PII – distinguishing risk and severity

Recently I have written and posted a number of articles which have questioned why it is that so many professionals fail to buy adequate levels of Professional Indemnity Insurance (PII) cover. This has provoked some interesting feedback and debate. One particular thread related to the perception of risk.

It was suggested to that professions such as Insurance brokers and accountants only buy the minimum level of PII cover put forward by their institutes and professional bodies because they perceive themselves to be at low risk of having a claim made against them. This is a dangerous argument as it confuses the "risk" element of insurance with the potential or "severity".

If we were to apply the same argument to a more tangible product, such as home insurance, we can see that if you base your insurance program on this presumption it is bound to fail. Here the risk or chances of having to make a claim for fire damage are low; however a home owner would be ill advised to insure his property for less than the rebuild value based on the fact that it was very unlikely to burn down. Instead the correct advice is to insure for full value of the property. The "risk" element to the common pool fund is reflected in the premium charged for what is a relatively low frequency of high severity claims.

This same principle applies to Professional indemnity Insurance. There is a risk to all professionals, however good, that a claim will be made against them. This is the guiding principle which justifies the rules laid down by Institutes and professional bodies that their members must buy professional indemnity insurance.

The levels set by such bodies however can only every be guidelines as to the minimum level of PII cover required. The individual or firm must assess the potential for loss based on the work that they do and the worst case financial exposure for their business.

Applying this argument to an insurance broker buying PII cover it can be seen that the FSA minimum of €1,120,200 for a single claim and €1,680,300 in the aggregate (or 10% of annual income up to £30 million), is only the correct level of cover for a very small broker whose customers purchases are limited to policies where the risks are basic and the sums insured are low.

The moment that you throw in an insurance policy that covers a factory or a property with a sum insured over the FSA PI minimum limit you are exposed to the possibility of a claim and need to increase your cover limit accordingly. The "however slight" argument is taken care of by the relatively low premiums charged for PI cover for General Insurance brokers vis a vis the risk.

For more help and advice with Professional Insurance cover please see our web site www.piexpert.co.uk or call PI Expert on 01825 745410.

Supreme Court Abolishes Immunity for Expert Witnesses

The Supreme Court ruling in respect of Jones v Kaney. This landmark ruling has the effect of abolishing the immunity previously available to expert witnesses from claims arising out of the evidence prepared and for the purposes of, and in connection with, legal proceedings. This ruling has wide implications for and professional who provides expert testimony in the course of their work and may have an impact on professional indemnity premiums in the longer term.

Lord Phillips, who delivered the lead judgement of the majority, set out arguments in favour of removing immunity for witnesses. One of the points that he made is that the vast majority of expert witnesses carry professional indemnity insurance. Whilst this is true in some cases, there are a good number of individuals that provide expert witness services without purchasing PII cover.

One of the major problems that will arise from this judgment is that many experts who have PII cover do not realise that the cover needs to be in place not just when the work is carried out, but also later when a claim is received. In the case of court work this can be many years later. The impact on the expert witness is that they will have to retain their insurance cover for many years, even though they might only give evidence on very rare occasions.

Another area of concern that arises in respect of the PII cover that expert witnesses purchase, is the extent of cover. Many witnesses buy cover for their business or company, and assume that the cover extends to the expert witness work that they do in a personal capacity. In fact unless the individual is specifically named as being covered in this capacity on their insurance policy, many policies will not cover this angle of the work.

The decision by the courts could opens up the floodgates for successful negligence claims being made against expert witnesses. If this happens it will impact on professional indemnity premiums as previously this particular activity has been viewed by insurers as a low risk activity – largely because of the immunity previously afforded.

Expert Witnesses who would like help and advice with their Professional Indemnity Insurance can call PI EXPERT on 01825 745 410.

For further details of this case please see the PI Protect case notes prepared by Berrymans Lace Mawer

PI Expert tells major insurer which cow is which!

Do you know the difference between "Additional Increased Cost of Working" (AICOW) and "Increased Cost of Working" (ICOW) cover?

As any good insurance broker will tell you ICOW and AICOW are one of the extensions commonly available under a business interruption cover. If you don't know the difference between the two then it seems that you are in good company. This afternoon we had to explain to a major insurer what the difference was between the two types of cover. We found this particularly amusing because this is an insurer who has recently decided that it would be a good plan to offer their products direct to the public at large via the internet.

In this case we had a client who runs an IT business. PI Expert provides cover not just for his Professional Indemnity needs, but also some office and business interruption cover too. Due to the nature of his business a traditional cover based on gross profit would not have been suitable; however an AICOW cover was appropriate. We had placed this particular client with a Professional Indemnity Insurer who also offers property damage cover, including an extension for business interruption. We duly obtained a quote and were delighted to note that on the insurers risk profile that "Additional Increased Cost of Working" was automatically included.

The client accepted the quote and we set about making the cover live. Prior to sending out the policy we checked the documents for accuracy (another free service provided by brokers). Under the BI section there was no mention of AICOW cover. On checking with the insurers we were told that they didn't offer AICOW cover, even though the pre-quote documentation specifically stated that it was automatically included.

At this point it became clear to us that the underwriter had no idea what AICOW was! We had to explain the difference between ICOW and AICOW and the underwriter went off to check with senior management. Some hours later a very sheepish underwriter called us back to confirm that there was an error on the risk profile and AICOW could not be provided. The blame was put firmly on the IT and Marketing departments who were not insurance experts and therefore had no idea that AICOW was a specific insurance cover. It seems that underwriters who checked the documentation were equally in the dark.

This story highlights not just the dangers of buying insurance on line – what hope has the customer got if the insurer doesn't understand what they are selling - but also underlines the value a good broker, such as PI Expert, can add when purchasing an insurance policy.

Customers should remember that Insurers do not offer "advice" (as defined by the current FSA regulations) when selling insurance. They are unable to make any recommendations and do not compare the products that they offer against those that may be offered by other insurers. On the other hand a broker is legally required to provide "Best Advice" for the customer regardless of any other factors (such as the level of commission paid).

A broker can also be called on not just to translate terms and wordings and explaining how a policy will operate before cover is purchased, but also during the course of the policy life to assist with changes alterations. Brokers will also be on hand if to fight the insured's corner with the underwriters if there is a claim. And, unlike an insurer, a broker will have the extra protection of a Professional Indemnity policy which the customer can fall back on if a problem arises with the advice that's been given.

And the difference between ICOW and AICOW? In layman's terms ICOW covers increased costs of working which do not exceed the loss of revenue that would ensue if the increased costs were not paid (i.e. economic losses), whereas AICOW covers those costs which would exceed the resulting loss of revenue (i.e. uneconomic losses).

For expert help and advice on Professional Indemnity Insurance please call PI Expert on 01825 745 410. For help on sorting out your ICOW from you AICOW please ask for Pam Jackson (our in house BI Expert!)

Professional Indemnity for General Insurance Brokers – The Minimum Is Not Enough

In the late 1980's there was a quiz show on ITV called "Busman's Holiday". For those of you not old enough to remember this was a popular quiz show where three teams of three from differing professions competed in various ' work' related question rounds to try and win a trip abroad. The trip would be a "busman's holiday" and would involve the lucky winners spending time doing their normal job in a foreign country.

It's fair to say that at the time the show was popular, foreign travel outside of two weeks to Majorca was still a bit of a luxury enjoyed by a relatively small minority of the UK population, even so I am not sure that there were ever any teams from the Insurance Industry that took part (no doubt someone will correct me if I am wrong!).

For most professions the idea of the busman's holiday where they have to applying their own trade to their own set of circumstances is a bit of an anathema. This attitude persists across all professions and is why builders have half finished extension, painters have houses in need of decoration and, I would venture to suggest, why General insurance Brokers tend not to give due consideration to their own insurance needs.

Let us consider for a moment Professional Indemnity Insurance. Prior to regulation by the FSA when PII cover became compulsory for General insurance Brokers, very few firms purchased the cover. It could be argued that this is because at that time the industry, and the UK generally, was a far less litigious place than it is now. However if you take a snapshot of the Industry today it is quite plain that most general insurance broking firms are inadequately insured for PII, largely because they have failed to evaluate their own risk.

The vast majority of brokers purchasing Professional Indemnity Insurance ask not "what is my exposure to claims", but "what is the FSA minimum requirement for this cover". If expressed by a client, this is a sentiment that we would all go to great pains to explain as folly. So why do professional insurance advisors fail to take their own advice?

There is probably a combination of factors at play here. Undoubtedly the "Busman's Holiday" principle applies but also, and particularly in respect of PII covers (and probably D&O risks too), there is uncertainty about a product that is on claims made rather than claims occurring basis and is not a class of business that comes up as part of the package of advice provided to mainstream clients on a day to day basis.

As at June 2011 the current FSA minimum requirement for UK General Insurance brokers buying PII Cover are €1,120,200 for a single claim and €1,680,300 in the aggregate (or 10% of annual income up to £30 million). Whilst €1,120,200 might be suitable as a limit for a very small general insurance broker selling home, motor and cover to small businesses, it is totally inappropriate as a limit for a firm that sells high net worth household or cover to medium sized businesses. Consider the possibility of not correctly placing a high net worth household policy where the rebuild exceeds £1.5M. Or a property portfolio which has commercial property values in excess of the same figure. Or a commercial risk where the Business Interruption cover for loss of profits exceeds £1.5M per year. The potential to blow through the FSA minimum cover limits is obvious.

I am not suggesting for one minute that the FSA should revise the minimum levels, general insurance brokers are already over regulated for the risk that they pose, however as a profession we should, rather than looking to the minimums, consider the risks and take appropriate action.

PI Expert is happy to advise Insurance Brokers and other professionals on all aspects of PII cover. Please call 01825 745 410 for help. www.piexpert.co.uk

Professional Indemnity Insurance – is the minimum right?

PI Expert is often asked by clients for advice on the level of Professional Indemnity Insurance (PII) cover that they should buy. This is a common question that all insurance brokers encounter in their work in respect of many different types of cover, but what is specifically interesting in connection with Professional Indemnity Insurance is that a number of professions never or rarely ask this question. Typically these are professionals who have an industry body that lays down a minimum requirement for cover. This will include Solicitors, Accountants, Surveyors and Insurance brokers, IFA's and Mortgage Advisors.

Maybe some of these worthy individuals will have thought long and hard about the limits of cover that they are buying and have concluded that the minimum cover required by their regulatory body is the right level of cover for their firm, however as these professionals rarely buy more than the prescribed minimums it is doubtful that any real meaningful thought goes into this. In a "no win no fee" culture PI Expert believes that this is a dangerous attitude to adopt.

Insurance Brokers are a really good example of a class of PI buyers who really should know better – after all we spend our lives advising others to think about the risks that the business faces, we spend time helping clients predict the financial impact of a major fire or similar disaster on their business and help formulate Business Interruption cover requirements. But when it comes to our own cover we buy the minimum that the FSA says we should have. This really is a case of "physician heal thyself"! You only have to look at the number of Brokers who did not buy cover for PI risks prior to being forced to by the FSA to realise what little importance we as a profession attach to a vital cover for our businesses.

The FSA lay down a minimum requirement for Professional Indemnity Insurance for General brokers which at the time of writing is €1,120,200 for a single claim and €1,680,300 in aggregate. If we were to take a fairly typical property portfolio for a reasonable sized client it is easy to see that an incorrectly insured office building destroyed by fire could wipe out the minimum FSA PII sum insured and then some! Or a business interruption claim for ongoing profits – if these are forecast incorrectly (which is not unusual particularly in the case of a factory which has an ongoing loss of profits claim due to it taking longer to regain orders after the rebuild than the rebuild takes itself) you could be looking at a poor advice claim of many millions of pounds. And this would probably be enough to take most small to medium sized brokers out of business as well as their clients.

The same can be said of Lawyers – particularly those practising in the conveyancing field – or indeed surveyors. Accountants too – the minimum PI requirement laid down by ICAEW is two and a half times fee income. But what would be the impact of messing up a big clients VAT or tax advice? Could it wipe out your PI Limit? And if so, remember that sole trader and partnerships (solicitors and accountants particularly take note) the individual not the firm, bears the ultimate cost – even to the loss of their own assets or the shirt off your back to quote a famous maxim.

PI Expert offer specialist help and advice to all types of professions for their Professional Indemnity Insurance (PII) cover. Call 01825 745 410 for a quotation.

Business Interruption – Make or Break Insurance

A key indicator of a well run business will often be found in the time and effort that has been spent on disaster recovery or business continuity planning (BCP). A key factor in any BCP will be the insurance that is arranged for the business. It is therefore essential that the business fully understands the insurance cover that it has in place and how this interacts with and underpins the BCP. Many good businesses with well developed BCP's can be destroyed by the failure to properly insure their operations through lack of knowledge about the finer points of their insurance cover. When insuring a business can often focus in great detail on the value of the physical buildings and contents whilst brushing over the finer points of the business interruption cover.

Business Interruption Insurance (BII) protects the income of the business in the event that an insured event occurs (e.g. fire flood etc.) which prevents or reduces the ability of the business to function. BII cover is bought as part of the insurance protection that covers the property (buildings and contents) of the business. A BII policy will pay out only if the cause of the loss is covered by the property policy. So for example a burst pipe at a restaurant that causes a flood and prevents the business from functioning would trigger a business interruption claim, whereas a new road layout that alters the flow of passing trade would not (although road works or a road closure might!).

A BII policy covers items such as loss of profits, increased cost of working, and additional expenses incurred to keep the business running. The coverage is normally subject to an over arching set limit and a predefined time scale over which the cover will operate. In order to make a claim a business will need to be able to provide proof in the form of previous trading figures of the loss of profit or additional expenses incurred.

Most BII policies are issued to cover Gross Profit. One of the common mistakes that a business can make when calculating the sum to be insured here is to consider only the net profits of the business. A BII claim under the Gross Profit heading will normally be calculated using the following formula:-

Amount of Insurance
-------------------------- X loss = Value of claim
Gross Profit

Another common problem relates to the period of time that is insured. Whilst a business may be able to rebuild or reinstate damaged property over a relatively short period of time, the time to return the business to the pre loss level of turnover or profit may be longer, This could be because orders are lost to the competition during the period that the business is inactive or because it take time to rebuild the reputation of the business. The additional loss of profits may need to be insured in addition to the gross profits depending on the policy wording.

In addition to the loss of profits heads of cover, a BII policy may need to extend to include Additional Expenses. In order for a business to continue to function during a period of interruption, it may necessarily incur additional costs, over and above what it would normally have to find, to keep the business running. This might include for example temporarily relocating employees, the cost of management overtime or the additional cost of subcontracting work that would normally be carried out in house in order to fulfil contractual obligations to clients or to retain orders.

For help and advice on commercial insurance issues contact Affinity Select Insurance Services Ltd on 01825 745 410

 

 

No Increase in PII costs says FSA

Following today's announcement by the Financial Services Authority (FSA), that the award limit for Financial Ombudsman Service (FOS) complaints is to be increased from £100,000 to £150,000, the FSA have said that this should not impact on firms Professional Indemnity Insurance costs. The FSA says that as there are only a small number of cases currently where the award exceeds the current limit the impact on authorised firms covered by the FOS scheme should be minimal.

However PI Expert is not convinced by this argument. Given that the number of insurers who are prepared to provide cover for IFA's, Insurance Brokers and Mortgage Advisors has shrunk significantly and this is already having a significant impact on premiums, PI Expert's view is that the increase in the maximum award cannot fail to result in premium hikes. Notwithstanding that a higher maximum means that some claims must by definition, receive higher awards, it seems likely that as the bar raises at the top end of the payment spectrum, that the lower awards will also increase in value. Spiraling awards across the board will result in more insurers withdrawing from the IFA/Broker/Advisor Professional Indemnity Market and that can only result in further (significant) increases in premiums, even in the unlikely event that the maximum limit increases do not.

The FSA also announced plans today to undertake a significant review of the financial services industry complaints handling process which it described as being "inherently prone to misuse". The proposal is to scrap the two stage system that currently exists under which customers must first complain to the firm and then wait eight weeks before being able to bring the case to the FOS.

The FSA's director of conduct policy, Sheila Nicoll, said: "Good complaints handling contributes to customer loyalty and should provide the opportunity for firms to put right problems in product design or sales before issues become widespread. But we have found major failures with the way firms handle customer complaints and have since taken enforcement action against two firms as a result of poor complaints practices." The administrative costs of the FSA's proposals to firms are estimated at £24m-£82m a year.

Quite what the FSA intends is not clear, however brokers, advisors and intermediaries who are unfairly carrying the financial can for the cost of investigating complaints in respect of the banks miss selling of PPI policies can only hope that this review does not end up in further unreasonable hikes in the levy.

For further information about Professional Indemnity Insurance or for a PI quotation for mortgages advisors, claims handlers, underwriting agencies, tied agents, loss adjusters & assessors, insurance professionals (general brokers, underwriting agents, loss adjusters and assessors etc) call PI Expert on 01825 745 410 or on line at www.piexpert.co.uk