Two professional indemnity policies can carry the same limit, the same premium and the same insurer, and still be worth very different amounts when a claim arrives. The difference sits in two phrases many policyholders have never been asked to consider: whether the limit applies to any one claim or in the aggregate, and whether defence costs are paid in addition to the limit or from inside it. This article explains both, and then the question underneath them, which is how the limit itself should be chosen.

Any one claim

A limit written on an any one claim basis renews itself for each separate claim. If the limit is £1 million and three unrelated claims arrive in the same policy year, each claim has the full £1 million available to it. This is the stronger basis, it is the basis most commonly demanded by contracts and regulators where they specify one, and it is typically the more expensive of the two, though usually by less than firms expect. We would, however, caution that policies on this basis often still apply a single aggregate to particular exposure types, and the policy schedule should therefore be checked carefully for any such limitations.

In the aggregate

An aggregate limit is provided once for the whole policy year. Every claim notified in the year draws from the same pot, and when it is exhausted, later claims are uninsured, however valid. For a firm whose realistic exposure is one claim at a time, an aggregate limit can be a perfectly sensible purchase. The risk concentrates where one error can touch many clients at once: the same faulty advice given across a client base, a template document with a defect repeated in every use, a miscalculation applied to a whole scheme. Errors of that shape generate related claims in clusters, and a clustered year is exactly the year that an aggregate limit is least suitable for.

Some aggregate policies soften this with one or more automatic reinstatements, which restore the limit after it is used, sometimes for unrelated claims only, although these are less common. A reinstatement narrows the gap between the two bases, and whether one is included, and on what terms, is worth careful analysis.

Where defence costs sit

The second phrase matters just as much. Under a costs in addition wording, the insurer pays legal costs on top of the limit: a £1 million limit means £1 million available for damages, with the legal costs paid separately. Under a costs inclusive wording, every hour of your own defence costs spends the same pot the damages come from. It should be noted that the legal costs involved are rarely just your own: where liability is established, or the insurer elects to settle the claim, the claimant’s legal costs are commonly payable as well, although these form part of the claim against you rather than being drawn from the defence costs element, meaning they are paid from the limit of indemnity itself. Professional negligence disputes are document-heavy and slow, and we have seen claims where damages in excess of six figures were still outweighed by the two sides’ combined legal costs. On a costs inclusive basis, a fought claim can therefore reach settlement with much of the limit already spent before any damages are paid, which makes this a very material coverage decision. When a contract requires a specified limit, the safer reading is that the counterparty expects that much capacity for damages, which points to costs in addition, and where the market for a profession only offers costs inclusive terms, the answer is usually a higher headline limit to compensate.

Choosing the number

The limit should be built from three inputs, none of which is last year’s renewal schedule. First, contractual obligations: the highest limit any current appointment or framework requires, on the basis it requires. Second, the realistic worst case: not the average project, but the largest financial loss one error in your largest engagement could plausibly cause, remembering that claims commonly arrive years after the work. Third, the shape of your work: many small engagements point differently from a few large ones. Where you are asked to sign a contract requiring a limit beyond what your policy currently provides, there are two routes. Limits can often be increased mid-term, and for higher requirements an excess layer can be added: a separate policy that sits above your primary one and responds once the primary limit is exhausted, topping the programme up to the figure the contract demands. Layered programmes of this kind are how larger firms routinely meet high contractual limits.

We compare professional indemnity wordings line by line, and the limit basis and costs treatment are among the first things we check. Our professional indemnity insurance page explains the cover in full, or speak to the team about a review of what your schedule actually says.