A Professional Indemnity Insurance (PI) policy contains an important clause called the Reasonable Precautions Clause. This clause emphasizes that the insured is required to take reasonable precautions to reduce the risk of error, negligence, or legal action. Without this principle, claims can be rejected even if premiums have been paid. This article is part of the 50 PI Policy Analysis series written by Mhd. Taufik Arifin ANZIIF (Snr. Assoc) CIIB, an insurance broker with over 40 years of experience with L&G Insurance Broker, a reliable consultant ensuring your PI protection is truly effective.
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Reasonable Precautions Clause in PI Policy: Basic Responsibilities of the Insured
In the world of insurance, particularly Professional Indemnity Insurance (PI), not all risks can be directly transferred to the insurance company. There are fundamental responsibilities that remain with the insured. One of these is reflected in the Reasonable Precautions Clause, or the obligation to take reasonable precautions. This clause is a crucial foundation, because even if you have a PI policy, the insurance company will only pay a claim if you are proven to have fulfilled this basic obligation.
What is a Reasonable Precautions Clause?
This clause stipulates that the insured must take reasonable and standard steps to prevent loss or claims. Essentially, the insured must not be negligent, let alone intentionally allow a risk to occur. Insurance exists to protect against unforeseen risks, not to cover actual or deliberate negligence.
A simple example: a doctor must ensure that their diagnosis meets medical standards; an architect must perform structural calculations according to regulations; and an accountant must adhere to auditing standards. If they are found to have ignored these minimum standards, the insurance company can deny the claim.
Why Is This Clause Important?
- Teaching discipline risk – The insured is encouraged to remain cautious and professional.
- Maintaining fairness – Insurance does not cover intentional negligence.
- Protecting insurance companies – Preventing moral hazard from insured parties who could abuse the protection.
- Building client trust – Professionals who comply with this clause automatically maintain their reputation in the eyes of clients.
The Risks of Ignoring This Clause
Many PI claims are denied because the insured is deemed to have failed to take reasonable precautions. For example:
- A lawyer who does not attend the hearing due to negligence, not due to force majeure.
- IT consultants who do not install basic firewalls resulting in client data leaks.
- Engineers who ignore technical inspections before a project is executed.
In such cases, even if there is a PI policy, the insurance company can reject the claim because the insured did not comply with reasonable precautions.
The Role of an Experienced Insurance Broker
This clause is often a trap for many professionals due to the complex policy language. An experienced insurance broker like L&G Insurance Broker will help:
- Explain the contents of the clause in simple language.
- Provides practical guidance on what constitutes “reasonable precautions”.
- Defending the insured in the event of a dispute with the insurer.
- Draft the policy so that this clause is not interpreted to the detriment of the client.
The Reasonable Precautions Clause is a fundamental responsibility for all IP policyholders. By understanding and implementing it, you not only protect yourself from potential claim rejections but also enhance professionalism and client trust. To ensure this clause truly benefits you, don’t hesitate to work with L&G Insurance Broker, a trusted partner with over 40 years of experience in professional risk management and insurance.
Case Study of the Application of the Reasonable Precautions Clause
Case 1: Surgeon in Jakarta
A surgeon was sued for post-operative complications with a patient. The patient’s family alleged malpractice. However, an investigation proved that the surgeon had performed all procedures according to medical standards, used sterile equipment, and recorded medical details accurately. In this case, the insurance company paid the claim in full, as the surgeon had taken reasonable precautions. The PI policy protected the surgeon’s reputation and finances from an 8 billion Rupiah lawsuit.
Case 2: Architectural Firm in Surabaya
An architectural firm was accused of negligence in designing the foundation of an office building. The client sued for Rp 20 billion in damages because the project developed a large crack. Investigation revealed that the architectural firm failed to conduct standard soil testing before the design was created. The insurance company denied the claim for violating the reasonable precautions clause. The architectural firm ultimately had to bear the losses itself and nearly went bankrupt.
Case 3: IT Consultants in Singapore (International Comparison)
An IT consultant faced a lawsuit from a client for a data breach. Fortunately, they had installed a firewall, conducted a security audit, and documented all preventative measures. Despite the breach being the result of a sophisticated cyberattack, the insurance company still paid out a $2 million claim. This confirmed that reasonable preventative measures were sufficient to satisfy the clause, even though the risk remained.
Lessons to be Learned
- Documentation is essential – all preventative measures must be documented.
- Professional standards must be followed – ignoring them can result in claims being rejected.
- Insurance brokers play a big role – in the first two cases, it is the broker who can help interpret whether the insured’s actions comply with the clause.
The Role of L&G Insurance Broker
Many professionals in Indonesia don’t realize how crucial this clause is. As an independent insurance broker with over 40 years of experience, L&G Insurance Broker consistently assists clients in:
- Compiling a fair PI police.
- Provide education about preventive measures.
- Defending clients when claims are disputed.
With L&G, you are not just buying a policy, but also getting a strategic partner to ensure business continuity.
Conclusion & Recommendations
The Reasonable Precautions Clause is one of the most crucial clauses in a Professional Indemnity (PI) policy. This clause stipulates that the insurance company will only pay a claim if the insured is proven to have taken reasonable precautions in accordance with professional standards. This means that a PI policy is not a “shortcut” to bypass professional responsibilities. Instead, this policy works optimally only if the insured is diligent in maintaining service quality standards, work procedures, and adequate documentation.
Numerous cases in Indonesia and internationally demonstrate that claims can be denied if the insured fails to perform basic, required procedures. For example, an architect who fails to conduct a soil test, or an auditor who fails to adhere to auditing standards. However, if a professional follows proper procedures—such as a doctor who documents every medical procedure—a PI policy can be invaluable financial and reputational protection.
This is where the role of an insurance broker like L&G Insurance Broker becomes crucial. With over 40 years of experience, L&G helps clients understand the terms of the policy practically, provides guidance on necessary preventative measures, and assists them in filing claims. Experienced brokers ensure that IP policies are not a trap but a genuine protection tool for professionals and service-based companies.
Recommendations: Don’t just read the policy summary, but understand the details of the clauses. Consult with an experienced broker like L&G Insurance Broker to ensure your business is fully protected from the risk of increasingly complex lawsuits.
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