Professional Indemnity Insurance – FSA Rule Requirements
The FSA’s requirements for the holding of professional indemnity insurance can be found in Chapter 9.2 of the Prudential sourcebook (PRU), part of the FSA’s Handbook of Rules and Guidance.
The requirements of PRU 9.2 can be categorised as follows:
- The use of a comparable guarantee to disapply the rules;
- The use of insurers;
- Terms to be incorporated;
- Minimum limits of indemnity;
- Policies covering more than one firm; and
- Additional capital.
The rule at PRU 9.2.1 R(3) is disapplied if another authorised firm with net tangible assets of more than £10m provides a comparable guarantee.
If the firm is a member of a group in which there is an authorised entity with net tangible assets of more than £10m, the comparable guarantee must be from that entity.
The rule sat PRU 9.2.7 R requires the intermediary to use an insurer authorised to transact professional indemnity insurance in the EEA, or an insurer of equivalent status in a ‘Zone A country’i.e. any country which is a full member of the OECD, or the Channel Islands, Gibraltar, Bermuda or the Isle of Man.
The rule at PRU 9.2.10 R sets out the required policy terms. These are:
- cover in respect of claims for which the intermediary may be liable as a result of the conduct of itself, its employees and its appointed representatives;
- the minimum levels of indemnity as set out elsewhere in the rules;
- excesses as set out elsewhere in the rules;
- appropriate cover in respect of legal defence costs;
- continuous cover in respect of claims arising from work carried out from the date on which the intermediary was granted part 1V permission; and
- cover in respect of Ombudsman awards made against the firm.
Minimum limits of indemnity
The rules at PRU 9.2.13 and 9.2.14 R require a minimum limit of indemnity of 1 million Euros for a single claim, and the higher of 1.5 million Euros or 10% of the intermediary’s annual income in aggregate.
Where the policy limits are not denominated in Euros, the intermediary must take steps at renewal to ensure the limits are at least equivalent to those required.
The rules at PRU 9.2.16 to 9.2.18 R set out the maximum levels of excess and these vary depending on whether the intermediary holds client money.
An intermediary not holding client money is permitted an excess of no higher than either £2,500 or 1.5% of annual income (whichever is the higher).
An intermediary who holds client money is permitted an excess of no higher than £5,000 or 3% of annual income (whichever is the higher).
Policies covering more than one firm
The rule at PRU 9.2.19 R requires that where a policy covers more than one firm, the limits must be calculated on the combined income and that each named firm must have the benefit of the minimum limit requirements.
The rule at PRU 9.2.20 R and the tables at PRU 9.2.20 R and 9.2.21 R sets out the additional amount of capital a firm must hold if it seeks to have an excess greater than that stipulated in the rules.