Insurance + Risk Services

Potential professional indemnity claim? Four steps to follow if your business receives a letter of demand.

If a third party believes you or your engineering firm are responsible for loss or damage through an alleged breach in your professional duty, and they decide to seek compensation, you will likely receive a letter of demand.        

No matter how far-fetched a claim may appear, whether you believe it happened or not, it is not something to ignore. Renee Cassidy, EngInsure Claims Manager, explains…  

What is a letter of demand (lod)? 

“Also known as a solicitor letter, a letter of demand is a formal notice demanding that the person to whom the letter is addressed perform an alleged legal obligation such as rectifying some identified problem, paying a sum of money or acting on a contractual commitment.

Most demand letters will include a deadline for action, and are often used to prompt payment, avoiding expensive litigation.

A demand letter often contains a “threat” that if not adhered to, the next communication between the parties will be through a court of law in the form of formal legal action.”

(Source: Legal Dictionary).

In essence, a LOD is a demand of payment for losses arising from an allegation involving the person or entity to whom the letter is addressed.   

does it always come as a letter? 

Not always. A LOD can come in many forms — e.g. an email, a phone call, a conversation in person, etc.

WHY might your engineering firm receive a lod? 

Your engineering firm may receive a LOD if:

  • another party alleges your business is responsible for loss or damage as a result of a breach in professional duty, arising from an act, error or omission.
  • compensation is sought.

Society is becoming increasingly litigious, and the number of Professional Indemnity (PI) Insurance claims for losses as a result of an alleged breach in professional duty have grown significantly. Even if an alleged claim appears ridiculous or unfounded at first glance, a LOD is something that all engineers should take seriously.

If you fail to address the issue early, the case could end up in court, where legal expenses can very quickly escalate into tens of thousands of dollars — even if you are not at fault.


PI Insurance is designed to protect you and your engineering firm against claims alleging negligence or a breach in professional duty arising from an act, error or omission in the performance of professional services.


To help ensure your PI insurance policy responds effectively if your engineering firm receives a LOD, we recommend following these four key steps: 

1. Don’t ignore it. 

Under no circumstances should you ignore a LOD. Disregarding even the most preposterous LOD could see your legal situation quickly escalate.

Over time, we have seen some interesting claims, and, yes, even the ones that are seemingly innocuous at first glance, have been awarded with damages.

An example:

Damages sought for sunken building foundations

The owners of a four-year-old car park building noticed cracking of concrete walls, floors and parts of concrete pillars crumbling off. A building surveyor deemed the building unsafe, and the car park could no longer be used.

The owners launched further investigation and found the foundations of the carpark were incorrectly designed for the soil type. As a result, the owners sent a LOD to the engineering firm who designed the foundations. The LOD sought $500,000 in damages for loss of profits as a result of the carpark being unsafe for use, as well as reparations for the cost to rectify the foundations and repair resultant damage.

The engineering firm felt it was not to blame, believing the company who performed the foundation works was responsible. As such, the engineering firm did not respond to the LOD.

Unfortunately, as the LOD was not addressed or reported to the PI insurer in the first instance, the case ended up going to court. Even though the engineering firm insisted its innocence in the matter, the courts found it liable based on its design and recommendations for the foundations.

The car park owners were subsequently awarded $500,000 in damages, which the engineering firm was required to pay — PLUS the associated legal expenses incurred by both parties.     


Often, we find that people who receive a LOD sit tight hoping the claim will go away, but, generally, ignoring a LOD only acts to intensify the problem.

If the issue at hand is not dealt with, your engineering firm is likely to be issued with formal legal action, where the case may end up in court. As demonstrated in the example above, this can make the initial issue far more complicated and expensive.

If a case goes to court, there are a number of preventable consequences:

  • Legal costs: a court case will inevitably incur legal expenses and, should the judge rule against your firm’s case, you may also be required to pay the legal expenses of the third party.
  • Excessive damages awarded: damages awarded against your engineering firm in court could be far greater than if the case was settled out of court.
  • Mental angst: involvement in a court case can cause anxiety for business owners.
  • Reputational damage: court cases can sometimes bring unwanted publicity, potentially causing reputational damage to your brand.
  • Limited Insurance coverage: your PI insurer may not cover the damages and legal expenses in full, particularly if there is a delay in notifying the matter to the insurer. In the insurer’s eyes, the huge costs associated with a case being heard in court could have been significantly reduced if a LOD was dealt with when initially received. A suitable settlement for the demand could have been negotiated earlier, circumventing the need to go to court.

2. Notify the appropriate parties immediately.

PI insurance is a ‘claims made’ insurance policy, and, as such, we always recommend you inform your PI insurer and insurance broker as soon as you receive a LOD.

A ‘claims made’ policy is designed to respond at the time the insured becomes aware of a claim or potential claim. You must have PI Insurance in place on the date you become aware of a claim against you, and the insurance policy coverage is only triggered when you notify the insurer.

It is important to be prompt in notifying the PI insurer ‘on risk’ at the time you receive a LOD. Late claim or potential claim notification can have serious coverage consequences:

a) It can prejudice how the insurer treats a claim

Delayed notification may result in increased costs for the insurer to resolve the claim. As these could have been avoided through earlier notification, the insurer may reduce the settlement amount paid.

b) The insured can be without PI insurance cover

If an engineer fails to notify the insurer upon receipt of a LOD, and then changes PI insurers, the engineer won’t have PI Insurance cover to protect them. It is a PI policy condition that a claim be lodged in the same policy period that the insured is made aware of the claim.

Other benefits of early notification

a) The insurer will take the situation off your hands

Once your engineering business notifies your PI insurer or insurance broker, the insurer will typically take care of the whole issue from the start on your behalf. This removes the need for your direct involvement in the dispute.

The insurer will:

  • Review the LOD and advise on next steps to take.
  • If required, engage legal representation to protect your interests, and liaise with the other party and their legal team who are seeking damages.

b) You will have expert advice from the start 

Your insurer will know the best way to settle the claim — i.e. whether it will be more beneficial to settle a claim out of court or not. They will be aware of win/loss trends in court for similar cases, and are in a position to make an informed decision on how to achieve the best and least costly outcome for the claim.

c) Settlement out of court 

The PI insurer will likely seek to settle the claim as soon as possible to avoid formal court proceedings.

Early LOD notification to your PI insurer can also give the insurer the opportunity to look at alternative ways to resolve the LOD, or share the cost of the damages with another party.

d) Legal expenses covered by insurance 

PI Insurance can cover your firm’s legal expenses associated with the claim for damages up to the limit defined in the policy.

TIP:  Don’t be discouraged from reporting a potential claim to your insurance broker or PI insurer — it is to your benefit to report early, even if the claim doesn’t progress.  

3. Do not respond to the letter personally, and do not admit liability.

  • Instead of responding to the LOD, you need to inform your PI insurer or broker. The insurer will determine whether there is any professional breach attached to the claim on your behalf. There in fact may be no legitimate claim, in which case they will work to have the matter dismissed. The insurer will respond to the LOD appropriately on your behalf.
  • You should never admit liability (fault) for the allegations associated with the LOD. This could leave you open to legal action for damages and prejudice the insurer’s position. It could be almost impossible to argue your case if guilt has already been admitted.

4. Do not pay the demand.

If your business receives a LOD, refer it to the insurer who will take control on your behalf. Paying the demand could be interpreted as an admission of guilt, leaving you vulnerable to further legal action.


To secure Professional Indemnity Insurance with the specialist guidance of an insurance adviser, and the support of a dedicated claims consultant when you need it, contact the EngInsure Insurance & Risk Services team on 1300 854 251 or visit us at


For further advice regarding letters of demand and professional indemnity insurance, contact one of EngInsure’s professional indemnity specialists on 1300 854 251 or

This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.