What are costs inclusive and costs in addition?

We'll get to the ins and outs of costs inclusive and costs in addition in a sec. But first, some context.

If you offer a service or give advice, we, and every other business insurance broker will tell you that you need professional indemnity insurance. Just in case someone sues you for negligence.

But, we'll also tell you that proper, unequivocal professional negligence is actually pretty rare. It's far more common to be accused of making a mistake when you haven't. (Sneaky clients can try this to avoid paying your invoice.)

Either way, you're faced with having to defend yourself. Your reputation is a fragile and valuable thing and you want to protect it.

Luckily, your professional indemnity (PI) insurance covers wing-and-a-prayer claims as well as bang-to-rights ones. All it takes is a quick call to your broker to get the ball rolling.

It's at this point you might hear 'costs' mentioned.

What sort of costs?

The costs we're talking about here are legal costs.

Assuming you want to refute the claim, your insurer may want to appoint legal specialists or expert witnesses from outside their own team.

The good thing is that professional indemnity covers these costs – regardless of whether you're in the wrong or not. You're not faced with a big solicitor's bill; your insurer is.

Even so, how those bills are paid affects you and your policy:

Costs inclusive

Costs inclusive policies, as the name suggests, include these legal costs in the overall level of cover.

If your policy limit is £1m, and a claim against you costs £50,000 to investigate/defend, there's £950,000 left to compensate your client or fix what's wrong.

Costs in addition

Costs in addition (also called excluding costs) policies separate the legal costs from the rectification costs. They're paid 'in addition' to, not out of, the overall level of cover.

So using the same example, those £50,000 legal costs don't erode the overall level of cover. There's still £1m left to pay compensation or fix-up costs if needed.

Fairly obviously, costs in addition policies are a safer bet. Solicitors aren't cheap and you'd be surprised how quickly the bills mount up. Just be aware that this type of policy is a bit more expensive to buy in the first place.

Excess information

Perhaps more importantly, the excess (the amount you pay towards a claim) can be costs inclusive or costs in addition too.

A costs inclusive excess is paid by you whenever your insurer investigates/defends a claim against you, regardless of its outcome.

A costs in addition excess is only paid when you're at fault and your insurer has to compensate your client. Unlike a costs inclusive excess, a costs in addition excess means a successfully defended claim shouldn't cost you anything.

Again, in addition excesses are a better, if more expensive, option.

Not all insurers offer them though. It's definitely worth checking your policy schedule (or quote details) to make sure you have what you need.

If you have any more questions about costs inclusive and costs in addition, you can give us a ring on 0345 222 5391.

Image used under license from Shutterstock.