When your PI insurer disputes cover
What a coverage dispute is, and is not
A coverage dispute is a disagreement about whether the policy responds to a notified matter, or how far it responds. It is separate from the underlying claim your client is bringing. Insurers rarely open with an outright declinature: the usual first move is to accept conduct of the matter while reserving the right to decline later, which keeps the defence running while the coverage question is investigated.
It is also not, in itself, evidence of bad faith. Wordings are complex, facts emerge slowly, and an insurer is entitled to investigate. What matters is whether the reservation is specific, whether it is resolved in a reasonable timeframe, and whether the insured is left able to make decisions about their own defence.
Reservation of rights
A reservation of rights letter says, in substance: we will deal with this matter for now, but we do not accept that the policy necessarily covers it, and we reserve the right to withdraw. A good one identifies the specific clauses in issue and the specific facts that raise them. A vague reservation covering “all terms, conditions and exclusions” tells you nothing and should be pressed for particulars.
Reserving rights creates a real tension. The insurer is directing a defence in which it may ultimately have no financial interest, while the insured may prefer a settlement strategy that the insurer would not fund. Where the conflict is material, separate representation for the insured is a reasonable thing to ask about. The obligation to cooperate under the cooperation clause continues throughout, and it is worth complying with it carefully even while the coverage point is live.
What insurers most often raise
Late notification. The most common ground in professional indemnity, because claims-made policies depend on notification within the period and many conditions about notification are drafted as conditions precedent. Our pages on notification of claim and the date of notification set out how the tests work, and our first thirty days timeline covers what to do at the moment awareness arises.
Fair presentation. Under the Insurance Act 2015 a commercial insured owes a duty of fair presentation at placement and renewal. Where the insurer says the duty was breached, the available remedy depends on what the insurer would have done with the missing information. See fair presentation and the deep dive on the Act.
Scope and exclusions. Whether the activity falls within the insured professional services; whether an exclusion such as contractual liability, deliberate acts or a specific carve-out applies. Where the allegation is framed as a strict contractual obligation, our note on breach of contract cover explains why that boundary is contested so often.
Prior knowledge. Whether the firm knew of the circumstance before inception, which most claims-made wordings exclude.
Declaratory proceedings
Where negotiation fails, either party can ask the court for a declaration as to the parties’ rights under the policy. Insurers use it to establish that they need not indemnify; insureds use it to establish that they must. It is a distinct action from the underlying claim, and in practice the two are often case-managed together or one is stayed pending the other. Our entry on coverage litigation covers the shape of these actions, and bad faith explains why the American concept does not translate directly into English law.
Coverage litigation is expensive and slow, and the insured is usually funding it while also funding a defence. That asymmetry is the reason most coverage disputes settle, and the reason the statutory late-payment remedy matters.
Section 13A: the duty to pay within a reasonable time
Section 13A of the Insurance Act 2015 implies into every contract of insurance a term that, if the insured makes a claim, the insurer must pay any sums due in respect of the claim within a reasonable time. The section was inserted by section 28 of the Enterprise Act 2016 and came into force on 4 May 2017.
What counts as a reasonable time depends on the circumstances, and the Act recognises that investigating and assessing a claim takes time; the section expressly contemplates that an insurer may have reasonable grounds for disputing a claim, in which case the conduct of the insurer in handling the dispute is relevant to whether the time taken was reasonable. Where the term is breached, the insured’s remedies for late payment are in addition to the sums due under the policy — in other words, damages for consequential loss caused by the delay.
Two practical points follow. First, there is a short limitation period: section 5A of the Limitation Act 1980 provides that an action for breach of the section 13A term may not be brought after one year from the date on which the insurer has paid all the sums referred to in section 13A. Second, contracting out is restricted: under section 16A, a term in a non-consumer contract putting the insured in a worse position in respect of a deliberate or reckless breach of section 13A is void to that extent, and any other disadvantageous term is only effective if the transparency requirements in section 17 are met.
The ombudsman route for smaller firms
Not every insured has to litigate. The Financial Ombudsman Service can consider complaints from eligible complainants, a category defined in the FCA’s DISP rules that extends beyond consumers to include micro-enterprises and, since the rules were widened, certain small businesses, as well as some charities and trusts. Eligibility turns on size tests measured by things such as turnover, balance sheet total and employee numbers, and on the complaint falling within the ombudsman’s jurisdiction. The thresholds are set out in the FCA Handbook and are updated from time to time, so they should be checked against the current rules rather than assumed.
Where a firm qualifies, the ombudsman is materially cheaper and faster than court, it is free to the complainant, and its decisions are made on what is fair and reasonable in all the circumstances rather than strict legal rights alone. A decision is binding on the firm if the complainant accepts it. There is a limit on the money award the ombudsman can require, which matters on larger PI claims. See FOS jurisdiction over claims and the entry on the Financial Ombudsman Service.
Practical steps when cover is questioned
Ask for the reservation in writing, clause by clause, with the facts relied on. Keep complying with the policy conditions, including cooperation and the prohibition on admissions. Preserve the placement file, the broker correspondence and the notification record, because most disputes turn on what was said and when. Raise the conflict question early if the insurer is directing a defence it may not fund. Use the insurer’s internal complaints procedure before going further, since that is the gateway to the ombudsman. And involve your broker properly: the placing broker holds the evidence of what was presented and is the right party to press for particulars.
Frequently asked questions
What does a reservation of rights letter actually mean?
It means the insurer will handle the matter for the time being without accepting that the policy responds, and reserves the right to decline later. It is not a declinature. A useful reservation names the specific clauses and facts in issue; a generic reservation of “all terms and conditions” should be pressed for particulars so you know what is genuinely being investigated.
Can I claim for the loss caused by my insurer taking too long?
Section 13A of the Insurance Act 2015, in force since 4 May 2017, implies a term that an insurer must pay sums due within a reasonable time, and remedies for breach are in addition to the sums due. What is reasonable depends on the circumstances, and an insurer with reasonable grounds to dispute a claim is not automatically in breach. Note the one-year limitation period in section 5A of the Limitation Act 1980.
Can a small firm take a PI coverage dispute to the ombudsman?
Possibly. The Financial Ombudsman Service considers complaints from eligible complainants, which includes micro-enterprises and certain small businesses as well as consumers, subject to size tests in the FCA’s DISP rules and to a cap on the money award. The current thresholds should be checked in the FCA Handbook. You normally have to exhaust the firm’s own complaints process first.
Should we settle the underlying claim while cover is disputed?
That is a decision to take with legal advice, because settling without insurer consent can itself breach a policy condition, while waiting can increase the exposure. The practical route is usually to obtain the insurer’s position in writing, keep the insurer informed of settlement opportunities, and document what was offered and when.
This page is general insurance information about how UK professional indemnity policies are commonly structured. It is not legal advice, and it is not a statement of what any particular policy covers. If a claim, a circumstance or a contract term is in issue, read your own wording and take advice on your own facts.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.