Cover your bases: PI for bro­kers and ad­vis­ers

PI for bro­kers and ad­vis­ers

RISKSA Magazine - - CONTENTS - Sarah Bas­sett

With reg­u­la­tory re­form com­ing in from ev­ery cor­ner, it’s not just your clients who are fac­ing in­creased risk. With claims against bro­kers and in­ter­me­di­aries on the rise, RISKSA takes a look at pro­fes­sional in­dem­nity cover for bro­kers and ad­vis­ers and how else to mit­i­gate your risk.

Across the board, un­der­writ­ers can­vassed by RISKSA, re­ported that cases and claims against bro­kers and ad­vis­ers are on the in­crease. “This is as a di­rect con­se­quence of more strin­gent reg­u­la­tions in the in­sur­ance in­ter­me­di­ary sec­tor; new leg­is­la­tion ( such as the Con­sumer Pro­tec­tion Act, the new Com­pa­nies Act and bin­der reg­u­la­tions); as well as fee reg­u­la­tions and the grow­ing fre­quency with which mat­ters are brought be­fore the ombud," ex­plains Nicky Stokes, man­ager of pro­fes­sional in­dem­nity and med­i­cal mal­prac­tice at Hol­lard Spe­cial­ist Li­a­bil­i­ties.

“What’s more, ombud find­ings against bro­kers are be­com­ing a lot more fre­quent, and we are see­ing in­creased ac­tiv­ity in no­ti­fi­ca­tion of PI claims against bro­kers. Not only the num­ber of claims but the sever­ity in quan­tum as well,” she con­tin­ues.

“The in­crease in claims is di­rectly at­trib­ut­able to leg­isla­tive changes that have cre­ated new li­a­bil­i­ties and seen South Africans be­come far more ac­cus­tomed to lit­i­ga­tion,” agrees Ana Mullins, direc­tor for fi­nan­cial and pro­fes­sional lines at Ca­mar­gue Un­der­writ­ing Man­agers.

“The Con­sumer Pro­tec­tion Act ( CPA) is a case in point and pro­vides a wider scope for li­a­bil­ity. Even though this par­tic­u­lar piece of leg­is­la­tion may not di­rectly re­late to in­sur­ance bro­ker­ing ser­vices, South Africans know that they have a right to ac­cess ac­cu­rate and pro­fes­sional ad­vice, and will seek to ob­tain re­im­burse­ment in the event of a loss.”

Im­prove­ments in global com­mu­ni­ca­tion through so­cial me­dia plat­forms will con­tinue to in­crease the pub­lic’s aware­ness of their rights and drive the vol­ume of lit­i­ga­tion, Mullins sug­gests, along with the in­creased drive from lawyers seek­ing al­ter­na­tive sources of in­come.

Reg­u­la­tion and risk

“Be­sides the leg­is­la­tion that re­lates specif­i­cally to the bro­ker, the bro­ker should be watch­ing for leg­is­la­tion changes or amend­ments re­lat­ing to their clients,” warns Stokes. “For ex­am­ple, the Pro­tec­tion of Per­sonal In­for­ma­tion Act ( POPI) which has just come in: this means bro­kers who have clients that hold cus­tomer in­for­ma­tion need to be ad­vis­ing their clients of the new risks and com­pli­ance is­sues in­volved.

Also, that if they fail to com­ply with the re­quire­ments of this new act, they will be held ac­count­able. All bro­kers, there­fore, need to be aware of the new act it­self and new in­sur­ance

prod­ucts that ad­dress these new is­sues so that they can keep their clients pro­tected and wellinformed. If a bro­ker isn’t on top of his game in ad­vis­ing his af­fected client of risks – and how to man­age them – he/ she could be held re­spon­si­ble,” she ex­plains.

“Given the wave of re­cent and on­go­ing reg­u­la­tory change, it is crit­i­cal that ad­vis­ers stay up to date and un­der­stand how the changes im­pact both their own pro­fes­sional li­a­bil­ity in ad­di­tion to the chang­ing na­ture of their client’s li­a­bil­ity and are ad­vis­ing them ac­cord­ingly,” con­firms un­der­writer at pro­fes­sional in­dem­nity spe­cial­ists, Lep­pard Un­der­writ­ing, Stu­art Sin­clair.

Ac­cord­ing to Stokes, the chal­lenge of stay­ing in­formed is not to be un­der­es­ti­mated. “In­sur­ance in­ter­me­di­aries and fi­nan­cial ad­vis­ers face the huge chal­lenge of keep­ing fully aware of all prod­ucts avail­able in the mar­ket, as well as their rel­e­vance and ap­pro­pri­ate­ness for their clients.” Bro­kers have to keep cur­rent to en­sure that they cover all po­ten­tial gaps when do­ing their clients’ risk and needs analy­ses. And, when nec­es­sary, ex­plain to those in charge of bud­gets the im­por­tance of hav­ing cover. “For in­stance, for­get­ting to ad­dress cover for di­rec­tors and of­fi­cers, or em­ploy­ment prac­tice li­a­bil­ity breaches, could leave the in­sur­ance bro­ker ex­posed should the client ex­pe­ri­ence a claim in these lines,” she em­pha­sises.

Risk trends

Key risks for bro­kers and ad­vis­ers still lie pre­dom­i­nantly in the area of the ad­vice they have given and in­struc­tions they have re­ceived, Stokes ex­plains.

Fre­quent is­sues in­clude: a bro­ker for­get­ting to add in­sured items to poli­cies or for­get­ting to ad­vise clients of spe­cial pro­vi­sos in their poli­cies. “A com­mon one is when a bro­ker ne­glects to in­form the client of a telem­at­ics de­vice re­quire­ment on mo­tor pol­icy, for in­stance, or where a client phones in to add an as­set to a pol­icy, and per­haps due to the na­ture of the day, the ad­di­tion never gets made,” says Sin­clair.

“The re­sult of these types of over­sights is that the claim is re­jected by the in­sur­ance com­pany, and the third party au­to­mat­i­cally holds the bro­ker re­spon­si­ble,” says Stokes.

Even more con­cern­ing, how­ever, say un­der­writ­ers, is the lack of pa­per trails in a lot of cases. “When a bro­ker ver­bally in­forms their clients of cer­tain things with­out record­ing it or do­ing a full needs anal­y­sis, prob­lems re­sult,” says Stokes. “A dis­agree­ment be­comes a, ‘ he said, she said’ ar­gu­ment be­cause im­por­tant ex­changes weren’t con­firmed in writ­ing. Another trend is ap­pear­ing with bro­kers who hold bind­ing au­thor­i­ties for in­sur­ers but then breach their man­dates. If an in­surer re­jects the claim the bro­ker’s PI pol­icy is trig­gered.

Sin­clair con­firms that this is a fre­quent con­cern, em­pha­sis­ing that ac­cu­rate record keep­ing is a Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices Act ( FAIS) re­quire­ment which the ombud will ex­pect to be able to re­view in any case. “In many cases, the bro­ker’s de­fence is that a client may be un­der­in­sured, for ex­am­ple be­cause the client was un­will­ing to pay for the full cover re­quired. With­out a full record of this, this is im­pos­si­ble to prove.”

How much is enough?

PI in­sur­ance is there to pro­tect the pro­fes­sional’s prac­tice against the large claim that could spell fi­nan­cial dis­as­ter. It pro­vides cover against both the cost of rem­e­dy­ing phys­i­cal dam­age and the con­se­quen­tial losses that can arise, notes Mullins. So, how much is enough?

While larger bro­ker­ages do of­ten take large lim­its on their PI poli­cies, un­der­writ­ers sug­gest that many smaller bro­ker­ages and in­de­pen­dents stick to the Fi­nan­cial Ser­vices Board’s ( FSB) min­i­mum cover re­quire­ments as out­lined in FAIS ( be­tween R1 mil­lion and R5 mil­lion de­pend­ing on the bro­ker’s li­cence cat­e­gory), which may leave them with con­sid­er­able ex­po­sure.

“R1 mil­lion doesn’t go very far these days, par­tic­u­larly when you con­sider that the in­clude needs to cover le­gal costs,” Sin­clair points out.

“We con­sider the cur­rent min­i­mum leg­is­lated limit of R1 mil­lion, for Cat­e­gory I and IV reg­is­tered FSPs, to be in­ad­e­quate. This opinion is in­formed by the fact that this limit has, for a num­ber of years, not catered for in­fla­tion, in­creased awards be­ing of­fered by our courts, or the in­creased cost of a suit­able de­fence,” notes Mullins.

“When you have com­mer­cial clients own­ing fac­to­ries or fleets, or do­ing busi­ness across bor­ders, the min­i­mum cover is in­ad­e­quate,” Stokes con­firms. “In many cases the limit is eroded by le­gal costs and there is lit­tle or noth­ing left for the dam­ages pay­ment. This could eas­ily put a small bro­ker­age out of busi­ness, and we try to en­sure that our net­work of bro­kers has ad­e­quate PI cover.”

But cal­cu­lat­ing how much cover is re­quired is not so straight for­ward. “There is no sci­en­tific for­mula to cal­cu­late the re­quired limit for PI. This is why a bro­ker should be calling on an ex­pe­ri­enced ob­jec­tive risk ad­viser to as­sist with the process. Many bro­kers think that they can bro­ker their own PI, but this is a huge mis­take as there is no ob­jec­tiv­ity in­volved,” Stokes warns. “I think this is a time for any bro­ker, no mat­ter how ex­pe­ri­enced, to in­volve the ser­vices of a to­tally ob­jec­tive and ex­pe­ri­enced risk as­ses­sor. You can’t al­low per­sonal bias to in­flu­ence your PI cover in the times we find our­selves to­day.”

“A pro­fes­sional as­ses­sor will help you to avoid re­ly­ing on gues­ti­mates or his­tor­i­cal as­sump­tions like: buy as much as you can af­ford or cal­cu­late twice your fee in­come. An ob­jec­tive pro­fes­sional would help you to ex­am­ine rel­e­vant de­tails such as the na­ture of your port­fo­lios; cat­e­gories of your clients; and/ or the type and size of the in­vest­ments you are ad­vis­ing on.

They could help you ac­cu­rately cal­cu­late ‘ worst case sce­nar­ios’. Only then would you have the ac­cu­rate foun­da­tion for cal­cu­lat­ing your in­di­vid­u­al­is­tic risk ex­po­sure and the level of cover that would keep your busi­ness pro­tected at the level that is ap­pro­pri­ate for the na­ture of your busi­ness,” Stokes ex­plains.

“Our ad­vice is: try and buy as much cover as you can af­ford and take a higher ex­cess to re­duce the pre­mium,” says Sin­clair. “It is a catas­tro­phe cover. You may never use it, but when you do use it, it’s go­ing to save your busi­ness. So, take a higher ex­cess, but take a limit that will pre­vent you from be­ing shut down,” he ad­vises.

“If your busi­ness is pre­dom­i­nantly per­sonal lines and your big­gest in­sured as­set was R10 mil­lion, then tech­ni­cally that is the amount of cover you need,” he con­tin­ues. “But the prob­lem comes in when you have a busi­ness in­ter­rup­tion pol­icy of R30 mil­lion or R40 mil­lion; it’s not eco­nom­i­cal to buy that kind of limit, so that is why we ad­vise as much as you can af­ford ap­proach. PI in­sur­ance pro­vides peace of mind, and, there­fore, the high­est limit that is af­ford­able should al­ways be rec­om­mended,” Mullins agrees. “The pro­fes­sional in con­junc­tion with his/ her bro­ker, must there­fore con­stantly as­sess the na­ture of the work un­der­taken, both in re­spect of value and risk, and then de­ter­mine whether his/ her prac­tice is ad­e­quately in­sured.”

“When se­lect­ing an ap­pro­pri­ate level of in­sur­ance there are a num­ber of fac­tors to con­sider. The size and na­ture of your port­fo­lio, the ba­sis of cover on which you are pur­chas­ing your in­dem­nity in­sur­ance and any con­trac­tual re­quire­ments, among oth­ers. If a lim­i­ta­tion of li­a­bil­ity ex­ists un­der a terms of busi­ness agree­ment, that will also pro­vide a bench­mark of where pol­icy lim­its should be set,” adds Jonathan Healy, Di­vi­sional Ex­ec­u­tive of FINPRO at Marsh Africa.

Check your cover

As a con­se­quence of in­creased claims, a fur­ther con­sid­er­a­tion is that cover is not as read­ily avail­able as it once was. “There have been many neg­a­tive changes which have im­pacted the ex­tent of the cov­er­age of­fered, as well as the num­ber of mar­kets able to insure this type of busi­ness,” says Mullins.

“In the Lloyd’s mar­ket, for ex­am­ple, very few in­sur­ers syn­di­cates of­fer cover to in­de­pen­dent fi­nan­cial ad­vis­ers ( IFA), and if they do, terms are gen­er­ally pu­ni­tive,” she con­tin­ues. “Ad­di­tional ex­clu­sions have been ap­plied – in some

in­stances a com­bi­na­tion of nar­rower cov­er­age and higher pre­mi­ums. Ex­ten­sions which were his­tor­i­cally of­fered for no ad­di­tional pre­mium are now be­ing charged for, and un­der­writ­ers are more se­lec­tive about the risks that they are will­ing to con­sider.”

Healy ad­vises bro­kers and ad­vis­ers to pay par­tic­u­lar at­ten­tion to the ba­sis of in­sur­ance they have as the var­i­ous prod­ucts on the mar­ket pro­vide cover on ei­ther an ag­gre­gated or per claim ba­sis. This will im­pact how you cal­cu­late the level of cover re­quired. An ag­gre­gated limit of in­dem­nity al­lows for the limit se­lected as a to­tal limit for all claims dur­ing the pe­riod of in­sur­ance. Per claim cover al­lows for the limit of in­dem­nity se­lected to be avail­able for ev­ery claim that may oc­cur dur­ing the pe­riod with no lim­its on the amount of claims.

If you are cov­ered on a per claim ba­sis, you have that R5 mil­lion for ev­ery claim that you in­cur. So, a lot comes down to those tech­ni­cal word­ings in the pol­icy too, and that will af­fect what the lim­its on the pol­icy should be too.”

Man­ag­ing your risk

Of course, as any in­sur­ance pro­fes­sional is well aware, cor­rect in­sur­ance cov­er­age, though cru­cial, is only one part of a full ap­proach to man­ag­ing risk.

First and fore­most, bro­kers and ad­vis­ers need to en­sure that every­one in their busi­ness keeps an au­dit trail of all ad­vice given and in­struc­tions re­ceived. “It is im­per­a­tive to keep a log of ev­ery­thing you say and do and send and re­ceive. The bur­den of proof of neg­li­gence is on the ag­grieved party, how­ever, if you can­not show due process was fol­lowed, a court will find it hard to find in your favour no mat­ter how per­fectly you may have served your client,” Stokes em­pha­sises.

“Mit­i­ga­tion of risk in an in­creas­ingly reg­u­lated en­vi­ron­ment comes down to ed­u­ca­tion around the re­quire­ments of the rel­e­vant reg­u­la­tion and en­sur­ing the im­ple­men­ta­tion,“says Healy. It is easy to get caught up on the bur­den of com­pli­ance as­so­ci­ated with FAIS, but it can also be seen as a very use­ful guide­line for a com­plete and thor­ough ap­proach to risk man­age­ment,” notes Sin­clair, adding that bro­kers should not be afraid to ask ques­tions and seek ad­vice from the un­der­writ­ing man­agers they part­ner with.

“Ca­mar­gue of­fers a num­ber of risk man­age­ment ser­vices to its broking clients, which con­trib­ute to­wards min­imis­ing and mit­i­gat­ing their risks. These in­clude the vet­ting of con­tracts, such as sup­plier agree­ments, stan­dard trad­ing agree­ments, dis­claimers and in­dem­ni­ties, le­gal tele­phonic and face to face ad­vice, as well as pri­vate ar­bi­tra­tion ser­vices for any com­mer­cial dis­putes, or res­o­lu­tion of neg­li­gence based dis­putes,” notes Mullins.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.