The Personal Finance Society and specialist professional indemnity insurance broker Howden Windsor have jointly published a buyer’s guide to PI cover aimed at helping financial advisers secure the most appropriate cover for their business.
Here we set out the main areas advisers need to consider when buying PII, and the important features to look for in a policy.
What insurers are looking for
The first thing insurers will look at is the total income a firm is bringing in. In trying to assess their exposure, insurers will look at a firm’s performance over the last few years and the estimated income over the current or next financial year. They may question any sharp drops or hikes in turnover. Normally the larger the income the larger the premium will be, though size discounts are usually available.
Insurers will also consider a firm’s business mix, and whether certain activities are deemed to be high risk. They will also examine complaints and claims history, client documentation, compliance and the experience and qualifications of adviser firms’ staff.
Buying process top tips
Start the process early. Give your PI broker enough time to negotiate with the insurer if necessary, and chase your broker if they have not got in touch eight weeks before your policy is due to renew. Ensure your proposal form accurately reflects your business. Failure to disclose previous regulated activities may result in insurers avoiding claims or even voiding the policy completely.
Be prepared to give your insurer comprehensive information about any riskier aspects of the business such as recommendations to invest in Ucis or tax mitigation products.
Provide your broker with details of your risk management measures and any claims. Insurers can offer better terms to those firms with strong compliance procedures, or where firms have carried out a review of their systems and controls.
Get quotes well ahead of renewal so that you can familiarise yourself with the terms and conditions where you are moving insurer.
Features to look for
The level of coverage can range from the narrowest form of cover which is limited to negligence and only covers any claims that arise, to cover which includes the cost of defending any claim.
Advisers should check whether defence costs are subject to any excess, in which case insurers can appoint solicitors to defend you but advisers will be responsible for paying the excess.
Some policies will have insolvency or failed fund exclusions such as Keydata and Arch cru. These exclusions can be buried within policy wording rather than explicitly highlighted.
Advisers should also look to see whether the policy allows “inadvertent non-disclosure protection”, where insurers will not void the policy in the event of significant non-disclosure or misrepresentation of the facts. Advisers will have to prove any untrue statements were innocent and not meant to deceive.
Some insurers will also offer extended reporting periods after the policy has expired.
Notification of claims
Advisers should notify their PI insurer as soon as they are aware of issue which “might/could/may/is likely” to give rise to a claim.
Advisers should report any allegation or claim made against them, whether verbally or in writing.
They should also report any suggestion or indication a claim is being considered, however remote they believe it to be. Advisers should also report any situation that they recognise to be a problem to their business in terms of a possible complaint or refusal to pay fees.
Advisers should never allow worries about a potential increase in premiums to affect their decision about notifying their insurer, as the cost of defending a claim can often outweigh the increase in premiums.
Run-off cover is not mandatory, but is recommended given that PI insurers work on a “claims made” basis rather than when the act or omission occurred.
Premiums are normally set at the level of the last annual premium for the first year’s run off, with reductions every year after that point, subject to market conditions and claims history.
Those thinking of selling their business should ensure responsibilities for previous liabilities are agreed so that you can buy appropriate cover if necessary.