Professional Indemnity Insurance (PI or PII) is designed to protect an individual or a business in the event of a customer or client making a claim for financial loss against them as a result of non-performance, breach of duty of care or professional negligence.
In simple terms, any business providing services to third-parties should consider having PI in place. In many cases the FCA dictates that firms purchase PI cover. Some firms consider that they are lower risk and as such may wish to avoid the cost of PI cover.
Even if it is not a compulsory requirement, appropriate insurance protection will help in protecting the value of a business, should the unfortunate event of a claim occur. Given defence costs and expenses are part of the cover, even a spurious claim can be defended and insurers’ involvement can assist in preserving valuable management time.
A customer or client may insist that you have PI (and any other appropriate insurance) in place, as a condition of doing business and often as a contractual stipulation for certain businesses.
It is a compliance requirement for most FCA regulated firms to implement PI insurance. These include IFA’s and other types of intermediaries in different sectors. Additionally, for some firms such as ‘Exempt CAD’ investment firms then PI insurance can be used to reduce the regulatory capital requirement down to a lower amount plus PI cover. Firms without adequate PI insurance as stipulated by the FCA would be considered to be in breach of their capital requirements, which would lead to immediate sanction by the FCA if discovered.
The FCA states “it provides an additional financial resource from which firms can pay justified claims. And it can help to prevent insolvency and excessive claims on the Financial Services Compensation Scheme, which is funded by firms which are still trading.”
Whilst there are risks that relate specifically to holding client money, all other risks related to the provision of professional advice and services remain.
When the policy is put in place for the AR, it should be made clear to the insurer that the firm may consider direct authorisation. If this is the case, there should be no reason why the policy would not continue for the firm once directly authorised. The premium is usually similar for Appointed Representatives and Directly Authorised firms.
The cost of PI can vary greatly and depends on a number of factors. It is best to speak to a specialist provider, who should be able to provide an estimate of cost, based on a few headline data points. See below for more information on the rating factors used by insurers.
The insurers for FCA regulated firms tend to be specialist providers. In the main they are London Market or Lloyds underwriters, although not exclusively.
Generally speaking it is useful to allow a period of 2 to 3 weeks to put the policy in place. This allows the broker to carry out the appropriate amount of marketing, compare premium & conditions and to make recommendations. This timeframe is in addition to the decision making process of the customer or client.
It is important to make the distinction between getting an estimate (or indication) of cost and getting a formal quotation. If you merely need an estimate, a quick call with a specialist broker should enable that to be provided. A formal quotation is typically a firm offer of cover from insurers pending satisfaction of any subjectivities.
Typically your broker will provide you with a proposal form for completion. This summarises the main aspects of the firm’s activities and is the key piece of information for insurers to underwrite the risk. In additional you may need to provide information such as:
It is essential that the proposer (when seeking a quotation, taking out or renewing an insurance) discloses all material facts to insurers. A material fact is one that is likely to influence the judgement of an insurer in fixing the premium or in determining whether to accept the risk. The proposer should ask other senior members of the firm when completing the form to confirm that the statements made are accurate and representative of the whole firm.
At one end of the scale, deliberately not supplying material facts can lead, in the worst case scenario, to insurers denying a claim and voiding the insurance policy. At the other end of the scale, insurers are moving more towards technical underwriting, with the increasing use of complex ratings tools to ensure that the premium is appropriate for the risk. When no answer is provided to a question, the rating tool assumes the worst case scenario, thus potentially negatively impacting the resulting premium.
The insurance market views this sector as “specialist” and, as such, the choice of insurers in the London Market is more limited. By using a specialist broker, you can gain full access to those insurers and to a more bespoke, or tailored policy, offering. Pricing efficiencies are also created by the higher volumes of trading between those special brokers and insurers.
The broker should collate the information above and provide an underwriting submission to insurers. Ideally this exercise should encompass a number of different insurers, to ensure competitiveness. If you work with a broker that isn’t particularly tied to one or two insurers (as some are – you should ask the question) then you should not need to ask more than one broker to provide quotations. Specialist brokers servicing FCA regulated firms should be able to provide you with comfort on this point. At Protean, we work hard to promote the most positive aspects of the risk to underwriters, highlighting the salient points and adopting a personal, open-market approach with insurers.
Brokers can be paid either via a commission from insurers or by a fee from a customer or client. Occasionally it might be a combination of both. In most cases, apart from larger firms, brokers will be paid on commission.
Whilst it is beneficial to check premium competitiveness regularly, it can be counter-productive to do this every year. This is best to be discussed with your broker prior to each renewal.
Usually less information will be required for renewal and this may be limited to a new proposal form, report and accounts and claims information.
For regulated firms, that main factors influencing premium are:
Insurers will look more favourably where the firm does not have an exposure to retail customers.
In some cases the FCA will stipulate a minimum policy limit (for example, if the firm is an insurance intermediary, then the minimum limits of indemnity are: (1) for a single claim, €1,120,200 ; and (2) in aggregate, €1,680,300 or, if higher, 10% of annual income up to £30,000,000).
Otherwise it is a case of looking at the scale of the firm and the activities carried out. Your insurance broker would also be able to help in this area, particularly in providing industry benchmarking information.
Note: the FCA quotes these figures in Euros.
In the vast majority of cases, the limit is an aggregate amount, inclusive of all costs and expenses. This amount applies over and above any policy excess (also known as a deductible). In some instances, cover may be provided on an each claim basis, so that the limit would apply in each separate claim. Under many forms insurance, the payment of a claim reduces an aggregate limit by the amount of the claim. Provision is sometimes made for reinstating the policy limit to its original amount when the original limit has been exhausted. Depending on policy conditions, it may be done automatically, either with or without premium consideration (i.e., a reinstatement premium), or it may be done only at the request of the insured in return for an additional premium. There are also certain extensions that may have their own separate limit.
Limits are typically ‘Aggregate’ (either including claim costs and expenses, or with costs and expenses in addition to the limit) but on occasion an insurer might provide an ‘Any One Claim’ costs limit. This means that the policy limit would effectively be reinstated and thus available for any subsequent claims. Importantly, those must be entirely separate, unrelated claims.
Yes, the limit can be increased, usually dependant on claims activity. Mid-term limit increases occur typically where a firm is growing quickly, or where a client insists on a certain minimum level of cover.
Yes, in all cases some kind of policy excess would apply and in 99% of cases this excess would apply separately to each claim and even each claimant, depending on the firm’s activities.
The excess is an amount (of each claim) that the firm must bear at its own cost. Importantly, policies require claims to be notified (subject to the specific notification provisions on the policy) even if the cost of the claim is within the amount of the excess.
Within reason, increasing the policy excess will lead to a premium saving. This is not scientific, in the sense that the proportionate saving will differ, depending on the circumstances.
Generally speaking, whilst the premium increases as the policy limit is increased, the incremental cost reduces significantly. So for example, £5m of cover would cost a little more than double the cost of £1m. Sometimes insurers have minimum premiums to apply for each limit, so this is only a general rule of thumb.
Generally speaking yes, although the incremental increase will reduce as revenue increases.
In some cases yes, if the lack of profit is an indicator that the business is not performing well over the medium/long term. For early stage business it is a factor that would be taken into account when the policy is put in place.
Yes, it is usually possible to arrange premium finance via your broker.
Typically the policies are written on an annual basis. Generally speaking the minimum period would be 9 months and the maximum 18 months.
Whilst most policies do not contain an explicit cancellation provision, market practice allows for policies to be cancelled in most cases. Certain conditions will apply, such as an additional charge (above the pro-rata premium used) or a return premium, being net of the broker’s commission.
Professional Indemnity policies exclude risks that the insurers are unable or unwilling to cover, the most notable for Professional Indemnity are claims involving strict liability, contractual liabilities and guarantees, which are not subject to the test of negligence; fines, penalties and liquidated damages (including contractual penalty clauses); bonding liabilities (for which separate covers are available).
Yes, cover can be provided on a worldwide basis. In general terms, the inclusion of North America brings the highest premium loading.
In most cases, yes. Some insurers are not keen to underwrite risks with USA/Canada exposure and/or certain specific terms might be imposed (such as a higher excess or additional premium) but it should not present a problem.
The answer in most cases is yes. If you have either an instruction to carry out or are making a discretionary trade on behalf of a customer or client, this error constitutes a breach of professional duty and thus would be covered, should it lead to a financial loss to your customer or client. This is an area where it pays to reads the small print!
Advice provided to retail customers or clients is typically regarded as one of the highest risks given the ease of recourse by individuals facilitated through the Financial Ombudsman Service (FOS).
PI policies usually cover Costs, Expenses, Settlements and Damages incurred in defending and settling claims alleging breach of professional duty by the business or firm. For this reason, most claims are brought by customers or clients.
For regulated firms, the cost of legal representation should form part of the cover. It is important to consider what policy excess and/or cover sub-limit might apply.
Generally speaking, no.
In certain cases insurers may agree some kind of a no claims discount upfront. This might be for firms perceived as more high risk and/or firms in their early stages.
Notwithstanding these comments, once a track record has been built up, insurers may recognise this in premium reductions at renewal.
The impact on the renewal premium of a claim would depend on the severity and nature of the claim. Insurers look at the claim event and assess whether it is an isolated one-off event or a systemic failure. Insurers will also consider whether the insured has changed their risk management procedures as a result of the claim. If there are a number of smaller claims then insurers may look to increase the excess/ deductible on the policy.
This process can vary slightly but it is important to note that most policies require you to promptly notify insurers in the event of a circumstance that might lead to a claim. It is important to make the distinction between this and an actual claim event. If in doubt it is best to contact your insurance broker who will be able to advise you and notify your insurer if appropriate.
Even though there is often a policy excess (also known as a deductible) to be borne by the firm before insurer’s liability kicks in, typically you would notify a circumstance and then a claim, regardless of potential quantum. At this point, you would seek approval for your preferred legal representation which, provided it was reasonable, would typically be approved.
In terms of protecting the liabilities of the business, there are other covers to consider, such as Cyber/Data Protection Insurance.
Often the most valuable assets of a firm, particularly in Financial Services, are the people that work in the business. Consideration should be given to how these risks are dealt with from the perspective of the firm and also the individuals themselves.
Directors’ Liability (D&O) insurance protects the personal liability of directors and other senior partners or managers. As such, there is often a desire to ensure that individuals are protected. It can prove cost effective to purchase a combined PI/D&O policy.
If you have provided full details for PI cover, that should be sufficient to obtain a quotation for a D&O policy.
The insurers for D&O are most often the same as the insurers for PI. It is considered beneficial to have both policies with the same insurer and the same renewal date.
Yes, insurers do market joint policies. The benefits include simplicity of purchase, that there are less likely to be gaps in coverage and, potentially, pricing.
D&O cover can cost as little as £500 but would typically be between £1,000 and £5,000 depending on the limit of liability and specifics of the risk.
The government issues guidelines on when this cover is required. In broad terms, once you have employees (either contracted, full or part time) you should have Employer’s Liability and Public Liability Insurance.
Employer’s and Public Liability insurance is usually provided as part of an Office Insurance package policy, that also can extend to provide buildings, contents, equipment, business travel and personal accident, for example.