When it comes to insurance, cheaper doesn’t mean better

While better deals on top-up professional indemnity (PI) insurance will be welcome news for local law firms, it’s critical to remain vigilant when looking for a better deal, ensuring policies are compared on a “like-for-like” basis rather than cost alone, writes Will Laundy.

Will Laundy • 27 June 2024 • SME Law

While Australia continues to grapple with a cost-of-living crisis, local law firms should expect to pay less for their professional indemnity top-up insurance this year as international players flood our shores.

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The anticipated price relief for Australian law firms comes after the cost of top-up insurance has risen for several consecutive years.

This has been primarily driven by lower competition in the Australian insurance sector as several providers pulled out of the local market.

However, these higher prices are now attracting the attention of many international insurers keen to capitalise on the better margins available.

This is especially true of London-based insurers, who are experiencing thinning margins in their local markets. In many instances, these insurers are entering Australia and being quite aggressive in their pricing to gain market share quickly.

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For Australian law firms, this means there may be better deals available, and it will pay to shop around when renewing annual PI top-up insurance programs.

While this will be welcome news for local law firms, it’s critical to remain vigilant when looking for a better deal, ensuring policies are compared on a “like-for-like” basis rather than cost alone.

Many new providers are straying away from traditional insurance policies, and if you’re unaware of the changes, you’re at risk of having inadequate coverage.

If you are thinking about switching providers, consider these five tips to help avoid a dud policy:

Ensure your top-up insurance policy is aligned with your compulsory primary PI insurance policy. If there is a disconnect between your primary insurance policy and the top-up policy, this may mean you can make a claim with the former but not the latter.
Understand how a claim would be handled. Some new international providers don’t have on-the-ground infrastructure to support claims and instead outsource it to a third-party claims handler, which can make the claims process very tedious and difficult.
Watch out for honeymoon deals. Some insurers might give you a good deal upfront but become more restrictive with their policies when it comes time to renew.
Take a long-term view with your insurer. Just as quickly as these new insurance providers enter the market, they can also pull out if market conditions deteriorate for them. This can leave you in a vulnerable position where you may need to go back to your original insurer.
Ensure your top-up policy includes a “direct” reinstatement of the policy limit. Some policies specify a “round-the-clock” reinstatement, which means the policy limit will only refresh once the full liability has been eroded on an aggregated basis (i.e. it has made its way “up the insurance tower”). A direct reinstatement will mean your policy will be reinstated for each new claim and, in the case of most primary lawyers, will be reinstated as many times as required in the period.

It’s important to note that one of the most common reasons for top-up claims being denied is that the policyholder didn’t notify the top-up insurer(s) of a claim or potential claim in the correct policy period.

This is especially problematic when switching insurers. For example, if litigation is brought against you for advice you provided five years ago, but you were made aware of the potential claim two years ago, your current insurer(s) are unlikely to cover this. Unfortunately, neither are your previous insurer(s), as you no longer have a policy with them. You are required to notify your insurer(s) of claims or potential claims in the policy period in which you (or others) first become aware.

To avoid losing your ability to claim, it’s crucial to notify your primary and top-up insurer(s) of claims or circumstances that could give rise to a claim in the insurance period in which you first become aware.

Will Laundy is the director of Pillar Brokerage.

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