The mitigation costs clause is one of the most used features of the professional indemnity policy. In the latest episode of Unsure? Insure! we talk about what the mitigation costs clause is, how it works and share real examples of when it's helped freelancers.
What is the mitigation costs clause? Policy wordings differ depending on who your insurer is. The insurer's definition that we work with is:
“If Your client is dissatisfied with Your Professional Services rendered, refuses to pay for any or all of Your fees and threatens to bring a Claim against You, We will pay You the amount owed to You by Your client if:
- It is possible to settle the dispute with Your Client by You agreeing not to press for the disputed amount; and
- We believe this will avoid a Claim covered under this Cover for a greater amount; and
- We have given Our written approval to settling in this way and for this amount.
If it is not possible to reach an agreement with Your client as above, We will still pay You the amount owed to You if We believe that by making this payment We can avoid a Claim covered under this Cover for a greater amount.”
In plain English, if your client isn’t happy with the work you’ve delivered, refuses to pay your invoice and accompanies that refusal with a threat, the insurer will pay you the money owed to you if they believe it will avoid a claim for a greater amount.
We find this is one of the most used features of the professional indemnity policy. Why? If a situation has reached the stage where a claim is being brought against you, we can assume your client isn't happy with the work you've done and probably isn't paying you.
When I talk about cover under the professional indemnity policy for clients refusing to pay due to dissatisfaction, a lot of people say “My insurance doesn’t cover unpaid invoices!. It might do, but all policy wordings are different so it might not appear under the mitigation costs clause.
It’s important to highlight that the refusal to pay needs to be accompanied by a potential claim against you to trigger the mitigation costs clause. If a client isn't paying for other reasons, there might be some help under the legal expenses product.
Back to the professional indemnity policy, here are situations the mitigation costs clause has been used by our customers.
The job was to design a website. The client had spent a lot of money drumming up buzz for the launch, but the freelance designer missed important milestones due to underestimating how much work was involved.
This lead to the website lacking important functionality at the date of launch. In the client’s words the website was "not fit for purpose". They refused to pay the final invoice and threatened to involve solicitors if the payment was pursued.
As you can see, the refusal to pay in this instance was accompanied with a legal threat which triggered the mitigation costs clause. The insurer covered the unpaid invoice on the basis that the client considered the project at an end and wouldn’t take further action for the money they’d wasted on the PR campaign or the costs incurred for hiring other contractors.
The job was to build a web platform, but the client complained of missing functionality. The functionality wasn't included in the initial scope of work, so the developer agreed to build the feature for an additional fee.
The client refused to pay them for the completed work and threatened to involve solicitors if the developer didn’t co-operate. The client wanted the developer to do extra work for free and threatened to withhold payment if they didn’t oblige.
Because the refusal to pay was accompanied with a legal threat, it triggered the mitigation costs clause. The insurer covered the unpaid invoice on the basis that the client considered the project at an end.
The project stalled due to the client not providing deliverables on time. When the client terminated the project because it was taking too long to complete they blamed the freelancer.
The client’s logic was that they didn't have to pay for the work that had already been completed. When the freelancer highlighted the contract terms, the client threatened to take further action.
The threat of legal action accompanying the refusal to pay triggered the mitigation costs clause, meaning the freelancer wasn't out of pocket. The only expense they had was their insurance policy—which costs £14 a month—and the emotional energy they’d invested in dealing with their client.
By now you should have an understanding of how the mitigation costs clause can help you. We find this clause is hugely beneficial to freelancers when settling most professional indemnity claims.
Usually claims arise due to other factors, such as clients claiming for loss of income due to a delayed project or claiming for compensation because they’ve had to hire other freelancers. It’s fair to say that if a situation has come to that, the client probably isn’t happy with the freelancer and doesn't want to pay them.
This is why the mitigation costs clause can be so helpful. It helps to put the freelancer in the financial position they expected to be in when accepting the job.
To recap, here's how the mitigation costs clause can help freelancers:
- If your client isn’t happy with the work you’ve delivered or the service you’ve provided, refuses to pay your invoice and accompanies that refusal with a threat, the insurer will pay you the money owed to you as per the mitigation costs clause
- Usually claims arise due to other factors, but if the situation has escalated to the point the client is threatening to make a claim, it's likely they’re not going to want to pay the freelancer. The mitigation costs clause is a useful feature because of this
- There is cover for unpaid invoices under the legal expenses product where a solicitor chases overdue invoices on your behalf, but that’s a separate product. The mitigation costs clause will only spring into action if the refusal to pay is accompanied with a potential claim