What is a “Circumstance” in Professional Indemnity Insurance?

Key features of a circumstance

• Objective test: Whether something qualifies as a notifiable circumstance is assessed objectively. It’s not just about what the insured personally believes, but what a reasonable person in that profession would consider a potential issue that my result in a claim.
• “Real possibility”: There must be a genuine possibility of a future claim – not just a remote or unlikely chance.
• Notification is critical: PI policies are usually claims-made, meaning the policy in place when the claim (or circumstance) is first notified is the one that typically responds. Failure to notify a known circumstance during the correct policy period could result in a later claim being denied.
• No admission of fault required: A circumstance should be notified even if the insured believes they did nothing wrong. The policy covers defence costs – even for allegations that turn out to be unjustified.

Examples of notifiable circumstances

Here are some common situations that should be reported as circumstances:

• Client complaints/expressions of dissatisfaction: Direct criticism of professional performance, especially if it mentions financial loss. This could be verbal or written.
• Verbal intimations: Informal remarks in meetings or phone calls suggesting an intent to hold the professional liable or a client repeatedly expressing dissatisfaction about services or advice.
• Known errors: Discovery by the professional that they provided incorrect advice or made a mistake, even if the client is currently unaware.
• Project failures: A major mishap or technical failure (e.g., a designed structure showing defects) where the professional can foresee a client suffering a loss.
• A large loss or serious injury: If the cause could potentially be connected to the professional services. The larger the loss, the higher the chance that a claim or legal proceedings may be pursued.
• External reports: News or media reports of legal action in connection with work the professional completed, which could lead to a cross-claim.
• A client suggesting advice was incorrect – even if the insured disagrees.
• Receiving a letter or other communication advising that a professional issue or conduct is being investigated or hinting at a potential claim, inquiry or legal action, particularly if it is coming from a lawyer or a regulatory body.
• Media reports of a claim in connection with work completed by an insured. This could include any claims made against business partners with whom the insured collaborates which could lead to a cross-claim or the issuance of a third-party contribution notice.

Why notification matters

Professional Indemnity (PI) insurance is usually written on a claims-made basis, which means an insured must notify the insurer of any circumstances as soon as they become aware of them.

Timely notification is critical for several reasons:

• Locking in cover: Notifying a circumstance during the current policy period “locks in” that issue to that specific policy period. If a formal claim arises years later, the original policy will still respond. This is mandated by s40(3) of the Insurance Contracts Act.
• Avoiding exclusions: Failing to report a known issue may allow a future insurer to deny cover under a “known circumstance” exclusion, which excludes facts the insured was aware of before the policy started.
• Objective standard: The test for reporting is whether a reasonable professional in that professional’s position would believe the situation could lead to a claim—not just your or your client’s personal view.
• Reduce exposure/reputational damage: once notified, an insurer may take proactive steps to provide informal support and nip a matter “in the bud”. This can minimise potential future costs, inconvenience and adverse publicity for an insured.
• Complying with the Duty of Disclosure: transparent notification is always prudent to protect a client against a non-disclosure issue arising in the future.

What this means for brokers

When arranging or renewing PI insurance for your clients, it is best practice to ask if there are any situations like those above that could possibly lead to a claim. Lodge a notification with the insurer if warranted as a precaution. Doing so is considered good risk management and typically does not result in higher renewal premiums. The guiding principle for PI insurance has always been “If in doubt, notify”.

Whether a “circumstance” or “claim” has arisen may depend on the definition of “claim” in the policy. Sometimes the difference may not be clear so in those circumstances, notification will always be the best option.

Once notified, an insurer will usually confirm whether they consider the matter to be a claim or a circumstance and what further action or information may be required.

We hope you found the above useful.

For further assistance, contact the Acerta PI team or reach out to Chris or Bill directly.

This article contains information of a general nature for education purposes only. It is not intended to constitute the provision of legal advice and the information may be subject to change.