What happened

An accountant working through a piece of tax advisory work realised, before the policy year came to an end, that the advice given to a client might turn out to be wrong and might cost that client money. The accountant said nothing to the insurer at the time. The policy ran its course, a new period of cover began, and the client came back two months later with a formal negligence claim. The accountant reported it to the insurer straight away, expecting the new policy to respond. The insurer declined to pay.

Why the timing beat the negligence

The insurer's reasoning had nothing to do with whether the advice was actually wrong. It turned on when the accountant first knew there might be a problem, and on which policy year that knowledge fell into. The circumstance existed before renewal, so the insurer treated it as something that should have been reported under the old policy, not brought forward into the new one. A two-month gap either side of a renewal date was enough to put the claim outside the cover that had actually been in force when the risk first became apparent.

Professional indemnity policies are almost always written on a claims-made basis, which means the policy that responds is the one in force when the claim is made or notified. This is the opposite of an occurrence policy, where cover attaches to the date of the incident itself. For an accountant, a solicitor, an architect or any other adviser, the practical effect is that a mistake made in year one can only be claimed under whichever policy is running when the client complains, or when the professional first becomes aware that something might be wrong.

Notification as a condition precedent

Most professional indemnity policies make prompt notification a condition precedent to cover. If the policy wording requires notification of circumstances that might give rise to a claim, and the policyholder becomes aware of those circumstances but reports them late or under the wrong policy year, the insurer can decline on that basis alone. Whether the original work was negligent, and whether the client actually suffered a loss, becomes secondary. The insurer is entitled to look at the notification clause first.

Retroactive dates and the gap between renewals

Claims-made policies usually carry a retroactive date, the point before which no acts or omissions are covered even if the claim is made during the current policy year. Where a business changes insurer, or lets cover lapse and then reinstates it, a gap between the old retroactive date and the new one can leave a period of past work with no policy willing to respond to it at all. This is why continuity of cover, and an accurate record of when a possible problem first came to light, matters as much as the sum insured.

Why timing outweighs fault

An insurer assessing a late notification does not need to reach a view on whether the underlying advice was competent. It only needs to check the policy wording against the date the policyholder knew, or ought reasonably to have known, that a circumstance might lead to a claim, and the date it was actually reported. That comparison is often faster and cleaner for the insurer to make than a full assessment of professional negligence, which is part of why notification disputes are common in professional indemnity claims. The mechanics of this cover, and the terms that decide when it responds, are set out in what each cover actually does, and terms like condition precedent and retroactive date are defined in full in the small print, translated.

The accountant's mistake was not the error in the accounts. It was leaving two months between finding out something had gone wrong and telling the insurer. That gap is the whole story, and it is the part any reader can act on today, whatever trade they are in and whatever cover they hold.

Report the circumstance, not just the claim

Most professional indemnity wordings, and many others written on a claims-made basis, ask for two different things to be notified: a claim, meaning a demand has actually been made against you, and a circumstance, meaning you have become aware of a fact, an event or a piece of work that could turn into a claim later. A circumstance notified during the policy year it arose, before any claim exists, is usually treated as having been made in that year even if the client complains twelve months afterwards. Waiting until you are certain there will be a claim is what turns a covered circumstance into an uncovered one.

Notify the insurer you have on the day you notify

Under a claims-made trigger, cover generally responds to the insurer on risk when notification is given. If the aware-of date falls inside one policy year and notification is delayed into the next, the previous insurer can point to a late notification outside their period, and the new insurer can point to a circumstance that existed before their policy started. Neither position is unreasonable on its own terms, which is exactly why the gap in the middle is where claims like this one are declined.

Write the date down, on the day

• The date you first became aware that something might be wrong.
• The date you told the insurer, in writing, and what you told them.
• The date of any acknowledgement the insurer sent back.

An email to the insurer or broker on the day you become aware does two things: it starts the notification clock running in your favour, and it gives you a record to point to if the insurer later disputes when you knew. A phone call remembered differently by both sides months later does neither.

Whether a particular fact counts as a notifiable circumstance under a specific policy is a question of that policy's own wording, and it is not something a general explanation can answer for an individual case. The glossary sets out how claims-made cover, circumstances and retroactive dates are defined, and what each cover actually does works through professional indemnity alongside the other main covers a business is likely to hold.