Faced with hefty insurance premium hikes, it's tempting to increase the excess you pay or reduce cover. Don't do it – there are other ways over this hurdle
You have probably come across the phrase "… provided that such insurance is available at commercially reasonable rates" in relation to your professional indemnity insurance cover. You may even have wondered what the definition of "commercially reasonable" is and who decides it. Well, the answer may soon be revealed, and you may find that you are more closely involved than you would like.

The last few months have not been good for the insurance industry. The demise of Independent Insurance in the middle of last year caused a reduction in capacity in the insurance market. The devastation of 11 September, followed by the Enron collapse and the subsequent claims against Andersen have meant that the insurers are getting ready for big payouts. This has made them look twice at the risks they are taking on and the rates they are charging. All types of insurance, from buildings to public liability, are going up, and there are horror stories circulating about professional indemnity insurance premium increases. One consultant apparently had a first quotation that was 10 times its existing premium – although it did manage to reduce this significantly, thanks to some deft work by its brokers. I am not suggesting that everyone will be looking at rises of this magnitude, but you would be mad not to start thinking about what you should do.

The most common ways of reducing premiums is to increase the excess – the amount of the claim paid by the insured – or reduce the amount of cover. Neither is particularly palatable. An increased excess means slightly more risk for the consultant. If there is a claim, then it will have to pay more towards it. It's not something that you would choose, but perhaps it's unavoidable if you want to achieve a reasonable premium. Reducing the amount of the cover is certainly not a preferred option to adopt as it means significantly increased risk, both for client and consultant.

So what can you do? The first thing must be to find out what is likely to happen to your premium and to allow for it in your budget. Consultants who have been on a two-year insurance arrangement are seeing the biggest increases because their turnover, which is the starting point for the premium calculation, has gone up quite a bit over that period. In addition, they are seeing the effect of rises in premiums over two years, rather than one. If your brokers or insurers are any good, they should be able to give you a pretty good idea of what premium to expect.

The second thing is to prove to your insurers that you are a good risk. Risk management is the key. Review what you do, make sure you have identified the risks, and create a system to manage and control those risks.

Risk management is the key. Identify the risks, and create a system to manage and control them

Start with your standard terms and conditions. Review them if they exist. Write some if they don't. Make sure you send them to the client when you start work on each commission. This is common sense, but it's surprising how many consultants don't do it. And failure to do so could mean the end of your professional career. The RICS, picking on one particular professional institution, requires surveyors to confirm the terms of their appointment and the basis of their fee to the client (regulation 27.2.4, for those naughty people who don't know about it).

Non-compliance can be a disciplinary offence.

Review what liabilities you are willing to take on, bearing in mind that they do not have to be the same as your professional indemnity cover. Traditionally, consultants' appointments have been set up so the consultant has unlimited liability, backed by professional indemnity insurance of a defined value. This is a bit strange, considering that most consultants don't have much in the way of assets. So think about limiting your liability either to the amount of your professional indemnity insurance or in relation to the fee – say, 10 times the amount you will earn. This may seem extreme, but there are professions around that have done this in their standard appointments for years.

It is also worth looking at including a net contribution clause, so any liability you take on is after the other consultants have borne their own share of any damages.