Analysis: Brokers face PI exclusion dangers
Need to know
- Brokers still seeing quadrupling of PI rates and coronavirus exclusions
- Consultants warn of confusion in the market about compliant PI cover
- FCA has flagged the need for suitable insurance and raised concerns about insurers including blanket exclusions
- Experts point to worries about brokers facing increased Covid-19 related legal action
- Mixed views on how the PI situation will unfold over the medium term
Compliance consultants have highlighted the dangers for brokers of buying professional indemnity insurance with Covid-19 exclusions, warning that the Financial Conduct Authority can suspend permissions if firms do not get the right cover
In August 2020, Post reported on broker PI rates going through the roof, coronavirus exclusions being added by insurers and excesses being ramped up. The situation has not eased, one compliance expert noted, with a client recently seeing a renewal soar from £20,000 to £80,000 even with Covid-19 excluded.
However, accepting these terms is fraught with risk.
“There is a lot of misunderstanding in the broking community as to what is compliant PI cover,” cautioned Branko Bjelobaba, founder of compliance consultancy firm Branko.
In September 2020 the Financial Conduct Authority reiterated that intermediaries must meet the minimum requirements in MIPRU 3.2. This includes that a broker’s PI insurance must provide: ‘cover in respect of claims for which a firm may be liable as a result of the conduct of itself, its employees and its appointed representatives’.
James Dart, managing director at Dart Compliance said the rule was clear.
“Firms must be covered for any business they have done since the date they were first authorised,” Dart assessed. “If they have previously written business which included business interruption cover, in particular non-damage BI cover under which they could receive a complaint that Covid wasn’t included, they must have the cover.”
Part of the confusion could be around those who would not have needed Covid-19 related cover.
Whether cover is required for Covid-related claims under a broker’s PI policy will be very firm-specific. A broker that specialises in offering motor insurance, for example, may actually have no Covid-19 exposure and so an exclusion on their PI policy may still see the firm being in full compliance.
The issue remains though that parts of the insurer market are not prepared to cover Covid-19 and what the future may hold.
Suspension risk
“There is a threat that the FCA will suspend their permissions until they are able to get cover,” said Dart.
Brokers have to submit their Retail Mediation Activity return twice a year. This includes answering if their PI terms are different. Dart advised communicating with the watchdog outside of this process with a specific notification.
“If that [the RMAR] is how the FCA find out, it is pretty robust in its responses and pretty unsympathetic,” he noted.
“The FCA response is you need to speak to your PI insurers and your trade bodies that you are a member of and obtain the cover.”
The FCA statement in September also highlighted that providers should consider whether exclusions are consistent with their product governance obligations including whether the product is compatible with the needs, characteristics and objectives of the target market.
And it addressed that firms distributing PI need to meet insurance conduct of business requirements.
Dart said there was a danger from insurers and PI brokers not accurately identifying customers’ needs. However, he put the onus on brokers buying the policy to make the right choice.
“You have to ask the question, would they recommend to a customer that the customer takes a policy that doesn’t include probably the biggest risk to their business over the next 12 months?” he questioned.
Michael Sicsic, managing director at Sicsic Advisory, said he felt that the problem was starting to crystallise. The rules have not changed, he observed accepting that it was a difficult problem to “size”.
“People should be very careful with wordings now,” he stated. “What brokers can do is find exactly what is the minimum requirement they need and tell their insurer and [PI] brokers and be very specific about what they need.”
PI: in numbers
4x
One broker’s PI quote rose from £20,000 to £80,000
40x
The increase in BI claims put through software house Acturis in the week of the Supreme Court Covid-19 judgment (compared to the average of the same weeks in 2019 and 2020). The following week the multiple was 500
£479.1m
Value of BI payments made (full and partial) for non-damage BI policies affected by the test case (as of 3 March)
18,387
Number of test case-related BI claims where the insurer’s decision as to whether there is a valid claim is pending (as of 3 March)
Legal action risk
With solicitors advertising their services to sue brokers, experts were concerned that the problem could worsen over the next two years. One compliance expert told Post: “Solicitors are piling in to try and make money out of this. It is frightening.”
The business interruption legal test case brought by the FCA on behalf of policyholders had been estimated to affect up to 370,000 policyholders. After the regulator’s victory the industry was concerned about press coverage leading to a glut of claims from businesses that were not covered but would have had their expectations raised.
One broker who declined to be named said: “A lot of brokers, while they may not have any cause to answer, will have to defend their position when it comes to business interruption cover and the possible legal jeopardy they might find themselves in.”
He stressed that with the story being newsworthy there will be people “having a pop” and he understood why brokers would be the next target.
“You have a crack at everyone in the chain particularly if businesses are struggling very badly,” he summed up.
Roger Flaxman, chairman and principal consultant at Flaxman Partners, said: “We constantly have brokers asking our opinion about what they can or should do. They are in a state of nervous fear.”
“You cannot as a broker say there isn’t a risk,” Flaxman observed. Over time PI insurers may say you were wrongly sued but still decline to renew cover or put it up to unaffordable levels, he forecast.
Compulsory PI being unavailable puts people’s livelihoods at risk. “If a broker is put out of business and have their permissions withdrawn by the FCA it is not only the business that goes, all of the people who are employed by the business and [there is] all of the issues of their clients,” he said.
This could happen even when the root cause is nothing that the broker has done, Flaxman continued. “They haven’t made a mistake they are not bad brokers. They can’t obtain something which they are required [to have] for a regulatory reason.”
Such an outcome would be a failure of regulation, Flaxman argued saying he had written to the FCA. He praised its willingness to engage.
“If the FCA gets this right it will anticipate the problem before it crystallises,” he stated. “Now is the time to start thinking about it. It doesn’t need to happen.”
Even the present circumstances are troubling, in Flaxman’s view. Having substantially different wordings is “misleading the public”. “If you start interfering with the basic cover how far is it before actually the basic cover is a chimera of what it was intended to be?” he questioned.
He urged that as is the case for lawyers, surveyors and accountants, there should be a level playing field with everyone insured on similar cover albeit with different financial levels available. One solution could be a market fund or pool with a wide number of insurers each taking a small proportion and committing not to withdraw without adequate notice, he suggested.
At the moment brokers can only make representations to the FCA about the real unintended outcomes of declining market availability and the increasing cost of something without which they cannot trade,
he advised.
“The best thing brokers can do is postulate the positions they are in so the FCA is working from a basis of fact.”
Time-limited
British Insurance Brokers’ Association CEO Steve White was aware that some intermediaries have found finding appropriate cover including Covid cover challenging, but in the trade body’s experience these have tended to be firms whose capacity has left the market, leaving them faced with placing PI on a new business basis with a new provider.
The hope is that the situation will ease as time passes. Covid-exclusions being put into the insurance policies brokers sell individuals and businesses removes the potential for their own PI liabilities.
“Covid exposure is time-limited and probably only applies in relation to Spring 2019 to Spring 2020 policy placements, and for a maximum six-year period as per the Limitations Act (1980) timeframe for a non-personal injury negligence claim - or more broadly, a tort claim,” White detailed.
Adding: “We have been made aware of claims management companies that are encouraging affected businesses to make claims against intermediaries. Our extensive review of the case and the support and guidance provided for members indicates that such cases against intermediaries are likely to be unsuccessful and we will support any member going through this.”
However while the medium term outlook might be brighter the short term remains concerning.
It is the plethora of CMCs that have “crept up” since the judgment was handed down, that are exacerbating the issue, Bjelobaba wrapped up.
“The tsunami is now because the ambulance chasers are at it,” he concluded.
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