Managing Professional Indemnity Risk

This article has been provided by Robin Wood, chartered insurance practitioner and expert on insurance broking market practice and standards, and Roger Franklin, Head of insurance Litigation at Edwin Coe Solicitors.

Each week we will provide some key learning points and at the end of each case study give you a question for reflection. You can deal with this personally or perhaps with colleagues in your firm. You might wish to consider the exercise as structured CPD. Our intention is that if you read the article, make notes, reflect on the issues, and answer the question for next week that this should take 30 minutes to an hour.

The objective of the series is to improve the quality of your Professional Indemnity risk management and thereby, reduce the risk of your client having a claim reduced or not paid.

The most important concept for any professional person to understand is the duty of care. If a broker fails to discharge this duty and a client suffers, they might be found to be negligent and liable for any losses or damage which might occur.

To understand how we might manage the risk of breaching the duty, we need to understand a little more about what duty of care actually means. Remember that seeking to avoid negligence claims against your firm is a key aspect of the duty of care. If there is no reason to sue you for negligence, the chances are you have taken a big step in managing your client’s risk as well as your own.

A person or firm is regarded as a member of a profession if advice is given and, typically, there is a charge for services. So, if you don’t give advice, it is likely you will not, in law, be regarded as a member of a profession.

An insurance broker is a member of a profession which gives advice on insurance and related matters. We can discuss that subject in greater detail but for the moment, let us focus on the objective of this advice.

Suitability is something that we hear every day from the FCA, but one has to ask whether in 20 years, regulators have truly defined the meaning of the word in the context of the main objective of insurance: to see claims paid fully and without reduction!

We believe there are four key elements to suitability:

1. That claims are paid fully, and that if they are not and are rejected or only partially paid, the client is not surprised by that occurring.

(In other words, if the client is sufficiently informed that the rejection or partial payment of a claim might occur and why, then the policy might still be regarded as suitable to the client’s needs and, in any event, the broker should not be found liable for any loss or damage suffered by the well-informed client.

If a client is genuinely surprised by a rejection or reduction in a claim, then whether a broker has discharged their duty must be questioned.

2. That the legal insurance requirements of the client are met.

(If they are not met, the client must be sufficiently informed to know they are not covered. If the correct legal requirement for insurance is not in place and the client is genuinely surprised about this, then whether a broker has discharged their duty must be questioned).

3. That the contractual insurance requirements of the client are met

(If they are not met, the client must be sufficiently informed to know they are not covered. If the contractual requirements are not in place and the client is genuinely surprised about this, then whether a broker has discharged their duty must be questioned.)

4. That in the context of cost, the insurance is of reasonable value when set against the level of service provided and the typical market premium for such a risk, at the time of inception and renewal.

There are two key elements to the service an insurance broker provides:

1. The Demands of the client; namely, what the client wants. A broker should make a record of these demands and if a demand is not met, the client must be advised of this.

2. The Needs of the client are most important, and this is where a broker is most likely to give advice. Needs should be clearly identified and will either be an adjunct to a demand or suitable insurance which a client does not include in the list of Demands.

A good example is a client’s Demand that the broker arrange £1 million of property insurance on a building. The Need is that the sum insured is adequate. If average applies, the broker must take steps to reasonably ensure that the client knows and understands this and the effect of not insuring adequately.

Another example is that a client will instruct a broker to advise on suitable business insurance (The Demand). If the broker forgets to consider a client's Needs (say, Directors and Officers Liability Insurance), then it is likely the broker has failed to discharge the duty of care.

This series of articles is going to gradually unlock the secrets of the Duty of Care. From over 300 legal cases against brokers and financial advisers, we will start to put a sense of reality into what regulators and professional bodies seem to have promoted as a somewhat ethereal and non-practical topic.

Ultimately, what brokers must do is adapt this to their own firm, in particular their clients, and adopt practices which will reduce the risk of a PI Claim for negligence.

Case study 1

This is the case of a broker who recommended a package policy to a commercial client. It was a modest sized business with a turnover of £1.5 million. A delivery man visited the business premises and a store of goods fell on him. He was incapacitated and lost the use of both his legs. He sued the client for over £5 million, plus costs of nearly £1 million.

The default sum insured for public liability under the package policy was £2 million.

We want you to review these simple facts and consider whether the brokers have discharged their duty of care. Deal only with the claim at this stage but make a list of any additional thoughts you have.

Also, take some time to look at business interruption wording and study the definition of indemnity period. It may not be what you expect!

We will follow up on this in next week’s article.