Taking heed of this advice could prevent a relatively contained issue becoming business-threatening
There has been a lot of press coverage lately around the issue of professional indemnity insurance. Excesses are either so high to establish an effective bar to Financial Services Compensation Scheme recovery (for example, where the per claim excess is set at £50,000 – the FSCS limit of compensation, per person, per firm in respect of investment advice) or insurers have excluded cover for:
- Certain types of advice (for example, certain non-standard investments or defined benefit transfer advice); or
- Lack of notification(s) under the relevant policy.
While advice firms may have little option but to accept relevant exclusions and excess levels per claim and in the aggregate, it is still important to shop around to obtain the best terms available.
The notification issue is something that can be controlled – both prior to inception/renewal of the relevant policy and during its life via prompt notification of claims, including complaints and circumstances in accordance with policy terms.
If in doubt, businesses should talk to their brokers and err on the side of caution when it comes to notifying claims/potential claims in order to avoid preventable policy issues.
It is logical that the premiums charged will be affected by what insurers are told. That is because full information is material to their assessment of risk and the alternative may be that a business is left without cover for certain claims and complaints or, even worse, without any insurance at all because insurers seek to avoid the policy from the start. Either way, it could become the FSCS’s problem, which consequently impacts levies.
The Insurance Act 2015 represented a significant reform of insurance contract law in the UK.
The pre-contract duty of disclosure on the policyholder is one of a duty of “fair presentation”. This aims to encourage co-operation between insured and insurer prior to inception.
The insured is required to:
- Disclose every material circumstance it knows or ought to know; and
- Conduct a reasonable search of its records to discharge the duty of fair presentation.
In turn, fair presentation of a risk involves:
- Disclosing information in a clear and accessible manner (so “data dumping” should be avoided); and
- Taking steps to ensure that “every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith”.
With this in mind, practical steps should be taken by firms at inception or renewal of their PI policy to avoid preventable coverage issues arising. Here are some key dos and don’ts:
- Ensure that all questions asked by insurers are answered fully and accurately at the pre-contract stage/during the renewal process;
- Be conscious of the need to conduct a reasonable search of company records to ensure a fair presentation of risk to insurers;
- Disclose if there is any doubt as to whether something is material;
- Ensure prompt notification of claims and circumstances (in accordance with policy terms) during the life of any PI policy.
- Choose not to disclose something, as it may affect your premium/whether insurers will offer terms. This suggests the information is material and will likely cause a coverage problem if issues in the form of claims and complaints arise;
- Admit liability/deal with/settle claims and complaints without input from PI insurers;
- Sit on claims/complaints/circumstances and notify later. Prompt notification, in accordance with policy terms, is essential.
Taking heed of the above may well avoid a relatively contained issue becoming a business-threatening one. It will also mean businesses (and ultimately consumers who may have recourse to the FSCS) have the best chance of cover being confirmed/made available when it is most needed.
Terence Dickens is managing associate (FS litigation) at Foot Anstey