The Scope of Your Duty of Care to Your Client: Part 2 - Key Man Insurance

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.

It is quite surprising how few brokers actually define the scope of their service accurately, which leaves the door open for a client who does not have suitable insurance for their demands and needs.

Consider for a moment the risk to a trading entity of something happening to a key person which prevents them from working, and in particular stops or limits the progress of a commercial client.

Here are the typical contingencies:

• Death
• Illness/disability
• Need for medical assistance and treatment

And of course, the first obvious point is that these are all insurable in a very simple fashion.

Ask yourself how the commercial risk presented cannot be part of your clients demands and needs and you will find there is no example.

All these risks can be insured within the scope of the legal authority to advise which attaches to most general insurance brokers.

• Short term life assurance without options to convert to an investment contract
• Personal Accident and Sickness Insurance
• Permanent Health insurance with no investment element
• Private Medical Insurance

So, if you are silent on the matter, your firm is at risk. Remember the story of the typical accountancy firm which, in its Terms of Business, spends more time telling you what it won’t do than what it will do.

But perhaps consider more closely now whether you and your firm might be well placed to advise a client on what is, in effect, an extension of the Business Interruption risk facing the client.

In the same way that Fire and Perils might affect the trading results of a business so might the absence or ineffective performance of a key person, particularly in a small to medium sized enterprise where no short-term replacement is viable. Think about how trading results are affected.

Death: injection of capital until replacement is found. Not only loss of profits but also Increase Cost of Working including “hello” payments to a replacement.

Injury or illness: Temporary or permanent disability might involve the need for additional income or cash payments (continental scale) to help recover to levels of turnover as if the contingency had not occurred.

Permanent Health Insurance: Does the firm have a contractual or moral obligation to maintain income levels or make any other payments? If this becomes an increase in cost of working, should the firm insure the risk?

Medical treatment: With NHS waiting lists so long, should your client effect private medical cover to speed up the time for treatment for key persons?

A key person does not have to be a senior person. Advice you give on risk assessment might well include key technicians, machine operators, managers etc.

Summary

We can only give you a brief glimpse of the opportunity so let us summarise:

1. Know the scope of the insurance policies you are authorised to advise on (your compliance adviser will help you).
2. Accept that the client has a legal right to assume, in the absence of anything you say to the contrary, that you will advise them on all their commercial insurance demands and needs. That could include completely different branches of insurance such as Marine and Aviation. The client might not know that if you do not tell them.
3. Make a list of all the insurances you will not advise on. Make sure the client is given that list, perhaps in your TOBA.
4. Make a list of those you do not advise on and consider if you could and whether that would be commercially viable for you.
5. Consider whether you might be doing no more than adding to the services you offer already. (Key Man cover is a corollary of Business Interruption Insurance, Director's and Officer’s insurance is a type of Liability insurance, tools insurance is regarded as a corollary to commercial motor insurance, and so on).
6. Don’t forget you have to have at least one person assessed as competent to advise on every policy you recommend.
7. Don’t forget you have to have at least one person who can supervise/oversee that person or people.
8. Consider whether you want to develop a relationship with other advisers to cover areas you choose not to advise on

Most Common Issues we come across where broker has failed to define scope.

• Key Person
• Director's and Officer's
• Professional Indemnity
• Tools in Vans
• Commercial Motor Insurance
• Contractors All Risks
• Calculation of Sums Insured (we don’t do it!)
• Client has more than one broker. Important to define who does what.

Finally, this week, understand that if you are the account executive and the person dealing with the client, unless you advise them otherwise, that client will assume that the advice is coming from you personally. If something goes wrong, it will be you who is at the forefront of any claim against your firm. It is absolutely in your interests to seek to minimise the risk of a PI claim by discharging your duty of care to the client in a competent manner. If you think your firm is not discharging their duty of care, then mention it to someone.

As ever, contact us on:

Robin: ruylopezuk@btopenworld.com

Roger: rogerfranklin@edwincoe.com