(Originally published by the Association for Consultancy and Engineering in InterfACE News October 2018)

James Burgoyne of Brunel Professions discusses some of the differences between Any One Claim cover and Aggregate – Round the Clock Reinstatements cover

The professional indemnity (PI) insurance market is currently experiencing a significant re-adjustment on the back of the losses in 2017, including the Grenfell tragedy. A number of insurers, including Lloyds, have identified detrimental underperformance in their PI book and are taking steps to adjust the situation for 2019.

Many practitioners are facing sharp premium increases and less market appetite for their firms as a result. Insurance underwriters are restricting cover for firms with key exposures such as cladding on taller buildings.

One of the ways in which PI cover might be restricted is by an insurer offering a different basis for the limit of indemnity. We are all familiar with “any one claim” (AOC) and “in the aggregate”, but there is a third option of “aggregate with round the clock reinstatements” (aggregate RTC).

This is only an option where there are excess layer policies, in addition to a primary PI policy. The limit of indemnity on the primary policy is in the aggregate. However when the limit on the primary policy is exhausted, the excess layer insurer “drops down” to deal with claims, until its limit of indemnity is exhausted. If there are additional excess layers higher up the programme, this process continues until the entire limit of indemnity is exhausted. Only when the whole limit is exhausted across the programme of insurance policies is the limit of indemnity reinstated, and at this point the primary insurer becomes the first port of call again.

As such, if there is significantly adverse claims experience, the primary insurer can be insulated from multiple losses. This makes it attractive to primary insurers, although the position is not so favourable for the excess layer insurers. However they still have the comfort that the aggregate of claims may still not be sufficient to touch their layer.

These ideas may be clearer, in the following examples.

Example 1

£5m AOC Programme                                             

Insurer A £1m AOC primary

Insurer B £2m over £1m excess layer

Insurer C £2m over £3m excess layer

Insurer A pays the first £1m of any claim. Only if a claim is over £1m or £3m will Insurer B or Insurer C be affected.

 Example 2

 £5m Aggregate Programme                                   

Insurer A £1m Aggregate primary

Insurer B £2m over £1m excess layer

Insurer C £2m over £3m excess layer

 Insurer A pays the first £1m of any claim or claims. If a claim exceeds the amount remaining under Insurer A’s policy, there is additional cover under Insurer B and Insurer C policies. However once Insurer A’s policy is exhausted, there is no further cover for a new claim, even if the aggregate limits under Insurer B and Insurer C’s policies have not been exhausted. Once Insurer A’s policy is exhausted (& unless reinstated), there is no trigger to bring a claim into Insurer B or Insurer C’s policies.

 Example 3

 £5m Aggregate RTC                                       

Insurer A £1m Aggregate RTC primary

Insurer B £2m over £1m RTC excess layer

Insurer C £2m over £3m RTC excess layer

The firm experiences claims for £500k, £1m and £4m. Insurer A pays the first claim. Insurer A pays £500k of the second claim, and Insurer B pays £500k of the second claim. Insurer B pays £1.5m of the third claim and Insurer C pays £2m in respect of the third claim. What happens to the remaining £500k outstanding depends on the wording of the reinstatement provision, and whether it will be immediately reinstated, or reinstated for a new claim.

In the present market conditions, some firms are only being offered terms on an aggregate RTC basis.

Some firms are being offered AOC cover by some insurers (with a significant hike in premium compared to the previous year), and aggregate RTC by others, and finding that the cost for aggregate RTC cover is significantly less. In these circumstances, it is sometimes suggested to them that aggregate RTC cover is the same as AOC for practical purposes. With a significant saving in premium cost, the firm may be wondering if that is actually the case, and whether they would be foolish in not taking the offer.

As the above example demonstrated, a critical question is at what point the limit of indemnity is reinstated. If it is only for a new claim, the limit of indemnity for the present claim may be significantly reduced. In the example 3 above it might have only been £3.5m rather than the £5m of the initial programme.

It is worth noting that the terms under the excess layer policy may not be exactly the same as the primary insurance policy. If the excess layer insurer has become the primary insurer due to erosion of the aggregate limit, these differences may be significant.

On such a basis, aggregate RTC cover is clearly not the same as AOC cover. Typically professionals will be entering into contractual commitments in their appointments and warranties in which they commit to maintaining PI cover of a certain financial value. If the contract stipulates “any one claim” or “each and every claim” cover, then such an aggregate RTC policy would be a breach of contract.

However, if the reinstatement was immediate then situation is different as a full limit of indemnity is available for the new claim.  The question then becomes how many reinstatements are available under the policy terms. If it is a limited number, then the cover is still not AOC.

Conceivably, a set of insurers might offer aggregate RTC cover with unlimited immediate reinstatements. For arguments sake, let’s assume that there are no additional exclusions or restrictions in any of the excess layer policies. Is this the same as AOC?

In terms of the financial amount available for a claim, there does not appear to be much difference. However the change in insurer dealing may still have detrimental effects from the perspective of the claimant.

Firstly it may be the nature of the insurer itself. The insurer of the primary layer may be a well known and reputable insurer which was acceptable to the professional’s client. The excess layer insurer (who might become the insurer dealing with the client’s claim if they “drop down”) may be less acceptable. This may be particularly relevant to a claimant if they are considering their position under the Third Party (Rights Against Insurers) Act 2010. This legislation allows a claimant to bring a claim directly against an insurer, if the professional firm is insolvent.

The financial strength and solvency of an insurer is also relevant, and under an aggregate RTC arrangement, the most relevant insurer can keep changing. As such this can be a concern to the professional’s client.

This may well have knock on commercial effects. Where practitioners are tendering for work, the firm with the AOC limit may be more attractive than the firm with the aggregate RTC limit to the employer (especially on larger projects where the participants are more sophisticated and are thinking in terms of financial solvency and their options under the Third Parties (Rights Against Insurers) Act).

If we are specifically considering Consulting Engineers, there is also the perspective that as a sector, they are a low frequency high severity profession (ie they don’t have many claims, but when they do happen it can be eye wateringly expensive). This perspective may favour aggregate RTC cover, as it is about having a large limit of indemnity available for one or possibly a few claims, rather than having to deal with a large number of claims.

Nevertheless the current PI market concerns are that construction professionals may be facing multiple claims all at once due to sector wide issues such as cladding and insulation, and unrelated problems coming to light in reviews of projects prompted by these initial concerns. This is what is driving the shift from AOC to aggregate RTC in the first place.

In conclusion, AOC cover and aggregate RTC cover are conceptually different, and that is why there are different names for the different basis of the limit of indemnity (and indeed, why the prices are different).

As such, if a firm has both options and wants to take the aggregate RTC cover, it should check its contractual commitments carefully. If it has signed contracts which stipulate AOC cover, it should be asking the client or beneficiary for a variation which allows them to buy aggregate RTC instead. However logistically this may not be a viable option, as the professional would have to be checking every contract signed over the last 12 to 15 years.

The professional may be in a “better” position if their insurance commitments stated that they only had to buy AOC if it was available on commercially reasonable terms. If aggregate RTC is the only option on the table, or if the AOC option is exorbitantly expensive, then the aggregate RTC cover may be commercially acceptable.