Professional Indemnity: A Circumstances Notice, a Retroactive Date and Two Claims
Suhani & Rao, a 14-partner chartered accountancy firm in Bengaluru, held a professional indemnity policy for 1 April 2023 to 31 March 2024. It is written on a claims-made-and-reported basis with a limit of Rs 3 crore for any one claim and in the aggregate, defence costs inside the limit, a retroactive date of 1 April 2018 and a deductible of Rs 5 lakh each and every claim. On 22 February 2024 the managing partner emailed the broker: 'The Income Tax Department has issued a notice to our client XYZ Ltd for AY 2018-19; our audit for that year may be questioned.' The broker forwarded it to the insurer on 26 February 2024 without labelling it a claim; the insurer filed it and said nothing. The assessment order against XYZ Ltd was passed on 30 April 2024 and XYZ sued the firm for Rs 4.2 crore on 20 May 2024. The insurer declined cover on 10 June 2024, citing late notification and the retroactive date. Defence costs to date are Rs 22 lakh. A second, unrelated claim of Rs 60 lakh from another client was notified in June 2024. The firm's audit report for FY 2017-18 was signed on 12 August 2018.
1. Was the 22 February email a valid notification, and does the retroactive date bar the claim?
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Two separate tests must be passed.
1. Notification. A circumstances notice must be specific enough for the insurer to identify the potential claimant, the transaction and the nature of the alleged error - not necessarily to quantify it. Here the email names the client, the assessment year and the audit year, which is at the margins but workable. The insurer's failure to respond, however, is not neutral: a reservation-of-rights letter was required. Silence plus continued premium acceptance can support waiver or estoppel arguments, and the insurer will also have to show prejudice from the delay. Obtain the full broker/insurer correspondence, the acknowledgement, and the date the notice was actually logged.
2. Retroactive date. The operative question is not the assessment year but when the negligent act, error or omission was committed. The audit report for FY 2017-18 was signed on 12 August 2018, after the 1 April 2018 retroactive date, so the audit claim is not barred. But the plaint may rely partly on tax-planning advice given in 2017, which falls outside cover. Read the plaint closely: if the negligent act pleaded is the 2018 audit, cover attaches; if it is the 2017 advisory work, that element must be apportioned out.
Action: issue a reservation of rights citing both points, preserve the late-notice defence while investigating prejudice, and obtain panel counsel's opinion on the retroactive date before any indemnity decision. Communicate the position to the insured within the regulatory timeline.
2. How do the two claims interact with the any-one-claim limit and the aggregate limit, given that defence costs sit inside the limit?
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Which policy year? Each claim attaches to the policy in force when it is made and reported, unless the wording deems a claim arising from circumstances notified in an earlier period to be made in that earlier period - the first claim attaches to 2023-24 if the February notice is upheld. The second claim, first notified in June 2024, attaches to 2024-25 unless the two are 'related'. Test relatedness: same client, same transaction, same originating cause or a series of connected acts? Here they are unrelated, so they are two separate claims in two policy years - the aggregate does not combine them.
Limits. Rs 3 crore is both the any-one-claim and the aggregate limit, and defence costs erode it. The first claim of Rs 4.2 crore is capped at Rs 3 crore; the Rs 22 lakh of defence costs already reduces the available limit to Rs 2.78 crore for indemnity plus further defence. If both claims were found to fall in the same period, the first would exhaust the aggregate and the second would recover nothing.
Deductible. Rs 5 lakh each and every claim - confirm whether it applies before or after defence costs, and whether it is per claim or per policy period.
Practical point: erosion of the limit by defence costs is the insured's problem, not the insurer's, but the adjuster must tell the insured in writing early, agree a defence budget with panel counsel, and track the limit drawdown on a single schedule so that no payment is made in ignorance of the remaining aggregate.
3. What procedural steps should the adjuster have taken in the first 30 days, and what are the consequences of the insurer's silence from 26 February to 10 June 2024?
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Steps in the first 30 days:
- Acknowledge the 22 February letter in writing, state whether it is accepted as a circumstances notification, and request the missing particulars (potential claimant, transaction, estimated exposure, date of the act).
- Issue a reservation-of-rights letter covering late notification, the retroactive date, quantum and any second claim. Silence must never be allowed to look like acceptance.
- Appoint panel counsel to advise on the retroactive date and on the scope of defence cover; confirm the insured's right to choose counsel under the defence clause and agree hourly rates or a budget.
- Obtain the plaint, the assessment order, the engagement letter, the firm's working papers and file notes, and check the 'prior known circumstances' exclusion - did the firm know of the IT notice before inception on 1 April 2023?
- Open a limit-tracking schedule recording the Rs 3 crore limit, the Rs 22 lakh of defence costs and the deductible.
- Decide and communicate within 30 days of the last necessary document, as required by the IRDAI (Protection of Policyholders' Interests) Regulations, 2017; if more time is needed, say so in writing.
Consequences of silence: a waiver or estoppel argument on the late-notice defence; an Ombudsman or IRDAI grievance for delay; the risk that the insurer is treated as having accepted the circumstances notice; and a weakened prejudice argument, because an insurer that sits on a notice cannot easily say it was harmed by it. The 10 June repudiation letter must therefore deal with both grounds separately and in detail, not merely assert them.