This article is part of a series of 50 policy reviews Professional Indemnity Insurance (PI) that discusses each important clause in detail so professionals understand the protections they have. In this edition, we’ll discuss the Severability Clause, a clause that provides individual protection to each insured in the policy, even if one party is at fault.
This article was written by Mhd. Taufik Arifin ANZIIF (snr.assoc) CIIB, an insurance broker with over 40 years of experience, together with L&G Insurance Broker, to ensure you understand the strategic value of this clause in maintaining the credibility and legal protection of your business.
Definition and Function of Severability Clause in PI Insurance
In a Professional Indemnity (PI) policy, the Severability Clause provides individual protection to each insured. This means that even if one party—for example, a director, partner, or staff member—commits a violation, error, or even makes an inaccurate statement in an insurance proposal, this does not automatically invalidate or reduce the protection rights of the other insured parties under the same policy.
Without this clause, one person’s mistake could harm the entire team or company. For example, if a partner conceals material information when applying for a policy, the insurance company has the right to deny the claim for the entire insured. However, with a Severability Clause, this liability rests solely with the at-fault party, while others remain entitled to protection.
The main functions of this clause are:
- Individual protection – ensuring that each insured is treated fairly and does not bear the blame of others.
- Reducing the risk of collective moral hazard – encouraging transparency and personal accountability.
- Increase client confidence – that the PI policy truly protects the interests of professionals as a whole, not just the institution.
- Helps business continuity – because claims are not automatically rejected due to the actions of one individual.
Therefore, the Severability Clause is a crucial clause in a PI policy that must be understood and considered during every policy negotiation. Experienced insurance brokers like L&G Insurance Broker can help ensure this clause is included in the policy, ensuring optimal customer protection.
Case Example of Application of Severability Clause in PI Policy
To understand the importance of the Severability Clause, let’s look at three real-life examples that frequently occur in business practice and professional services:
- Law Firm
A law firm has five partners. One partner forgets to report that he is facing an ethics lawsuit from a former client. Without a Severability Clause, the entire IP policy could be voided due to perceived misrepresentations in the proposal. However, with this clause, only the partner in question is not covered, while the other four partners remain fully protected if sued by the client.
- Engineering Consulting Company
On a construction project, one of the engineers provided incorrect design data. A claim was filed by the project owner. If the PI policy had a Severability Clause, the error would have been solely attributed to the engineer. The company and other staff remained protected, allowing the claim to be paid without canceling the entire policy.
- Public Accounting Office
A junior auditor failed to report a conflict of interest with a client. When the matter came to light, a PI claim arose. With the Severability Clause, the junior auditor’s misconduct does not automatically void the protections for the senior auditor or the accounting firm itself.
These three examples clearly demonstrate that the Severability Clause protects companies and team members who work in good faith, without having to share the risk of negligent or dishonest actions of individuals. Professional insurance brokers like L&G Insurance Broker will ensure this clause is clearly stated in their clients’ IP policies, thus minimizing the risk of legal exposure.
Benefits of Having a Severability Clause in a PI Policy
In the professional world, a Professional Indemnity (PI) policy is often the last line of defense for a company’s reputation and finances. However, without a Severability Clause, the policy can be fragile, as one small mistake by a team member can invalidate all coverage. This is where the key benefit of this clause lies.
- Collective Protection
The Severability Clause ensures that errors, negligence, or dishonesty committed by one individual do not automatically harm the entire organization. This means that partners, directors, and other staff working in good faith remain protected by the policy.
- Operational Stability
In practice, many consulting firms, law firms, and public accounting firms work in large teams. With this clause, businesses don’t need to worry about being paralyzed by a single individual’s mistake. Policies remain in effect, claims can still be paid, and company operations can continue as normal.
- Maintained Reputation
If a policy is completely voided due to one individual’s misrepresentation, the company’s reputation could be severely damaged in the eyes of clients and regulators. A Severability Clause prevents this by separating the responsibilities of each individual, thus maintaining the organization’s credibility.
- Claim Certainty
In the event of a claim, this clause provides legal certainty that legitimate claims will still be paid according to the provisions, without having to stumble over administrative problems due to errors by other parties within the company.
Due to their complexity, not all PI policies on the market automatically include a Severability Clause. Therefore, experienced insurance brokers like L&G Insurance Broker play a crucial role in negotiating this clause to ensure maximum protection for clients.
The Role of Insurance Brokers
In practice, the Severability Clause is often considered an optional or additional clause by insurance companies. Not all standard PI policies automatically include it, even though this clause can be the deciding factor in whether your claim is accepted or rejected. Many companies end up with policies that appear comprehensive but actually don’t provide maximum protection when a claim arises.
This is where an experienced insurance broker like L&G Insurance Broker plays a crucial role. As an independent consultant, L&G not only distributes policies but also:
- Analyzing client-specific risks – understanding potential professional errors and their impact on the entire team.
- Proper wording – ensuring the Severability Clause is clearly included in the policy without any loopholes for detrimental interpretation.
- Negotiating with insurers – leveraging your network and reputation to pressure insurance companies to provide more comprehensive coverage.
- Claims support – when a claim arises, L&G acts as the client’s advocate in ensuring this clause is properly implemented.
With over 40 years of experience, L&G understands that every profession—whether architect, doctor, lawyer, auditor, or IT consultant—has unique risks. Therefore, the strategy for developing an IP policy must be specific, not generic.
Choosing a broker like L&G Insurance Broker means choosing the certainty that vital clauses like the Severability Clause are truly present, so that protection for you and your team is not just a promise on paper, but is real when risk comes.
Conclusion & Recommendations
Severability Clause is one of the most important clauses in the policy Professional Indemnity (PI) because it provides an additional layer of protection for companies and professionals. This clause ensures that a single individual’s error or dishonest act does not automatically invalidate the entire policy. This means that other teams or partners working with integrity remain protected, claims can still be processed, and the company’s reputation remains intact.
In practice, many standard IP policies in the Indonesian and international markets don’t necessarily include this clause automatically. Yet, for consulting firms, law firms, public accountants, architects, and IT consultants, this clause can be the difference between surviving a crisis and facing bankruptcy.
Therefore, the best recommendation for professionals and service-based companies is to always ensure their IP policies include a Severability Clause. Negotiating this clause is not easy, as it requires technical understanding and extensive experience dealing with insurance companies.
This is where the role of L&G Insurance Broker becomes vital. With over 40 years of experience, L&G is ready to help you find the perfect PI policy for your needs, including ensuring that important clauses like the Severability Clause are clearly stated for maximum protection.
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