The opinions expressed in this article are the author’s own and do not necessarily reflect the view of RWA Compliance Services Ltd.
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.
So much is made of the Insurance Act and the duties of clients and indeed brokers to make a fair presentation of risk that it is often forgotten that the other stream of our duty of care is to recommend a suitable policy or policies to meet the client’s Demands and Needs.
The tendency is to simplify the Demands and Needs Statement and often they look quite pathetic as a representation of a professional service.
Let us leave that aside for the moment. It is a subject on its own. Instead, we want to concentrate on a very high-risk area for a client and broker, and that is a change of insurer.
We have had 5 readers ask us about this subject this week and coincidentally a new case has come across our desks.
Unfortunately, there is perhaps, too much emphasis from the FCA on price. In the commercial insurance world, it is often the case that you pay for what you get. In the case we are looking at, a broker has undertaken a re-broking exercise and found a market for a commercial combined risk which reduces the premium from £20,000 to £15,000.
On the face of it, it is a ‘no-brainer’ to change, and it is unlikely that the client will not go for the switch of insurers but there is a massive risk trap for all.
From a duty of care perspective (and a Demands and Needs perspective) the broker has a responsibility to compare old cover with new cover.
In the first place the existing cover is a Rolls Royce cover with a Rolls Royce insurer. It is actually impossible to mirror the cover given and even if one gets close, it will involve at least 4 other policies with 4 different insurers.
This is where the conflict arises for the broker. On the one hand the client is as safe as they can be and on the other, there is a duty to report the potential price saving to the client.
The latent risk is that the client’s new arrangements have gaps in cover.
Typical examples will be the usual culprits:
It is the broker’s job to analyse all these and advise the client of loss of cover to balance the saving in premium so the client can make an informed decision. In our opinion, too many brokers emphasise the saving in premium (and often brag about it) without paying attention to why the premium is so much cheaper.
Of course, it is a very competitive market, and a broker is likely to lose business if the premium quoted is not competitive, but remember that to protect the client and your firm, it is vital that the differences in cover are conveyed to the client in a way they can understand.
In the case that came in this week, there are many differences, and the broker has given up counting and said to the client that: “the existing policy is very comprehensive with a host of covers and here is a schedule”. We have sympathy for the broker in this case, there were over 50, but the one thing the broker forgot to do was to compare the defaults and the wordings of common covers.
Policy A had a £10 million public liability indemnity limit but the new policy only £5 million and the £5 million top up they recommended had an aggregate clause. The client was not advised.
All brokers will switch policies for clients, and it is often far too time consuming to analyse every single difference. However, you should send the client schedules of the old and the proposed new cover so that the client can compare, and you should take the time to identify the differences in the significant covers and defaults. If you don’t, you may be accused of not having discharged your duty of care.
The changing of insurer also presents a massive risk in terms of the information gathering process.
You should use this as an opportunity to renew your knowledge of the client’s circumstances and not try to save the client time by putting old information on the new statement of fact. If you do not visit the client for a renewal meeting, then make sure that they complete the new insurer’s statement of fact.
Often an insurer will partially complete a statement of fact on the basis of the information you gave to obtain the quotation in the first place. Rather than send the client the partially completed fact-find, try to go through a new information gathering process or if you have to send them a partially completed form, then try to highlight those questions where you would like up to date information.
We are seeing a growing number of cases where a client’s business has grown exponentially, but the insurance cover has not.
The case this week sees an office risk (primarily) where the turnover has risen from £500,000 to £20 million in 10 years with staff rising from 8 to 250 and the broker changed the insurer without even a telephone conversation or meeting with the client. As far as they were concerned it was just a big office risk as opposed to a small one!
The average broker and the average client don’t have major claims, but when they do occur, they are life changing.
Knowing and understanding what can go wrong are the foundations of the duty of care. No amount of experience is going to prepare you for any unexpected event, but your insurance studies can. Only those dealing with claims on a full-time basis ever see anything like the range of things which can go wrong.
Whether that is formal study towards qualifications or absorbing information via papers such as this series of articles, treat it as part of your pathway to professionalism.
We have been asked about the CII’s new ideas about granting Chartered status to senior people and people from other industries without testing their insurance knowledge.
Can you imagine having any pride in your work on the basis that you have individual chartered status because the CII think you are important!
Keep studying. An amateur does something until he/she can get it right, a professional does it until they cannot get it wrong.
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