Claims-Made PI Cover, a Letter of Demand and a Retroactive Date Moved at Renewal
Meghdoot Systems Pvt Ltd, an ERP implementation firm, holds a professional indemnity policy running 1 April 2023 to 31 March 2024, limit ₹5 crore, deductible ₹10 lakh, retroactive date 1 April 2020, written on a claims-made basis. On 12 November 2023 its largest client writes a formal letter alleging that a 2021 warehouse-management rollout failed to meet agreed milestones, demanding a meeting 'to resolve the matter' and reserving all rights. The firm's CFO does not notify the insurer, believing the dispute will settle quietly. At renewal on 1 April 2024 the firm switches insurers; the new policy carries a retroactive date of 1 April 2024, and the proposal form asks whether the firm is aware of any circumstance likely to give rise to a claim. The CFO answers 'no'. On 20 August 2024 the client sues for ₹3 crore. The 2024-25 insurer denies liability; the firm turns to the 2023-24 insurer, which also denies, citing late notification.
1. Is the 2023-24 insurer liable? Analyse the claims-made trigger before the notification issue.
Read the worked answer
The notification argument is the second question, not the first. On a claims-made policy the insurer on risk is the one on cover when the claim is first made and notified during the period.
The critical analysis is whether the November letter was itself a claim. In most professional indemnity wordings a claim is a written demand for compensation. This letter alleges a failure to meet milestones, asks for a meeting to resolve the matter and reserves rights. Whether it crosses the line into a demand for compensation is a wording question, and it should be read closely against the policy definition rather than assumed.
If it is a claim, the 2023-24 policy is engaged and the insurer's complaint is late notification - a condition, not a trigger, question. Indian courts have generally been reluctant to allow repudiation for late notice absent prejudice to the insurer, and here there is none: the claim is quantified and the insurer can still investigate the 2021 project.
If it is not a claim, the practical route is the circumstance notification extension, which usually deems a notified circumstance to be a claim made when notified. That protection was available in November and was not used.
2. Assess the answer 'no' on the renewal proposal form.
Read the worked answer
This is the most damaging fact in the file. A professional indemnity proposal asks about circumstances likely to give rise to a claim precisely because the insurer prices the unknown future, not the known past. The CFO knew of a demand from the firm's largest client with rights reserved, made seven weeks before renewal. Answering 'no' is a misrepresentation of a material fact and, on any view, a breach of the duty of disclosure.
The new insurer can avoid the policy. Independently, the retroactive date of 1 April 2024 excludes injury arising from a 2021 project, so even an honest answer would have produced no cover for this loss under the new policy - at best the insurer could have declined to write the risk or written it with an exclusion.
The consequence is uncomfortable but clear: the firm has no cover under 2024-25, and the whole recovery depends on establishing that the November letter was a claim, or a deemed circumstance, within the 2023-24 period.
3. What should the broker and claims manager do now, and what onward exposure exists for the firm?
Read the worked answer
Notify at once, comprehensively. The 2023-24 insurer should now receive the November letter, the present suit, and a chronology explaining that the letter was a demand reserving rights. Notice should be given expressly under both the claim and the circumstance limbs so that neither is waived.
Arguing the 2023-24 file: that the November letter was a claim; alternatively that the insured notified promptly once the matter crystallised into proceedings; and that the insurer suffers no prejudice because the project documents are intact and quantum can be investigated. Push the insurer to state its prejudice with particulars.
The broker's file: the switch of insurer moved the retroactive date and left the firm without prior-acts cover. Brokers handling a renewal transfer must advise on continuity of retroactive date, and the placement file should show the advice. A professional indemnity claim against the broker is now a real possibility.
Quantum control: the firm should keep a separate reserve for the deductible and for defence costs, and should check whether defence costs are inside or outside the limit - on many Indian PI wordings they erode the limit and that changes the economics of defending.