Professional Indemnity Insurance, Covid-19 and the Regulatory Expectation

Covid-19 has seen many brokers finding themselves facing increased Professional Indemnity Insurance terms (ranging from increased premiums, increased excesses and in some instances increased exclusions, including the exclusion of risks emanating from Covid-19).

Faced with limited markets and, in some instances, insurers seeking to apply a blanket exclusion for risks emanating from Covid-19, it is extremely important for brokers (of all revenue size) to make sure that they not only ensure that they protect themselves against the risk of negligence claims but that their cover satisfies the regulatory expectation.

As a reminder an insurance broker’s Professional Indemnity Insurance must encompass:

  1. cover in respect of claims for which the broker may be liable as a result of the conduct of itself, its staff and its Appointed Representatives;
  2. up-to the minimum of (1) €1,250,000 for a single claim; and

(2) €1,850,000 in aggregate, the higher of an amount equivalent to 10% of annual income (this amount being subject to a maximum of £30 million;

  1. appropriate cover in respect of legal defence costs;
  2. continuous cover in respect of claims arising from work carried out from the date on which the broker obtained its regulatory license; and
  3. cover in respect of awards made by the Financial Ombudsman Service (FOS)

A broker’s PII policy, which contains an exclusion for claims associated with Covid-19, may, in our view (considering PII cover must encompass risks associated with the conduct of itself), be reasonably challenged to the extent that the cover would not satisfy regulatory expectations.

Our view is firmly that the overarching expectation is that a broker must hold PII to the required level without exclusion.

This means brokers should make every effort both before and during and, where appropriate, post any renewal cycle to endeavour to source the required PII cover without exclusion.

Evidently, there will be instances in the market whereby a broker cannot obtain the cover without exclusion, and it may be (and this would be unusual), if circumstance dictates, that a broker, is forced to accept PII cover with exclusion. Importantly, in this scenario, the broker will be required to make a notification to the regulator in line with the regulator’s general notification requirement on matters having a serious regulatory impact and as required under Principle 11 (disclose to the regulator any matters which the regulator would reasonably expect notice).

Clearly, a negligence claim emanating from a Covid-19 related circumstance, excluded from the broker’s PII policy would throw into question if such broker were able to satisfy the assessments which make up the regulator’s minimum thresholds.

Exploring the acceptance of a PII Covid-19 exclusion further, it could be reasonably argued that the likelihood is the regulator will look to impose some sort of additional capital requirements to satisfy their expectations and mitigate a broker’s risk exposure.

The regulator’s framework for identifying and assessing the risk of harm touches on this issue, acknowledging that potential harm may occur when brokers are exposed to negligence claims which may not be covered by their PII policy, potentially causing subsequent losses to clients and triggering a disorderly wind-down of the broker.

Therefore, the regulator will probably want to assess matters which could have a significant adverse impact on the broker’s reputation; and/or matters which could affect the broker’s ability to continue to provide adequate services to its clients, which could result in serious detriment.

Of course, a closer assessment of the process the broker completed to try and arrange appropriate cover, including its rationale for why cover with a Covid-19 exclusion will be of paramount importance, including whether its PII policy was accepted unreasonably on other grounds, such as a lower premium.

We accept that brokers face a difficult challenge in obtaining favourable PII terms but encourage brokers to do all they can to ensure they protect themselves. PII cover without exclusion is available. A returned declaration (a Self-Certification forming a broker’s Retail Mediation Activities Return ‘RMAR’) confirming that your PII does not comply with the minimum requirements is also likely to lead to implications.

The specialists with access to PII cover to meet specific requirements for brokers include (but are not limited to): Griffiths & Armour, Lockton Companies and Manchester Underwriting Management. It is recommended that brokers start the process of renewal of their own PII earlier than they would ordinarily to ensure they obtain adequate coverage and, wherever possible, mitigate their level of increased terms including premium payable.

To summarise, our view is firmly that a broker must hold PII to the required level without exclusion and make every effort before, during and post any renewal cycle, to endeavour to source the required PII cover without exclusion.

About the author

Ash was Managing Director at RWA from 2018. He had over 15 years’ experience in the legal and compliance field and ten years in broker sales and leadership roles in national and global insurance firms. Sadly, Ash passed away suddenly in August 2021. 

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