Consequential loss exclusions

A standard professional indemnity policy provides cover for damages and legal costs sustained by a third party from bodily injury, property damage or financial loss, as a result of a breach of professional duty by the Insured.  However, depending on the occupation, there may also be an inherent consequential financial loss exposure.

What is a consequential loss exclusion?

Insurers can look to limit their exposure to consequential financial loss by limiting claims to rectification costs only and excluding consequential losses such as:

• loss of profit;

• loss of use of any plant or facility;

• loss of earning capacity;

• loss of goodwill;

• loss of contract;

• delay or interruption of business;

• depreciation of any kind; or

• loss due to delay

What occupations would it typically be applied to?

Claims from consequential financial loss are generally expensive for insurers to defend and are often difficult to rate/price by traditional methods.
 
The occupations that have the highest exposure to consequential financial loss include those involved in, or providing services to, products, commodities or supply chains as they often include loss from business interruption, downtime or accumulation exposures, and include:
 

• Utilities/energy (water, gas, electricity) or technology (data/internet) where the services are used by other businesses

• Manufacturing/heavy industry where downtime of plant or machinery leads to loss of production or supply of products/commodities

• Transport/logistics that cause supply chain delays

What can your client do to mitigate consequential loss?

Typically, insureds can look to limit their exposure to consequential loss in a few ways:
 

• Obtaining peer review or third party sign-off on design work involved in the above activities/occupations (so any claims can be subrogated proportionally against these entities)

• Contractually, by excluding consequential loss under contract or limiting their liability under contract to the cost of the contract or to rectification costs only

• Ensure they review the contracts they sign or get independent legal advice to ensure they are not picking up any unexpected or assumed liability under the contract

Disclaimer: This information does not constitute legal or financial advice. We encourage you to seek your own professional advice in relation to the specific contract and how it allocates legal responsibilities and the insurance required for these obligations.