A Broker's Duty of Care: Customer Care and Competence

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.

Last week’s exercise was really a discreet introduction to this phase of Customer Care: Your competence to advise.

We asked you to look at three case studies:

• We have storage racks which have collapsed on a delivery driver in a small supermarket. The outlook is not good with a broken back and probably total disability. The policy has a £2 million limit of indemnity under the PL section. The broker faces a massive PL claim and probably well over its PI limit of £2 million.

Application of Knowledge and Understanding.

• £2 million is too low these days for PL cover and we need to arrange facilities to offer clients a higher limit
• We need to make a list of the clients to contact and when (mid-term is often a good idea)
• We need to design a note to clients explaining our thoughts and why we are recommending a higher limit
• We need to remember it is not our job to recommend a higher level but that they consider a higher level (give them the reasons) and they need to make the choice.
• We need to add “keeping up to date with PL claims” to our annual to do list (CPD?)
• A packaged office policy for an online marketing company whose turnover has risen to £8 million over the last few years and the GP figure remains at £500,000 from about 5 years ago.

Application of Knowledge and Understanding. 

• We need to check when we last contacted every commercial client and “discussed” their needs as opposed to just asking them if everything is ok and/or whether any changes are
• Check the turnover figure against the sum insured for GP
• Check the indemnity period. 1 year is invariably too short these days even for non complex risks.
• Remember the indemnity period is the time needed to get the business back to where it would have been had the loss not occurred, not to where it was immediately prior to the loss.
• Contact all clients where you think there may be a latent risk.
• Ask the client about trends. Rapid expansion might need special care.
• A package policy again for an office but the policy has an Increased Cost of Working cover and not gross profit, and we cannot see where that choice comes from. The client has grown to 256 staff with a turnover £6 million. It does have more than one premises, and it has ICOW cover of £250,000 as well as an indemnity period of 3 months.

Application of Knowledge and Understanding.

• Do you have evidence of where a choice came from on file? ICOW is normally a conscious choice instead of Gross Profit cover, but can you show how the client made this decision? Unless they are a sophisticated purchaser of insurance one would expect to see evidence that you gave them the information to make the decision. If a claim arises and ICOW does not cover the losses, then you might be blamed. Write to clients with ICOW and explain the cover and the alternatives and ask them if they are happy with the current arrangements.
• The IP of 3 months seems very low. Check it.
• You can always contact a client with a few points at once.
• The final example was one of those mix ups that occurs if you are not careful. There is a difference between 1^st party (the Client) and 3^rd Party (the client’s customers) fidelity cover.
• Just make sure you are aware of less familiar insurance cover and make it part of your regular learning. There is a tendency to trust package policies to cover everything but make sure that your firm has a complete list of all covers available and read up about them. Know and understand each at least to a level that you can identify a need for your client (Application).

Customer Care and Competence

We cannot discharge our duty of care unless we are reasonably competent (to the standard of the ordinary broker) to undertake a task.

The Government, through the National Vocational Qualification (NVQ) organisation defines competence to do a task as:

• Knowing what to do
• Understanding how to do it
• Applying those elements to the task
• Completing the task to a reasonable standard

So, after 11 weeks of giving you knowledge and understanding, we asked you to apply those in the exercises lasts week. If you completed the exercise, you went through the competence cycle to the point where you identified the need and contacted the appropriate clients with your recommendation.

For every task there is a KUA.

Have a look at ICOBS. It is full of tasks. Each one of them has a KUA.

Just one example:” Take reasonable steps to ensure that your client can make an informed decision.”

• I need to know and understand the subject
• I need to assess the knowledge of the client
• I need to explain the issue in terms they will understand
• I need to be confident (using my judgement) that the client does understand
• I need to keep records of all this (ideally)
• I need to confirm it in writing (ideally)

And so on.

Remember that the FCA is not there to make money in the same way as other institutions. All it thinks about is taking care of the public, so its rules are there to meet that end. ICOBS should be your bible in discharging your duty of care and SM&CR is about ensuring that those that run financial companies can do so, to the extent that the customer is not at risk, and manage those that give advice and provide the service do so competently.

KUA. Always keep it in your mind whenever you consider a task.

And of course, one of the biggest KUAs is how things go wrong and what latent risk is in any given situation. If you know what can go wrong and you can understand how to identify it and apply those two to fix it, you have discharged your duty of care and you are likely to be found to be competent and not negligent when something goes wrong.

Assessment of Competence

If you accept that application can only be finally assessed “on the job” (think of driving a car and getting your full driving licence, the ultimate test is on the public roads not on an airfield).

This is why you will be supervised for a while when you start a new task (if your firm is compliant), because your employer wants to be sure you can apply the knowledge and understanding in a live situation dealing with clients and this is why your files will be checked and you will be asked to undertake role plays or your KPI’s will be checked (complaints etc).

But knowledge and understanding should be tested and there are many ways of doing this.

• Written Exams
• Written Tests
• Face to Face
• Role Plays
• etc.

A qualification is granted when you reach a certain standard decided by an examining body or profession.

Some will be a mixture of written and practical (e.g. Doctors) and some will be written only (Insurance).

The insurance industry is second only to the medical profession (by a long way) in terms of the extent of the duty of care. As an industry, we are responsible for the insurance of every member of the population of the UK and probably billions worldwide. What heightens the need for a duty is the fact that the loss is instant: a factory, a home, a livelihood, a breadwinner. One minute it is there, the next it is gone. If we do not discharge our duty of care, there is generally no going back.

So, take your duty of care and competence seriously.

In court, over so many years now, we have found that qualified insurance brokers (say Chartered) individuals know what they have done wrong, whereas the non-qualified often find the whole thing a bit of a puzzle. That does not mean for a minute that they are necessarily inferior brokers. It just means that the system does not yet exist to instil all the principles of insurance and the things that go wrong, and perhaps a good bet is the CII exams. Even if you studied a handful of those relating to these subjects, your firm’s risk would reduce, as would that of the public of not having their claims paid in full.

If you don’t fancy that route, then dare we add a modest plug to Searchlight who are part of the UKGI group who sponsor our articles. Discharging your duty of care is about learning. How you do it is up to you (how are we doing with these articles?)

One trend at the moment, is to aggrandise experience and equate it to the equivalent of examinations. This is perhaps a little naïve. Whichever route you go, if you are going to reduce customer risk you will have to test knowledge to the same level as the exam. Being too lazy or busy to “do the knowledge” is not the answer! On the other hand, if you have the experience and the knowledge but cannot handle the examination route, there are also schemes afoot to help you get qualified by other means.

A final (and true) case study which should amuse you. The case involves an individual with a shop and someone from another financial industry who was acting as a financial planner and placed the customer’s shop insurance with a well-known insurer under a package arrangement. He was a sole trader.

The insurer had asked the question, “have you suffered a loss for the risks insured under this policy over the last 5 years”. The individual and his wife had suffered a massive theft at their house a year prior to the inception which they did not mention.

An armed robbery took place at the business premises and the insurer rejected the loss for non-disclosure of the theft from home. (Fairly we think).

As every competent insurance broker should know, if a business is a sole trader or a partnership then the word “you” in that question includes personal claims as well.

That is not the point of the story. The non-qualified, non-experienced practitioner stood in the witness box and said (wait for it!) “I don’t know why I am being blamed, I am a financial planner and know nothing about general insurance and was just trying to help out”. (Bless).

Next week, some practical help on wordings to help you gather information.