Businesses today often need to insure for high levels of professional indemnity insurance cover.
Sometimes the level of cover they require will exceed the amount available from their PI insurer and so an Excess Layer policy is necessary. Our guide explains more about this complex insurance.
We recommend that this guide is circulated to all Partners, Directors and Senior Managers for their general awareness and risk management purposes.
- What is excess layer insurance?
- How does it work?
- What does it cost?
- How the premium is calculated
- Buying a policy
All insurance companies have a maximum limit up to which they can offer insurance cover. The amount will vary between insurers but is normally up to £ 5 million for a primary professional indemnity policy.
Inevitably, many firms require more cover than their insurance company is able to provide. This is usually due to two reasons:
- An important client insists that the firm provides a specified amount of cover, giving them comfort they will not be under-insured if they ever needed to claim against them.
- The firm is involved in very large projects or areas of high risk where it feels that more PI cover is necessary to adequately protect the business.
This is where Excess Layer Insurance steps in. An additional 'layer' of cover which is purchased separately and sits on top of the main ‘primary’ policy.
For example, ABC Insurance Company provides the firm with its main PI insurance policy for claims of up to £ 5 million. But the firm has a large client who insists they carry PI insurance of £ 10 million. Their broker can then provide a separate excess layer policy with a different insurance company for an additional £ 5 million cover. The two policies combined are then providing the required £ 10 million cover.
This is common practice in the PI insurance market and enables firms to purchase much higher levels of cover (limit of indemnity) than can be provided by any one single insurance company.
The excess layer policy is only triggered if a major claim occurs which exceeds the amount of cover provided by the main PI policy. In practice, ABC Insurance Company will deal with all claims up to the first £ 5 million but if a claim occurs which exceeds the £ 5 million, then the insurance company covering the excess layer will pay the balance.
Some larger professional services firms such as solicitors and accountants may buy cover of £ 100 million or more. This could see 10 different insurance companies or more participate in the programme, each sitting on top of the other in layers.
The cost of excess layer insurance is surprisingly modest compared to the primary PI insurance policy. In fact, it can be just a fraction of the cost of the primary policy.
This is because most claims will fall to the primary insurance policy and excess layer policies are rarely called on unless an exceptionally large claim occurs. This level of low risk is reflected in the cost of the excess layer insurance.
The cost or rate reduces as the level of cover increases so an upper level of excess layer will cost less than the lower level.
Typically, an excess layer underwriter will first look at the usual risk information included on the proposer's PI proposal form together with the premium being charged for the primary insurance policy. They will then decide what they feel is an adequate premium for the level of excess layer they are being asked to provide.
This is done by using a combination of their own company ‘book rate’, some discussion with the broker and their own commercial judgement of the risk.
This insurance is complex and you’ll need to purchase via a broker to access the correct insurance markets and ensure the policy/s fits seamlessly to your primary policy.
For more information or a discussion with one of our experts call us on 0345 251 4000.
This guidance note is intended for information purposes only. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. This guidance note shall not be reproduced in any form without our prior permission. © 2021 Professional Indemnity Insurance Brokers Ltd