16th January 2020

Professional Indemnity Insurance Guide - Regulated Firms

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What is Professional Indemnity Insurance?

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 alleged professional negligence.

What is a ‘claims made’ policy?

Professional Indemnity Insurance is a ‘claims made’ policy meaning that the policy has to be in force when the claim is made, not when the claim occurred. Therefore, it is important to obtain cover for historic activities undertaken when incepting a new policy.

Which firms need to purchase PI?

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, however it should still be considered as a risk management tool to protect the value of a business in an increasingly litigious environment. 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 and expenses. A customer or client may insist that you have PI (and any other appropriate insurance) in place, as a contractual condition of doing business with them.

What limit of liability is required?

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, €1,250,000 ; and (2) in aggregate, €1,850,000 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 should be able to provide industry benchmarking information. However, you should discuss with your compliance officer to confirm your exact regulatory requirement. Note: the FCA quotes these figures in Euros.

Is it an FCA requirement to put PI in place?

It is a compliance requirement for many FCA regulated firms to implement PI. These include IFAs and other types of intermediaries in different sectors, such as ‘Exempt CAD’ investment firms. Purchasing PI Insurance can also be used to reduce regulatory capital requirements. 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.

Why does the FCA require firms to hold PI cover?

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 (FSCS) which is funded by firms which are still trading.”

We do not hold client money, do we still need PI?

Any business that provides advice or a professional service to clients should consider PI Insurance even if they do not hold client money. Unfortunately, mistakes can happen and disputes can arise, which can cause unwanted stress and worry, bad publicity and potentially significant damage to the reputation of your business. PI Insurance can help take away some of this stress and firms can benefit from specialist legal advice to help defend a claim.

If a firm is currently an Appointed Representative (AR), will the PI policy be suitable once the firm is Directly Authorised?

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 typically similar for ARs and Directly Authorised firms.

How much does it cost?

The cost of PI can vary greatly and depends on a number of factors. It is best to speak to a specialist provider, which should be able to give an estimate of cost based on a few headline data points. Q19 gives more information on the rating factors used by insurers.

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