dispute involving notification, policy periods, prior knowledge, retroactive dates, exclusions, insured professional activities and the precise wording of the policy.

The claim against you and the insurance claim are different things

This is perhaps the most important point.

Your customer may be saying:

Your insurer may separately be saying:

Those are different questions.

The claimant is concerned with whether your business is legally liable.

The insurer is concerned with whether the alleged liability falls within the insurance contract.

It is entirely possible for a business to dispute the underlying negligence allegation while simultaneously disputing the insurer's refusal to provide cover.

It is also possible for the insurer to accept that a claim has been made while still investigating whether an exclusion, notification condition or policy-period issue prevents indemnity.

Do not ignore the claimant while arguing with the insurer

If the insurer has not yet confirmed cover, it can be tempting to wait.

That may create risk.

The claimant's timetable does not necessarily stop simply because the insurer is investigating indemnity.

A letter before claim may require a response. Proceedings may already have been issued. Evidence needs to be preserved. Emails, reports, contracts, drawings, advice files, meeting notes and internal records may become important.

The business may therefore need to protect its position in the underlying claim while simultaneously trying to establish insurance cover.

A dispute with your insurer does not make the professional negligence allegation disappear.

Be extremely careful about admissions

Business owners understandably want to calm an unhappy client.

That can lead to statements such as:

• “Yes, we made a mistake.”
• “We'll put this right.”
• “This was our fault.”

That may or may not have the legal effect the sender imagines, but it is still a poor time to make casual admissions before the position has been analysed.

The Civil Procedure Rules contain specific provisions dealing with formal pre-action admissions. In the circumstances covered by those rules, withdrawal after proceedings have begun can require the agreement of the parties or the permission of the court.^[2]

That does not mean every apologetic email automatically becomes a binding admission.

It does mean that substantive concessions on liability should not be made casually.

Has your PI insurer reserved its rights or questioned cover?

Send us the claim letter, your professional indemnity policy, the insurer's reservation or rejection letter, and your notification to the insurer or broker. We can carry out a free initial review of the indemnity position.

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Professional indemnity insurance commonly works on a claims-made basis

This is where many business owners are caught out.

With some types of insurance, people naturally focus on the date when the underlying event happened.

Professional indemnity insurance frequently operates differently.

FCA material explains that PII policies work on a claims-made basis, so the insurer on risk when the claim is made can be responsible even where the work giving rise to it was carried out earlier, subject to the policy wording and matters such as any retroactive start date.^[3]

That means several dates can become critically important:

• when the professional work was carried out;
• when something first went wrong;
• when the business first became aware of a potential problem;
• when the client first complained;
• when a formal claim was made;
• when the insurer or broker was notified; and
• which professional indemnity policy was in force at each stage.

A dispute about those dates can determine whether an insurer accepts or rejects indemnity.

The difference between a claim and a circumstance

Professional indemnity policies frequently require businesses to notify not only actual claims but also circumstances which may give rise to a claim.

This can become highly contentious.

Imagine a client emails in March complaining that a design is defective and saying they are obtaining an expert report.

The business believes the matter will be resolved commercially and says nothing to its insurer.

The policy renews in June with a different insurer.

In September the client serves a formal £200,000 professional negligence claim.

The new insurer may say:

The previous insurer may say:

The business can suddenly find itself between two insurers.

Published Ombudsman decisions show how important the exact notification wording can be. In one professional indemnity dispute, the Ombudsman considered whether a notification of circumstances was valid and whether later claims attached to it.^[4]

What does “reservation of rights” mean?

A reservation-of-rights letter is not necessarily a final rejection.

It normally means the insurer is investigating the matter while making clear that, by doing so, it is not giving up rights it may have under the policy to restrict or refuse indemnity.

That investigation may concern questions such as:

• Was the matter notified in time?
• Do the alleged services fall within the insured professional activities?
• Did the business know about a circumstance before policy inception?
• Does an exclusion apply?
• Should another policy respond?
• Does a retroactive date affect the claim?

For the business owner, the important thing is not simply to react to the words “reservation of rights”.

Read the reasons.

• What issue is the insurer actually investigating?
• Which clause is being relied upon?
• What facts does the insurer say are uncertain?
• What documents have been requested?
• What would need to be established for cover to be confirmed?

A reservation-of-rights letter should be treated as a warning that the indemnity position is unresolved — not automatically as a final refusal.

Why might a PI insurer refuse cover?

There are many possible reasons, and each turns on the individual wording and facts.

Common coverage disputes can involve:

• late notification;
• prior circumstances or prior knowledge;
• a retroactive-date restriction;
• a claim made outside the relevant policy period;
• an allegation that the activity fell outside the insured professional services;
• specific exclusions;
• alleged non-disclosure or inaccurate information;
• contractual liabilities going beyond the ordinary legal duty; or
• an alleged breach of policy conditions.

The Financial Ombudsman identifies business-protection complaints where insurers have declined claims because the loss is said not to be covered by the policy, because notification was late, or because the event fell outside the period of cover. Professional indemnity insurance is one of the types of business protection insurance within that guidance.^[5]

Which policy should respond if you changed insurers?

This can become one of the most difficult parts of a professional indemnity dispute.

Businesses frequently change insurers at renewal.

That does not necessarily mean the new insurer automatically takes responsibility for everything that emerges afterwards.

The FCA describes a retroactive start date as a date before which the insurer is unwilling to provide cover.^[3]

Prior-circumstance provisions can also matter.

If the business knew before inception that something might lead to a claim, the new insurer may investigate whether that circumstance should have been disclosed or notified under the previous policy.

Conversely, where a circumstance was properly notified to an earlier insurer, later claims arising from that circumstance may, depending upon the wording, be capable of attaching back to the earlier notification.

This is why the chronology can become more valuable than pages of argument.

Build the chronology before arguing about cover

When IDS examines a professional indemnity coverage dispute, one of the first useful steps is to construct a precise timeline.

Not an approximate narrative.

A timeline.

A chronology can expose the real issue remarkably quickly.

For example, the insurer may say the business knew of a circumstance in February, while the documentary record may show that the first indication of any potential claim came substantially later.

Or the business may have told its broker in March, yet the insurer was not notified until July.

That raises a different question entirely.

The broker may become important

If you told your broker about a problem and believed the broker was notifying your insurer, preserve that correspondence.

Likewise, if the policy was arranged on the basis that a particular professional activity would be covered and the insurer later says it falls outside the insured business description, the way the insurance was arranged may deserve examination.

This does not mean every rejected professional indemnity claim creates a broker-negligence claim.

It means the insurance placement and notification history can sometimes be relevant to understanding why the business is now facing an uninsured exposure.

What about defence costs?

For a business facing a substantial negligence allegation, legal costs can become almost as important as the damages being claimed.

Professional indemnity policies frequently contain provisions dealing with defence costs, subject to their wording.

For some FCA-regulated firms, the FCA's rules expressly require professional indemnity insurance to make provision for appropriate cover in respect of legal defence costs.^[6]

But where indemnity is disputed, practical questions can arise:

• Will the insurer fund lawyers while the coverage investigation continues?
• Has the insurer appointed its own panel firm?
• Are costs incurred before approval covered?
• Can the insured appoint its own representation?
• Is there an excess or separate defence-cost limit?

Those questions need to be answered from the actual policy and correspondence.

What if the insurer flatly refuses to defend you?

This is where the IDS and Access 2 Barristers Direct structure can become particularly relevant.

If your insurer declines indemnity, the business may still have to defend the underlying claim.

That can create two parallel workstreams.

Through Access 2 Barristers Direct , litigation support and appropriate barrister expertise can be brought into the matter where necessary.

The objective is not to introduce counsel unnecessarily.

It is to make sure that, where the underlying claim requires specialist litigation support, the business is not left scrambling for help simply because the insurer has refused to take control.

The insurer's refusal should not dictate your defence strategy

If the insurer says no, the business should not automatically assume the claimant must therefore be right.

The claimant still has to establish its case.

Depending on the claim, there may be disputes concerning duty, breach, causation and loss.

Equally, successfully defending the negligence allegation does not by itself establish that the insurer was entitled to refuse cover.

Again, these are separate questions.

What should a business preserve immediately?

If a professional negligence allegation has arrived and insurance cover is uncertain, preserve the core material immediately.

• the claimant's letter or solicitor's correspondence;
• the professional indemnity policy and schedule;
• earlier policies and renewal documentation;
• proposal forms and declarations;
• broker correspondence;
• the insurer's reservation-of-rights or rejection letter;
• the original engagement terms or contract;
• the complete client file;
• emails and messages;
• reports, designs, advice documents or specifications;
• internal notes;
• invoices and financial records;
• expert material; and
• a chronology.

Do not tidy the file by deleting things that look unhelpful.

The purpose is to establish what happened, not to manufacture a better-looking record afterwards.

A reservation of rights is not the same as no cover

This is worth repeating because businesses can understandably panic when they receive one.

The insurer may simply be carrying out a genuine coverage investigation.

But that investigation should be understood and managed while the underlying claim continues.

Ask:

• What information remains outstanding?
• Which clauses are under consideration?
• Is defence funding being provided in the meantime?
• What issue is preventing confirmation of indemnity?
• When does the insurer expect to reach its decision?

The faster the actual coverage issue is identified, the easier it becomes to decide whether the insurer's concerns are legitimate or require challenge.

How Insurance Dispute Service can help

Insurance Dispute Service reviews disputes where a professional indemnity insurer has reserved its rights, delayed an indemnity decision, refused cover or argued that a claim or circumstance was notified to the wrong policy.

We can examine the policy wording, schedule, retroactive date, notification provisions, claimant correspondence, broker communications, insurer correspondence and the chronology surrounding the alleged circumstance.

The purpose is to identify the real coverage issue.

• Is this genuinely a late-notification problem?
• Was there actually a circumstance that should have been notified earlier?
• Does the exclusion relied upon apply?
• Is the insurer interpreting the insured professional activity too narrowly?
• Should an earlier policy respond?
• Does the insurer's conclusion withstand the policy wording and evidence?

Where the underlying negligence claim is continuing, litigation support can also be brought in through Access 2 Barristers Direct , including access to appropriate barrister expertise where that becomes necessary.

Frequently asked questions

Sources and further reading

1. Financial Conduct Authority — Professional indemnity insurance
2. Civil Procedure Rules — Part 14 admissions provisions
3. Financial Conduct Authority — Professional indemnity insurance FAQs: claims-made basis and retroactive dates
4. Financial Ombudsman Service — Published professional indemnity notification decision
5. Financial Ombudsman Service — Business protection insurance complaints
6. FCA Handbook — MIPRU 3 professional indemnity insurance requirements

This article provides general information about professional indemnity insurance disputes and litigation risk. It does not constitute legal advice or a prediction of the outcome of any insurance or professional negligence claim. The position depends on the policy wording, underlying allegations, evidence, applicable procedure and individual circumstances.