This article is part of a series of 50 policy reviews Professional Indemnity Insurance (PI) is designed to provide a comprehensive understanding of each important clause in a PI policy. This time, we’ll discuss the Alteration Clause, which is the clause that regulates the insured’s obligation to notify the insurance company if there is a significant change in their business or professional activities.
This article was written by Mhd. Taufik Arifin ANZIIF (snr.assoc) CIIB, an insurance broker with over 40 years of experience. With the support of L&G Insurance Broker, you will understand how an Alteration Clause can affect the validity of your PI policy, as well as the wise steps to ensure optimal protection despite changes in your business.
Contact L&G Insurance Broker now at 08118507773 for a free consultation before the risks haunt your business.
Definition of Alteration Clause in PI Policy
In Professional Indemnity (PI) policies, one clause that is often overlooked is the Alteration Clause. Simply put, this clause stipulates that any significant changes to the insured’s business, ownership, or professional activities must be notified to the insurance company. Otherwise, the policy may be void or the claim may be denied.
Why is this clause important? A PI policy is designed based on the information provided during the initial application (proposal form). This information serves as the basis for the insurer’s risk assessment and premium determination. If a major change occurs—for example, a change in the business field, the addition of new services, a company merger, or a change in ownership—the risk profile automatically changes. Without formal notification, the insurance company has the right to declare the policy no longer reflects the actual risk.
For example, an accounting firm that initially only handled small and medium-sized enterprises (SMEs) began handling large public companies. The risk of lawsuits increases dramatically. If this change is not communicated, the insurer may reject the claim, citing a violation of the Alteration Clause.
This is where the role of an insurance broker like L&G Insurance Broker becomes crucial. Brokers help clients understand what changes need to be reported, draft formal notices to insurers, and negotiate policy renewals under reasonable terms. With over 40 years of experience, L&G ensures that business changes don’t result in the loss of legal and financial protections provided by IP policies.
Example of Alteration Clause Case in PI Policy
To understand how important Alteration Clause is, let’s look at some real-life examples that often occur in the professional world.
- Law Firm Expanding into New Fields
A law firm in Jakarta initially handled only civil cases. However, after several years, they began accepting clients in the international legal field. This change increased the risk of cross-border lawsuits. Unfortunately, they never reported this change in activity to the insurer. When sued abroad, the claim was rejected due to a violation of the Alteration Clause. Had they reported this from the outset, the policy could have been extended with a reasonable additional premium.
- IT Consultant Expanding into Cyber Security
An IT consultancy initially provided only network installation services but later expanded to include cybersecurity services. The risk of errors in this new field is significantly greater, particularly regarding data breaches. When a client sued because the system failed to prevent a hacker attack, the insurance company denied the claim, claiming the new service wasn’t covered by the policy. If an experienced broker is involved, this expansion can be negotiated to maintain coverage.
- Merger of Accounting Firms
Two accounting firms merged to expand their market share. One firm had an active PI policy but never informed the insurer of the merger. When a major client’s audit went wrong, the claim was denied because the insured on the policy was no longer the same entity as the claimant.
Lessons from the Cases Above
These cases demonstrate that an Alteration Clause is not a formality, but rather a determining factor in the validity of PI policy coverage. Any business changes must be reported immediately.
This is where L&G Insurance Broker comes in. With over 40 years of experience, L&G ensures any significant changes in your business are recorded and negotiated, ensuring your PI policy remains valid, claims are not denied, and legal protection is maintained.
Risks If Alteration Clause Is Ignored
Ignoring the Alteration Clause in a Professional Indemnity (PI) policy can have serious consequences for both the company and the professional. This clause is not merely a formality, but a crucial element in determining the validity of insurance coverage.
First, the most obvious risk is claim rejection. A PI policy only applies to the business conditions described at the time of the initial application. If the business changes—for example, adding new services, expanding its operational area, or merging—without formal notification, the insurance company can declare the claim invalid. This is common in the legal, IT, and financial consulting sectors.
Second, there is the risk of the policy becoming null and void. If the insurer discovers significant changes that were not disclosed, they have the right to unilaterally cancel the policy. As a result, the insured not only loses coverage but may also face difficulties in fulfilling contractual obligations with clients or regulators.
Third, the risk of financial and reputational loss. Lawsuits that should be covered by insurance can become a direct burden for the company. Worse still, failure to meet policy requirements can damage the trust of clients, investors, and business partners.
To avoid these risks, experienced insurance brokers like L&G Insurance Broker act as strategic partners. L&G not only helps clients understand these clauses but also ensures any business changes are reported and negotiated with the insurer. With over 40 years of experience, L&G ensures that IP protection remains in place, even as your business grows or changes significantly.
Conclusion & Recommendations
The Alteration Clause in a Professional Indemnity (PI) policy is often overlooked, yet its impact can be significant. This clause requires the insured to report any significant changes in the business—whether it be service expansion, ownership structure changes, mergers, or changes in client types. The goal is to ensure insurance companies can accurately assess risks and ensure the coverage provided reflects current conditions.
Ignoring this clause can have dire consequences: claims being denied, policies being canceled, and companies being left to face lawsuits worth billions of rupiah. Beyond financial losses, reputations can also be damaged by failure to fulfill policy obligations.
👉Key recommendation: never underestimate the Alteration Clause. Any changes in your business should be reported to your insurance company through your broker immediately. Don’t wait until a claim arises, as by then it’s too late.
This is where L&G Insurance Broker plays a crucial role. With over 40 years of experience, L&G can help clients interpret these clauses, communicate business changes to insurers, and negotiate favorable terms. With the assistance of an experienced broker, you can undertake business expansion or changes with peace of mind, without worrying about losing your IP protection.
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