Broker ependency and reliance on pi insurer
16th August 2010
Broker’s ependency and reliance on pi insurer
Brokers are dependant upon their PI insurance for the financial support and legal advice of insurers and their agents to defend them. Also, it is a requirement of FSA regulation that PI is in force and maintained. It is therefore essential that the policy upon which the broker is dependent and relies will prove fit for its intended purpose when called upon.
There are four principal issues to be aware of:-
- No insurance broker is immune from a complaint or claim.
- Common pitfalls of a typical policy – Gaps in cover and hidden conditions.
- How Insurers assess your risk- obligations of materiality and disclosure
- Claims notification obligations. These are frequently misunderstood and lead to disputes with insurers at a time when the firm can least afford it.
Being left without indemnity is a serious matter. It can happen and does happen that brokers fail to take the care for themselves that they would take for their clients. This can lead to failure to appreciate the gaps in cover they have bought and the strict claims notification conditions that are an onerous feature of PI insurance.
No broker is immune from a complaint or claim-
FSA regulations provide no immunity or defence
In any business, however well run, things will go wrong. Insurance brokers will sometimes make mistakes and communications can break down between both the insurer and the insurance intermediary or the insurance intermediary and their client. This will sometimes lead to a claim.
Compliance with FSA regulations provides no immunity from claims of negligence. Neither is it a defence to say that you acted in accordance with the FSA regulations when it comes to matters of duty of care or contractual obligations between broker and client. It is important for every broker to recognise that FSA regulations are not intended as a surrogate form of risk management, nor do they fulfil that role.
Brokers will readily understand that policyholders’ expectations of insurance often exceed what is reasonable, resulting in complaints or, worse, claims, against the insurance broker. Complaints and claims are a fact of business life but if there is an awareness of how they come about and what NOT to do when they occur the broker will find themselves in much better shape to put up a defence.
Cost irrespective of liability
It is of no consequence whether the broker is eventually found to be liable or not to the extent that the broker will nevertheless be required to defend the allegation and this is always a costly, time consuming and stressful experience.
Once an allegation or claim has been made there is no option for the insurance intermediary but to enter a defence. Defence costs,even for misconceived or unmeritoriousclaims can be far beyond the financial reach of most small businesses.
It is a common misconception that all costs are covered by the PI insurance. They are not. The cost of the Insured’s time in compiling records, attending meetings and preparing statements combined with the resulting loss of business opportunity is not covered by insurance. It is often overlooked until revenue or cash flow difficulties come to light.
Failure of policy to meet expectations
There are many insurers competing for your business and each offer terms and conditions expressed in their own way. These do not each offer precisely the same cover, although at first sight the differences may appear to be merely cosmetic. Unless care is taken to understand what is bein bought the restrictions and exclusions will only become apparent for the first time when underwriters dispute liability.
This guide will help you to make that choice and demonstrate the perils of buying on price alone.
What is required of your PI Policy?
The most important feature is the defence it provides against the allegation or claim against you. If this fails at the first fence it has serious consequences for the eventual negotiation and settlement of any claim.
The insurers should :-
- Accept notification of a genuine “circumstance” without demur.
- Provide competent and timely advice and support from their solicitors.
- Wherever possible, use dispute resolution/mediation and so avoid litigation.
- Keep you informed of progress at all times.
- Have due regard to your reputation when settling a claim
Does your policy meet your needs?
The first and prime requirement of a PI policy is to provide the legal expertise of insurer’s solicitors and the insurer’s financial support in defending the allegation or claim.
CAUTION In a recent case a BIBA member firm had misunderstood their policy coverage. They had not reviewed their cover against their activities and needs and had failed to recognise the obligations imposed upon them by the policy wording. This exposed the firm to several million pounds of uninsured loss.
Cover – words, phrases, expressions and definitions
Recent research has discovered a variety of different policies available to brokers containing widely differing terms and conditions. At first glance one policy wording looks very similar to another, but words, phrases, expressions and definitions can have materially different meanings as between one insurer’s policy and another. The devil, as always, is in the detail.
Frequent changes introduced
Policy wordings are regularly changed and updated. The changes are influenced by market practice and claims experience. It is important to appreciate what is a sound PI policy for your purposes and what is not.
Selection by Price
There is a significant risk that the broker selecting cover by price alone will find the policy deficient for their needs. Brokers routinely tell their clients that there are risks in buying the cheapest insurance. So too with their own.
Your firm’s reputation can be damaged if the claim is not handled sensitively. Insurers will take over the conduct of the claim and may want to settle a claim for ‘commercial’ reasons which may not suit the Insured. This possibility should be anticipated and taken into account when deciding upon choice of insurer. Most brokers know that bad news spreads fast in their communit and so there is a considerable value on professional, discrete claims handling.
BIBA members experiencing difficulties of this kind can now obtain expert advice from BIBA’s special advisers. Full details are available from BIBA website at www.biba.org.uk
Value for Money?
The value of a PI insurance is directly proportional to the cover, assistance and reassurance given by the insurers when you most need help. This defines its fitness for purpose.
Usually, value for money is only calculable when the Insured needs help but with the assistance of this Guide it is possible to assess the true value of the policy at the time of purchase.
Key tests of fitness for purpose include:
At time of purchase;
- A policy that properly covers the activities of the Insured.
- Clarity of the definitions, exclusions and conditions.
- Clear and practical notification conditions
At the time of notification of circumstance or claim:
- Acceptance of, and a positive response to, first notification.
- Full support of the insurer and their lawyers in defending the allegation or claim.
- Dealing with the claim sensibly and using Mediation or other similar forms of alternative dispute resolution to avoid litigation if possible.
Top Tip – Always compare the cover offered by two or more policies currently available from the market.
Make enquiries of the BIBA Accredited Brokers about the insurer’s reputation in the market for fairness, support and paying claims.