Trigger Points: Why Professional Indemnity Insurance Won’t Work Without the Right Contract Clauses

Professional indemnity (PI) insurance is often misunderstood by clients as a catch-all safety net. But in practice, we in the industry know that these policies are only as responsive as the contract structures they sit behind.

In PI, coverage is not simply triggered by a mistake. It is triggered by a breach of a legally recognisable duty- often contractually expressed. If that contract lacks enforceable indemnity provisions or substitutes legally imprecise language like “responsibility,” you’re likely looking at coverage ambiguity, delayed claims decisions, or outright declinatures. Add to that the additional layer of a professional indemnity policy being a long tail product and the repercussions of unstable contracts not normally surfacing until what could be years later, the cost of a claim or denied claim is very much a hidden danger that could derail businesses.

PI Insurance Requires a Breach of Legal Duty- Not Just a General Obligation

PI policies don’t respond to general notions of fault. They respond to:

• A breach of professional duty,

• A third-party financial loss,

• And a legally recognised act, error, or omission that causes that loss.

Why that matters: A contract must clearly allocate legal liability- not vague responsibility and language.

Clause comparison from client negotiations:

The example below came from real client negotiations where the client requested that all wording in contract for “indemnity” be replaced with “responsibility.”

• Incorrect wording:

“The Consultant shall be responsible for any loss suffered by the Client in connection with the services.”

• Correct wording:

“The Consultant shall indemnify the Client against any loss arising from a breach of the Consultant’s professional duty in performing the services.”

Why this matters for the insurer:

The first clause creates ambiguity. What does “responsible” mean? Is it fault-based or absolute? Courts may interpret this as voluntary assumption of liability- a trigger excluded by many PI wordings. This works  both ways in terms of inefficiency in contract and could lead to costly claim costs or denial for both the client and the service provider.

Policy implication:

If a claim arises and the contract lacks fault-based indemnity or a breach trigger, the insurer may:

• Decline the claim under contractual liability exclusions,

• Argue that liability was assumed beyond common law duty,

• Or reserve rights, delaying indemnity while the matter proceeds.

Underwriters Use Contractual Triggers to Evaluate Coverage and Price Risk

PI underwriting doesn’t happen in isolation. We assess not just services and industry—but how liability is constructed contractually.

Key contractual triggers include:

• Indemnity clauses tied to breach of professional duty,

• Clear limitation of liability,

• Proportionate risk allocation,

• Absence of “absolute” obligations.

When clients sign contracts with vague or overly expansive obligations:

• Risk pools widen unpredictably,

• Insurers may price higher for contract certainty risk,

• Or enforce sub-limits or exclusions for certain engagements.

Common wording from PI exclusions:

“We will not indemnify the Insured for liability assumed under a contract unless that liability would have existed in the absence of such contract.”

The reason this exclusion commonly exists is because PI insurance is designed to cover liability arising from a breach of professional duty or legal obligation—not additional responsibilities the insured may have voluntarily assumed under contract. In other words, the policy responds to liabilities that would exist at law, not those artificially created by contractual terms.

When “responsibility” is used as the trigger in a contract, rather than fault-based indemnity, it introduces ambiguity. This often results in additional time, legal interpretation, or disputes to determine whether the liability would have existed at law- or whether it was solely created by the terms of the contract.

Claims Defensibility Depends on Legal Precision

A well-drafted contract is not just a commercial tool- it’s a defence mechanism.

For a PI insurer, a clearly articulated indemnity clause:

• Establishes causation between breach and loss,

• Defines the scope of duty and limits,

• Provides a clean path for subrogation and recovery.

In contrast:

When a contract uses “responsibility” or “obligation” instead of a breach-based indemnity, it creates legal ambiguity.

Claim scenario example:

A geotechnical consultancy agrees to a services contract with a mining client using this clause:

“The Consultant shall be responsible for all delays and cost overruns related to site analysis.”

Months later, the client alleges delays caused millions in site prep costs and files a claim. The consultant notifies their PI insurer. The insurer reviews the contract and finds no fault-based liability trigger- just an undefined responsibility clause that appears absolute and contractual in nature.

Result:

The insurer reserves rights under the contractual liability exclusion, noting that the clause appears to expand liability beyond what the common law would impose.

This is not a technicality. It could result in:

• The insured funding their own defence,

• Lengthy legal interpretation battles,

• Or an excluded claim, especially under project-specific carve-outs.

Master Services Agreements and Long-Term Risk

In sectors that use MSAs- mining, engineering, infrastructure- poorly drafted indemnity clauses can lock in coverage issues across multiple future engagements. For example, a vague indemnity clause in the master agreement may be referenced in 12 subsequent task orders, the contract trigger issue becomes systemic across all engagements, not just one.

Unless the MSA is updated or clarified, insurers may apply consistent limitations across the insured’s entire book of work.

Conclusion: Contracts and Coverage Must Align to be Effective

For PI policies to perform as intended, the underlying contract must:

• Establish clear legal duty,

• Use fault-based indemnity wording,

• Avoid absolute responsibility clauses unless insurance carve-outs are negotiated.

As underwriters, brokers, and claims professionals, we need to educate clients that risk transfer begins with the pen- not the policy.

Because if the contract fails to create a clear legal trigger, the PI policy simply can’t follow.