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Professional indemnity edge: Alan Harris

In November 2002, my PI insurance renewal application was declined by the Markel syndicate at Lloyd’s because, in their view, the premium and excess they would require would be uneconomical for the size of my firm.

Applications to other underwriters were rebuffed due to our general insurance (less than 800 commission a year) and portfolio management activities, a mainstay of the business. I tried every broker and underwriter on the FSA list to no avail.

The best that my MP could do was a nice letter from Ruth Kelly at the Treasury, in which she said that the FSA were hopeful that more capacity would be available soon.

Fortunately, after a process that lasted the best part of six months, I was able to obtain a rule waiver from the FSA disapplying the requirement for my firm to have PI insurance.

One of the conditions of the waiver was that my firm’s own funds’ requirement was increased from 10,000 to 160,000. I believe this figure was arrived at by multiplying the maximum possible compensation award of 100,000 by an arbitrary one and half times. The firm also became subject to a net current assets’ requirement of 15,000. This figure was obtained by multiplying a supposed average claim of 15,000 by the notional average number of complaints a year over the previous five years. I had had two. One was rejected as being without the PIA’a jurisdiction and the other withdrawn by the complainant when I pointed out that his comments constituted actionable defamation.

As part of the waiver process, I had to supply details of all my personal and business assets and liabilities and a breakdown of business volumes by lines of business. I confirmed I had never advised a client to effect a split-capital investment trust or a zero-dividend preference share.

It was a requirement of the waiver that I provided a quarterly statement of income and expenditure as well as a statement of business and personal assets and liabilities.

I argued that these requirements were unduly burdensome and did little or nothing to mitigate any risk to investors. I suggested that a statement indicating whether or not there had been any material change from the figures supplied would suffice but my comments were not considered worthy of a reply.

I was forced to go through the whole process again last summer as the FSA did not have a renewal process for the waiver and deemed my request as a fresh application. This time,I also had to stipulate how many high-risk products I had sold in the last five years.

The new waiver was only valid until January 14, 2005 when the European IMD came in to force. You might think that the FSA or the Government itself might have been able to persuade the European legislators that a process as painstakingly thorough as I have gone through over the past two years would suffice but apparently not.

The FSA say they are receiving positive noises from the PI insurers that they will be able to cope with the increased demand. My brokers say there are only three underwriters even willing to look at small businesses. If I can get cover, it is likely that the cost will be around 10 per cent of my turnover. Obviously, this must call the viability of my business into question.

I don’t want your sympathy but if you are interested in merging or making a joint application for PI then please let me know.

Alan Harris is principal of Harris Investment Management. He can be contacted on alan@harrisinvestment.co.uk

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