This article is part of a series of 50 policy reviews of Professional Indemnity Insurance (PI) which discusses each important clause in the policy. In this article, we’ll focus on the Fraud & Dishonesty Exclusion, which states that claims arising from fraud, deception, or dishonesty by the insured or their staff will not be covered by the policy.
This article was written by Mhd. Taufik Arifin ANZIIF (Snr. Assoc) CIIB, an insurance broker with over 40 years of experience. With L&G Insurance Broker, you’ll understand how to read these exclusions and strategies to protect your business from the increasingly complex risks of fraud in the modern era.
Contact L&G Insurance Broker now at 08118507773 for a free consultation before the risks haunt your business.
Fraud & Dishonesty Exclusion in PI Policy
One of the key clauses in a Professional Indemnity (PI) policy is the Fraud & Dishonesty Exclusion. This clause states that the insurance company will not provide compensation for claims arising from fraud, dishonesty, or deliberate violations of the law by the insured or their employees.
The main reason for this exclusion is that insurance is only designed to cover the risk of professional negligence, not intentional acts. If a claim is proven to be based on fraud or dishonesty, the policy is automatically void. For example:
- An auditor who deliberately covers up fraud in financial reports.
- Financial consultants who intentionally direct client funds for personal gain.
- Doctors who knowingly create false medical records to avoid lawsuits.
However, many PI policy wordings include additional provisions that protect the company as a whole. This means that if fraud is committed by a single individual without management’s knowledge, the policy’s coverage can still apply to the business entity and other uninvolved staff. This is often referred to as “innocent insured protection.”
This is where understanding the finer details of wording becomes crucial. Many professionals only read the summary, but the fraud and dishonesty exclusion can be a dangerous trap.
The role of an insurance broker like L&G Insurance Broker is vital. With over 40 years of experience, L&G helps clients negotiate fair wording, ensures protection for innocent parties, and provides education on how to mitigate fraud risks to ensure optimal PI policies.
With L&G, you’re not just buying a policy, you’re getting comprehensive coverage that truly protects your business from complex lawsuits.
Fraud & Dishonesty Exclusion Case Study
Case 1: Public Accounting Firm in Jakarta
A public accounting firm faced a Rp 50 billion lawsuit after it was discovered that one of its senior partners had intentionally covered up fraud in the financial statements of a major company. The injured client sued the entire firm. When the claim was filed, the insurance company denied the claim, citing fraud and dishonesty. However, because the policy contained an innocent partner clause, the other uninvolved partners were still protected. The firm wasn’t completely wiped out, but it had to bear the majority of the losses caused by the actions of one individual.
Case 2: Financial Consultant in Surabaya
A financial consultant was accused of making investment mistakes that cost a client Rp 20 billion. Initially, the case was deemed professional negligence, leading to a claim filed with the insurance company. However, an investigation revealed that the consultant had intentionally diverted funds to his personal account. Due to proven dishonesty, the claim was rejected in full. The consultant faces criminal charges and the loss of his license to practice.
Case 3: Law Firm in Singapore
A major law firm was sued by a corporate client for allegedly misusing escrow funds by one of its lawyers. The insurance company denied the claim as fraudulent. However, the insurance broker who represented the firm successfully negotiated that the firm remain covered for reputational damages and legal costs, as the firm’s management was unaware of the individual’s actions. The broker’s presence contributed to a fairer outcome for the claim.
Important Lessons
- Fraud & dishonesty is never borne, except for innocent parties.
- The innocence insured clause is very important so that the company does not collapse just because of the actions of an individual.
- Internal documentation & governance must be strengthened to prove that management is not involved.
- An experienced broker is a shield that can fight for a fairer interpretation of wording.
The Role of L&G Insurance Broker
As a broker with over 40 years of experience, L&G Insurance Broker consistently ensures clients receive policy wording that includes innocent party protection. L&G also provides education on how to set up internal monitoring systems to minimize the risk of fraud. With L&G, you’re not just purchasing a PI policy; you’re also receiving a comprehensive protection strategy to address the realities of modern business.
Conclusion & Recommendations
The Fraud & Dishonesty Exclusion is one of the most critical clauses in a Professional Indemnity (PI) policy. This clause emphasizes that the insurance only covers the risk of professional negligence, not intentional misconduct. Acts such as fraud, embezzlement, or data manipulation are automatically excluded. Therefore, a PI policy is not a shield for individuals with fraudulent intentions, but rather a protection instrument for professionals working in good faith.
However, in practice, a grey area often arises: what if the fraud is committed by a single individual without management’s knowledge? This is where additional wording, such as an innocent insured clause, becomes important, ensuring protection for innocent parties. Without this clause, a firm could collapse due to the actions of a single individual.
Real-life cases in various countries demonstrate the crucial role of an experienced insurance broker. Brokers can help select fairer policy wording, negotiate additional coverage, and assist companies in filing claims to avoid the “double penalty” of being sued by clients and denied insurance simultaneously.
Recommendation:
- Make sure your PI policy contains an innocent insured clause.
- Build an internal control system to minimize the risk of fraud.
- Don’t rely on the policy summary; understand the detailed wording with an L&G Insurance Broker.
With over 40 years of experience, L&G Insurance Broker is ready to be your strategic partner to ensure your PI policy truly provides real protection, including facing the challenges of fraud and dishonesty in the modern business era.
DON’T WASTE YOUR TIME AND SECURE YOUR FINANCIAL AND BUSINESS WITH THE RIGHT INSURANCE.
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