Cover your bases: PI for brokers and advisers
PI for brokers and advisers
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.
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.