This article is part of a series of 50 policy reviews of Professional Indemnity Insurance (PI) that details each important clause so that professionals and service companies fully understand their insurance coverage. This time, we’ll discuss the Innocent Insured Clause, a crucial clause that ensures coverage remains in place for parties not involved in fraud, dishonesty, or serious misconduct committed by another individual within the organization.
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 this clause works and why brokers play a crucial role in ensuring it’s included in your policy.
Contact L&G Insurance Broker now at 08118507773 for a free consultation before the risks haunt your business.
Definition & Function of Innocent Insured Clause in PI Policy
In Professional Indemnity (PI) policies, there is a crucial clause known as the Innocent Insured Clause. This clause provides protection to those within the organization who are innocent or unaware of fraud, dishonesty, or serious violations committed by another individual.
Without this clause, an entire entity or individuals within an organization could lose insurance coverage due to the actions of a single individual. For example, if a partner in a law firm manipulates funds, without an innocent insured clause, the insurance company has the right to deny all claims for other uninvolved partners. With this clause, coverage remains for parties acting in good faith.
The main functions of this clause are:
- Ensuring justice, so that the innocent are still protected.
- Maintaining business continuity, because one fraudulent act does not immediately destroy the entire organization.
- Increase internal trust, especially in partnership-based companies such as law firms, consultants, or public auditors.
It’s important to note that the wording of the innocent insured clause can vary from policy to policy. Some policies only cover partners, while others cover all staff and management. This is where an experienced insurance broker like L&G Insurance Broker plays a crucial role. L&G will ensure this clause is clearly stated, with coverage tailored to the client’s needs.
With L&G Insurance Broker, you not only get a standard PI policy, but also a policy that is designed in detail to ensure your business remains protected even if a breach occurs by an irresponsible individual.
Innocent Insured Clause Case Study
Case 1: Accounting Firm in Jakarta
A major accounting firm was sued by a client for alleged financial statement manipulation. It turned out that one of the senior partners intentionally covered up the fraud for personal gain. The client demanded Rp 80 billion in damages, implicating the entire firm. The PI policy initially had the potential to deny the claim, citing the partner’s actions as fraud and dishonesty. However, thanks to the Innocent Insured Clause, the other uninvolved partners remained protected. The insurance company covered a portion of the claim for the business entity, allowing the firm to survive without losing all its assets.
Case 2: Law Firm in Surabaya
A law firm was accused of misappropriating client funds. An investigation revealed that the act was perpetrated by a single junior lawyer without the knowledge of management. The client sued for Rp 25 billion. A PI policy with an Innocent Insured Clause ensured coverage for the firm and the senior lawyer who was not at fault. Ultimately, the insurance company paid the claim in defense of the firm, while the individual at fault faced personal legal consequences.
Case 3: Architectural Consultant in Singapore
An international architectural firm faced a lawsuit for tampering with tender documents. One of its administrative staff was found to have intentionally altered data. Their PI policy clearly stated an Innocent Insured Clause. This protected the company, even if the staff member was subject to criminal sanctions. The policy covered legal costs and damages of up to SGD 5 million, saving the company from a major financial crisis.
Important Lessons
- One cheating act cannot destroy the whole team – this clause preserves fairness.
- Internal documentation must be strong to prove who is guilty and who is not.
- An experienced broker is crucial to ensure the wording of these clauses is in place and fair.
The Role of L&G Insurance Broker
Many standard policies don’t automatically include an Innocent Insured Clause or write it with limited coverage. This is where L&G Insurance Broker comes in. With over 40 years of experience, L&G ensures this clause is negotiated with strong wording, so clients aren’t trapped by the actions of a few individuals that could harm the entire organization.
Conclusion & Recommendations
The Innocent Insured Clause is one of the most important provisions in a Professional Indemnity (PI) policy. This clause ensures that coverage remains valid for parties not involved in the fraudulent, deceptive, or abusive acts committed by colleagues or staff within the same organization. Without this clause, all insured parties could lose their right to coverage even if only one person is at fault.
Various case studies have shown that this clause can save accounting firms, law firms, and consulting companies from catastrophic financial losses. The underlying principle is fairness and collective protection: one individual’s mistake shouldn’t destroy an entire organization.
However, it’s important to note that this clause doesn’t automatically apply to all IP policies. Each insurance company may have different wording, with certain exceptions or limitations. For example, some policies only cover the corporate entity but not individuals other than the insured. Alternatively, coverage may be granted subject to strong documentary evidence that the other party was unaware of the fraudulent act.
This is where the role of an insurance broker like L&G Insurance Broker becomes crucial. With extensive experience handling IP policies across various industries, L&G is able to:
- Negotiating clearer and more comprehensive wording.
- Ensuring this clause truly protects the innocent party.
- Provide education to clients about required documentation and reporting obligations.
Recommendation: Any professional services firm at risk of legal action—whether a law firm, consultant, architect, or accountant—must ensure its IP policy includes an Innocent Insured Clause. With the assistance of an experienced broker, the policy becomes more than just a formality, but a real shield of protection when risks arise.
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