Overview
In Professional Indemnity Insurance, excess refers to the amount the insured professional must pay out-of-pocket before the insurer starts covering a claim. It acts as a form of deductible and applies per claim or per policy period, depending on the terms.
There are two common types of excess:
- Cost-inclusive excess: Applies to both legal defense costs and claim settlements.
- Cost-exclusive excess: Applies only to compensation, not legal expenses (which are fully covered by the insurer).
Choosing the right excess level affects the premium—higher excess means lower premium but more financial responsibility in the event of a claim.
Excess in professional indemnity insurance is defined as a small percentage of total sum insured which is payable by the insured at the time of claim. Insured has to borne the part of every claim which is a fixed amount prior to payment by the insurance company. This fixed portion of the claim which is borne by the insured is known as excess.
Giving financial and professional advice to clients is an accountable job and invites the possibility of litigation and claims since clients take legal actions against errors, omission and negligence.
Excess ensures cost saving as the limit of excess and premium are inversely proportional. If the limit of excess is high, premium amount would be small. Cost-effectiveness is one of the important benefits of excess. It is the part of the loss that is uninsured and has to be paid by the insured. The low rate of premium is provided because the policyholder is bearing a part of the loss.
Excess is beneficial on the part of the insurance company because the nature of professional indemnity insurance is very critical and it handles negligence, defamation, breach of duty. If insured has to pay initially because of errors and omission committed by him, he will always act in good faith. It fosters confidence and trust in insurance company since it knows that no negligence is performed intentionally. This feature of professional indemnity facilitates utmost good faith.
Excess is also defined as deductible. They are apparently identical in essence but there is a thin line of demarcation between excess and deductible which says that excess is an amount payable to insurer as a pre-determined self-imposed contribution in the claim amount paid prior to payment by insurers but on the other hand deductible is an amount withheld by the insurer from the claim amount paid to the policyholder. Excess and deductible function similarly if the claim amount is less than the sum insured.
Read About: What is Deductible in Insurance and How Does It Work?
There are two types of excess: One is cost-exclusive and other is cost-inclusive. Cost-exclusive says that the insurer is liable for all legal costs incurred no matter the claim ever reaches the settlement.
Cost-inclusive excess says that the insured is held accountable to contribute a certain percentage of costs and expenses in defending a claim up to the level of excess.
Setting a limit of excess is crucial because if it is set under the cloud without any estimation, the core benefit of availing a professional indemnity insurance policy becomes futile. The focus should not be on the low premium rather one should always look upon the risk exposures, limit of indemnity, the possibility of claims, affordability etc.
Case Study:
ABV Enterprise is a professional services firm which got sued for breach of confidentiality. The professional indemnity insurance has the sum insured of Rs.1000000 with Rs.50000 excess cover. The claim amount is Rs. 500000. In this case, the policyholder is accountable to pay initially the excess amount of Rs. 50000 and insurance company will bear the cost of remaining amount i.e. Rs. 450000.
The strain of high-cost premium is reduced because excess professional indemnity insurance helps in reducing the premium amount. Professionals are answerable for their advice so it is necessary to avail a cost-effective insurance solution. Add a protective layer to your business of giving advice and work with great confidence and peace of mind.
In summary, excess in professional indemnity insurance is a way to reduce the cost of the insurance premium. The excess is the amount that the policyholder must pay out of pocket before the insurance company will cover any claims. A higher excess amount means a lower premium, as the policyholder takes on more of the risk.
FAQs
Q) What does ‘excess’ mean in professional indemnity insurance?
A) Excess is the portion of a claim that the insured must pay before the insurer contributes. It reduces small claims and encourages risk management.
Q) How does excess work in professional indemnity insurance?
A) If a claim arises, the insured first pays the excess amount as agreed in the policy. The insurer then covers the remaining claim costs, up to the sum insured.
Q) What is the difference between cost-inclusive and cost-exclusive excess?
A) Cost-inclusive excess applies to both claim settlement and legal costs, while cost-exclusive applies only to settlements—legal costs are covered fully by the insurer.
Q) Can you choose the excess amount in PI insurance?
A) Yes, most insurers offer flexibility in choosing your excess. A higher excess lowers your premium but increases your upfront liability during a claim.
Q) Does a higher excess reduce professional indemnity premiums?
A) Yes, typically, a higher excess reduces your insurance premium because you’re taking on more of the financial risk upfront.