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

 

 

Home and Away – what are your limits?

One of the important things that a business should consider when buying professional indemnity insurance is the territorial and jurisdiction limits that apply to the policy. This may seem to be an obvious statement, however many policy holders are confused by what underwriters mean by these terms. The default potion that many policyholders adopt is often to ignore what the policy says is covered and then panic if a claim comes in!

Simply defined the Jurisdiction limits of a policy relate to the countries in which the policy will pay to defend a claim brought against the insured. On the other hand the policy territorial limits (sometimes referred to as geographical limits) relate to the countries in which the policyholder is insured to carry out their work. It is not uncommon for the territorial limits and the jurisdiction limits of a professional indemnity policy to be different.

For example a structural engineer may be insured by his professional indemnity insurance policy to work in the UK and Europe as territorial/geographical policy limits. The jurisdiction (or legislative limits) may be restricted to the UK only. This would mean that whilst the policy would cover him to work in France for example, it would only pay to defend a claim that was bought in the UK courts.

For many businesses such as Architects and Accountants whose clients are totally UK based with no overseas subsidiaries, a professional indemnity cover which provides UK jurisdiction and territorial limits will be perfectly sufficient for their needs, however some professions will need wider cover. Buyers of PI insurance should remember that you do not need to actually work abroad to be exposed to claims – a web designed with a modest turnover based in Bognor Regis will need cover for worldwide jurisdiction including US/Canada as his work will be visible throughout the world.

In general terms most PI insurers will grant European cover without making a particularly high charge as compared to their UK premiums. Equally worldwide cover excluding USA and Canada does not necessarily attract a particularly high premium. The real issues arise when cover is required for USA and Canada. At this point and depending on the profession and the work that is being carried out, premiums can mount steeply. The normal compromise where professional indemnity cover is required to include these territories is to provide cover for Worldwide Geographical limits and Worldwide excluding USA and Canada Jurisdiction. How sensible this compromise is depends on the individual clients circumstances, the work that they are doing, their asset base and how their business is structured.

As ever, it pays to take good independent advice. PI Expert is pleased to offer advice to customers who need help in understanding how the geographical and jurisdiction limits of a Professional Indemnity policy can impact on their business and to put together a cost effective insurance programme that meets the needs of the business.

Review and Reward

In difficult economic times we are all looking at ways of saving money. Insurance costs, which are often neglected during times of plenty, can be a good place to start, but you need to be careful about how you tackle this – you don't want to throw the baby out with the bathwater and find you have no cover in the event of a claim! It is however prudent for a business to review their insurance portfolio on a regular basis, providing that the review process is carefully considered.

1. The first place to start is to reread your insurance proposal forms. These will tell you what you have told insurers – and on which facts your policy cover is based. It is not uncommon for factors such as numbers of employees or turnover to fluctuate substantially during the course of a business's life. If you have a policy where the turnover or workforce that you have declared is higher than your current situation then you may be paying too much for your cover. If it is much lower you might find that you have no cover in the event of a claim.
   
2. Check that you are still doing what you told insurers you are doing. It is surprising how many businesses who undertake this process realise that what they originally insured for is no longer the process that they require cover for. You might also find that the percentage of your time is being used differently to when you took the cover out – perhaps a particular product or service has proved more popular as your business has grown or is more relevant to the current market place than previously. If your business has changed then you should talk to your insurers – this could mean a price increase or a price decrease, but it is better to be covered than not!
   
3. Consider what areas of the world you are now working in. Does this still fit what you have told your insurers – if you are now concentrating your business in the UK only then premiums may decrease, but if the internet has made you into a net exporter of products then you might need to change the geographical limits on your policy to fit.
   
4. Has your premium gone up every year for no good reason? It is surprising how many people simply renew with the same insurer each year even though the price has gone up a bit. Remember those one or two percents can add up over time, particularly as over the last 5 years insurance costs have been falling rather than rising.
   
5. Talk to an expert, not a call centre. PI Expert is on hand to help customers understand their insurance requirements. Our customers get straight through to a human being who talks their language and is ready to help customers understand their insurance cover and in order to the right cover at the best available price.
   

So you think you are a Management Consultant?

If you are a Management Consultant then you are a member of what is one of the fastest growing professions. But what is a Management Consultant exactly? There are many people who use this catch all term to describe the work that they do when buying Professional Indemnity Insurance (PII) however it is important to understand that just because you describe yourself as a management consultant that doesn't mean that you will automatically qualify for cover under a Management Consultants Professional Indemnity policy. And if Insurers don't agree that you are working as a Management Consultants then you may find that your Professional Indemnity Insurance policy won't cover you in the event of a claim.

The following people all have described themselves recently as "Management Consultants" when trying to buy professional indemnity cover - a lady who provides advice to management on the movement of their investment funds, a chap who advises managers about alarms and security devices (and installs them) and, my personal favourite, the lady who advises the management of one particular European army on their strategic nuclear missile programme. Let us be clear, in no way are any of these three professionals "Management Consultants". And, whilst a Management Consultants policy is very reasonably priced, it is not designed to cover the risks that these professions face.

Most Professional Indemnity Insurers offer a range of policy types to cover a variety of professions and it is important that you buy cover for the correct profession. Management Consultants are normally considered by insurers to be those professionals who provide strategic, organisational, purchasing, development advice to their clients. The cover can be extended to cover those consultants who provide Financial, Technical, Engineering & Industrial advice, however for consultants who provide this type of advice it might be more appropriate for a more specific policy such as an Accountants, IT, Engineers or even a Design and Construct policy to be used. The most suitable policy will depend on the depth and level of advice being provided as well as on the particular insurers policy cover.

Some insurers are comfortable to include within the definition of management consultant consultants who concentrate on specialist areas of advice such as Personnel or Human Resources consultants, however care needs to be taken with these professions as some policy wordings have exclusions in respect of the provision of legal advice.

Training consultants can in some cases be insured as Management Consultants, however this depends on the type of training being provided. As a general rule classroom based activities which do not involve any physical activities will be considered, however anything that involves active participation, team building away days or confidence building stunts such as fire walking are likely to be excluded by a basic policy which excludes claims for bodily injury or death.

Company Doctors deserve a special mention. As a rule those consultants who provide mentoring, coaching and careers advice will be covered by a Management Consultants policy, however the Business Turnaround or Merger and Acquisition specialist will need special consideration by insurers and may be more appropriately covered by an Accountants wording.

Interim Managers can be covered by a Management Consultants wording, however not all Interim Managers are considered to be the same by Professional Indemnity Insurers. The manager that goes into a firm to cover a head of department or to set up a new operation for a few months will be viewed very differently to an Interim who takes on a CEO or Caretaker Manager role. Interims who take on an FD role may well need to be covered by an Accountants wording rather than a Management Consultant policy. Insurers will be happier to insure the interim who is not responsible for financial decisions or the strategic direction of a company.

When buying Professional Indemnity or Professional Liability Insurance it is always best to take independent advice. PI Expert is happy to provide advice to Management Consultants, Business Advisors, Interim Managers, Business Doctors and all other professions on their Professional Indemnity Insurance requirements. Please feel free to give us a call on 01825 745 410 or online at www.piexpert.co.uk

Are your sums right?

There have been a number of changes over recent years to the Buildings Regulations in respect of the construction of buildings.

Part L (conservation of fuel and power) came fully into force in October 2010 and this raises the standard in relation to the allowable thermal emissions form buildings. Part K (equality) and Part E (sound insulation) have also impacted on the rebuilding costs, and therefore insurance value, associated with older buildings.

Although the regulations do not apply retrospectively, they would apply in the event of a structure having to be rebuilt, substantially repaired or altered following on from a fire or insured event. The cost of replacing an older poorly insulated building of a lightweight design with a modern, compliant structure can add 50% or more to the cost of replacing with a like for like building. These additional costs should be incorporated within the building sum insured on all property owners policies.

For further information about property owners insurance please contact Pam Jackson at Affinity Select Insurance Services Limited 01825 745 410

SRA Announces PI Shake-up for Solicitors

The Solicitors Regulation Authority (SRA) has announced how it plans to transform the PI market and the Assigned Risks Pool (ARP).

Following on from over 300 responses to the consultation document that it issued the SRA has announced the following changes:-

• The amount of time that a firm can be in the ARP reduces to six months form 12 – effective October 2011
  
• From October 2012 the ARP will be jointly funded by the qualifying insurers and the profession. Liability for claims arising from firms who are uninsured will transfer from the ARP to the Compensation fund
  
• From 2013 The ARP will be replaced with a system whereby insurers will offer a three month extension to existing policyholders who are unable to obtain cover for the following year.
  
• The single renewal date for all firms will remain as currently until at least October 2013 to facilitate these changes.
  
• Financial Institutions will be required to comply with the same minimum terms and conditions.
  

A policy statement will be issued on Monday to confirm the details. Details of the original proposals are available at www.sra.org.uk/sra/conultations

IT Professionals – Why Should You Use A Professional Indemnity Insurance Broker?

Quote from a live twitter feed a few days ago - "PI Insurance – quote on line £268 – quote form a broker £2,568 – compute that!" It's a good question and highlights beautifully the dangers of assuming that all Professional Indemnity insurance products are simple contracts which can be purchased as a commodity without the need for specialist advice.

The individual posting this question is an IT professional providing predominantly web based services such as Internet Marketing, SEO,
Web Hosting and Web Design Solutions. He is a sole trader with experience in PHP programming and transport model programming using Fortran, Visual Basic and C languages. He describes himself for the purposes of his insurance proposal as a "Computer Consultant".

This case highlights a number of misconceptions and problems that arise when trying to purchase Professional Indemnity Insurance. The first issue is one of language – what you understand by way of your job description may not be the same as a Professional Indemnity insurer. Take for example the "Management Consultant" whose main role was to "Advise Management" on the technical specification of Missile Systems. Without going into too much detail what was needed in this case was an Engineer's Professional Indemnity policy, with some very special extensions. What the client tried to buy was a Management Consultant's Professional Indemnity policy which, whilst much cheaper, would not have provided any cover in the event of a claim.

In the case of our "Computer Consultant" we need to consider what insurers mean by way of Computer Consultant. IT companies and the services they offer are not easy to categorise, largely due to the wide range of business and industrial environments in which IT professionals work. On line quote engines, which maybe ideal for the most simplistic IT professional, will have significant limitations in respect of the protection they provide and the business activities that they cover. They are unlikely to provide adequate cover for anything more than the most simplistic risks.

The problem facing buyers of professional indemnity insurance on line is that there is, from a risk perspective, a world of difference between a firm which provides advice on packaged hardware and software to a firm that provides bespoke solutions or internet services or financial trading platforms. There is a significant gap between the cover that is required for the different business activities.

What insurers are looking at when they consider an IT professional for Professional Indemnity Insurance is the potential that the particular firm or individual presents for immediate financial loss and other consequences if data is incorrect or a system fails or becomes unavailable for any period of time. Much depends on the precise function of the software and the commercial application it is being used for. In the case of the IT consultant selling packaged hardware and software there is clearly less risk to insurers of a claim being made than where a bespoke system has been provided. Equally a web designer has less chance of being sued than a company providing web hosting services.

The main areas that give rise to litigation against IT companies are Failure of the software / system to do the job which it was intended for (fitness for purpose), Failure to deliver the system on time, Failure to deliver the system to budget. There are also smaller, but more frequent, claims which relate to breach of copy-write, plagiarism and libel. Typical claims involve a client that withholds or claims for return of the purchase price / fees paid, an action against the IT company for the direct financial and consequential losses arising from the negligence of the IT company, damages for breach of copy-write or libel. Breaking down the risks in this way it can be seen that the simple computer consultant selling his packaged hard and software solutions is less at risk of a major claim than our programmer, web designer or internet hosting company.

Consideration also needs to be given to the geographical exposure that a risk presents. The basic IT Consultants package is likely to restrict cover to domestic territorial limits, or provide worldwide territorial limits, but domestic jurisdiction limits only. This can be confusing, but the distinction is very important and it is vital for the IT company to understand the limitations of their policy.

In layman's terms the territorial limits are about which countries you can work in, the jurisdiction limits are about the countries in which you will be able to claim for legal representation in the event that a claim is made against you. It is important to realise that these may be different.

For an IT consultant specialising in hardware or software sales in the UK with no overseas exposure, UK territorial limits and UK jurisdiction maybe fine, however a web developer may well need Worldwide cover for both Jurisdiction and Territorial limits even if he only works in the UK for UK companies as his work will be open to claim throughout the world.

Another factor that insurers will consider when underwriting an IT Consultants Professional Indemnity policy is the type of client that they look after. Areas of particular concern to insurers include clients in the financial sector, games developers, trading systems, process control systems, Application Services Providers and Internet Services Providers, Managed Service Providers and Mission and safety critical systems. There is also a direct relationship between the size and complexity of the work undertaken by the IT professional and the resultant exposure to potential claims. Underwriters will charge a significantly higher premium for this type of work, particularly if it is carried out US or Canadian firms.

In most cases Insurers' first line of defence will be a written contract between the insured and their client. It is very important that smaller firms take the time to understand the extent of their policy coverage in this respect as some policy wordings can exclude contractual conditions, particularly if they are overly onerous or include consequential losses. One of the benefits of using a professional Indemnity Broker such as PI Expert will be that the broker will be prepared to advise on policy coverage for individual contracts as and when they arise. This is particularly of benefit for smaller IT firms who are asked to sign onerous contracts with larger customers. This can be vital as insurers often expect that consequential losses will be excluded, or at least limited, by the IT company in their contract terms and conditions.

So what else should the IT consultant be looking for when they buy Professional Indemnity Insurance? Most policies will provide insurance under several different heads of cover. These are typically Professional negligence, Negligent misstatement or negligent misrepresentation, Failure of software to be fit for purpose, Infringement of intellectual property rights, Breach of confidence, misuse of confidential information, Defamation, Dishonesty of employees. Whilst a good policy will provide cover under all of these headings, some basic policies may cover only one or two items of coverage only.

 

Another factor to consider is how claims are handled. Many IT Professionals expect their professional indemnity policy to automatically pay out that if they identify that they have made a mistake or an error, however most basic policies require a claim to be made against the IT Firm by the client before the policy will respond. This will take time and imposes a burden of proof of negligence on the IT firm's client and normally results in the loss of the business for the IT firm. It is possible to buy enhanced cover – often called first party cover – which provides ability in the wording to allow insurers to put right a problem discovered before a loss occurs. In this case it is the policy holder, not his client, who will make the claim.

 

An IT professionals cover should always be on an "Any One Claim" basis. Some basic Professional Indemnity policies will seek to limit liability under the policy to an "Aggregate" or "In All" limit. An Aggregate limit can be disguised by some insurers as an "Any One Claim and in the Aggregate" basis of cover. Another trick is to include defence costs within the claim limit – these should always be shown as "Payable in Addition". Ideally the excess should not apply to defence costs as this is where most claims will start and finish. I have seen one policy which is being sold to a very large group of IT professionals which whilst it provides a limit of £1,000,000 on an Any One Claim Basis, the cover is limited to £2,000,000 in the Aggregate for all of the members of the group – meaning that only two large claims are needed to blow the cover for the remaining members.

 

The final point to consider is the policy coverage in respect of past work. This is called "Retroactive cover" and is necessary because all Professional Indemnity policies are written on what is known as a "Claims Made" basis rather than as is more usual (in motor or office insurance) a "Claims Occurring" basis. In simple terms you need to have a Professional Indemnity policy in place not just when you do the work, but also when a claim is made against you. The cover needs to be continuous. This is important to remember when pricing work as most claims tend to come after a contract has been completed and you could occur after the business has finished trading. You should therefore be budgeting to continue buying Professional Indemnity cover for at least five years after you cease to trade.

 

Retroactive cover is either shown as "Inception", "None" or with a date. If the policy states "Inception" as the retroactive date then you are only covered for the work that you have done from the start of the policy. If it has a date then the cover under the policy includes all work that you have done in the past back to the sated date. If the retroactive date is "None" then the policy covers you for claims made during the current policy year for all work done, including in the past, without time limit.

In most cases if we are looking at the basic premiums then you can be sure

In conclusion returning to our Computer Consultants post I have to agree that what he is saying is true – it is possible to buy an insurance policy for £268 for a "Computer Consultant". The problem of course is that there is not a hope in heck that it will provide any cover in the event of a claim. What he actually needs is something completely different, and yes if he wants to be covered in the event of a claim, it will cost him more than £268, although not necessarily £2,568 as the final price depends on whether he has consulted a broker like PI Expert who specialises in Professional indemnity Insurance with access to every insurer or just one with a small amount of knowledge and limited access to the market.

Buying professional indemnity insurance cover is one of the most important decisions that you will make about your business. In a no win no fee world you need to be sure that the professional indemnity insurance cover you buy will protect your business in the event of a claim. With so many different insurers and so many policies to choose from it can be difficult to know what to buy. That's why many professionals turn to PI Expert to help them find the find the best professional indemnity insurance cover for their business at the best possible price. Contact PI Expert by phone on 01825 745 410, by email at enquiries@piexpert.co.uk or check us out on line www.piexpert.co.uk

The Price of Loyalty?

In an age of economic austerity one of the ways that businesses can save money is to look hard at their insurance costs. This is an area which is often overlooked during times of success due to lack of time, understanding or expertise – sticking with the status quo can be the easiest option when your time is consumed servicing increasing sales. In quieter periods however many businesses have the chance to really look at the insurance cover that they need and the value for money that their insurance arrangements afford to them.

A recession can be a good time to carry out a root and branch review – not just because there might be cost savings to be made, but also to check that an insurance program still fits the needs of the business. Many businesses could save money by simply remarketing their insurance portfolio on an annual basis and this can seem to be an obvious course of action in a price comparison world, however there can also be a hidden price to pay in the medium term for what many insurers will see as a lack of loyalty.

Insurers will understand, and indeed expect, a certain degree of price benchmarking, however a business can do real damage to their insurance prospects by over marketing their portfolio. There is a fine balance to be struck between obtaining a fair price and excessive market exposure. The owner of a small to medium sized business, who does not have the luxury of a qualified insurance manager to advise them on their insurance requirements, can easily end not marketing their portfolio sufficiently or over marketing. The impact on the business of the former is easy to guess – the business ends up paying more for their insurance cover than they should, but what of the effects of over marketing?

In the short term over marketing can seem to have a positive impact on the business. Prices are driven down and the business pays less for its insurance cover. This does not necessarily have an impact on the quality of cover that the organisation buys, the effect appears to be on price only. In reality there is a hidden effect of over marketing and any short term price gain can be lost in the medium term. There is a quantifiable cost to Insurers for clients who shop around each year as opposed to those whose business they are able to retain for a period of time. To understand the value of loyalty it is important to understand how an insurer structures their premiums and how they achieve pay back on their investment.

The first thing to understand it that it is more expensive for an insurer to put on a piece of new business than it is to write a renewal. This is because when a new policy comes onto the books an insurer must take the time to take a detailed look at the proposal and put together a pricing strategy. At renewal the insurer is simply reviewing its previous decisions and looking to see if there are any major changes in the business that need to be factored into the rating structure. The time taken on a renewal is therefore significantly less than on a piece of new business and this provides an instant saving to insurers.

The other factor which reduces the cost of renewals over new business is that, providing the pricing strategy is right, an underwriter can expect the majority of the renewals to result in confirmed business (typically 90% or more), whereas new business quotes tend to have a much lower conversion ratio (typically 20 – 30%).

In many cases an insurer will not make any money in the first year that they hold a particular risk. It therefore makes economic sense for them to retain a piece of business over a period of time. It is in their interests therefore to work with clients who are prepared to be loyal and want a long term relationship with their insurance providers.

Insurers can and do become very frustrated by customers who they see marketing their business every year. The client who uses two or more brokers each year to bench mark their premiums is an even worse proposition. This can result in an insurer seeing the same piece of business several times over a short period of time. Insurers can and do remember what they have quoted on and to see a piece of business several times in quick succession sticks in their mind – particularly if they see the same piece of business several times each and every year without ever getting the business.

The affect of this over marketing is to end up with a hugely disaffected underwriting base. Quote requests will begin to be returned marked "no quote – annual marketing exercise". This can quickly reduce the number of markets prepared to look at a piece of business and as the supply base narrows so the actual price that the business pays for their insurance cover increases in the medium term.

The other effect of over marketing can be seen in the event of a claim. Every business that buys insurance does so in the certain knowledge that claims are something that happen to other people so this is not an area that need concern them, however claims do happen at some time or other to us all, whether we are at fault or not. If a claim at some point throws up an issue on which insurers have to take a view on whether the policy provides cover or not we will want the insurer to give our claim the benefit of the widest interpretation of the policy. There is no doubt that insurers are more inclined to take a generous view in cases where a client has been a long standing customer than in those cases where a client switches carriers each year.

Notwithstanding the above it is sensible and indeed healthy for a business to review and periodically remarket their insurance portfolio. There are ways and means of effectively marketing an insurance portfolio on a regular basis to ensure that the best price is obtained for the cover without causing disaffection with insurers. For an SME the most sensible solution is to use a broker, such as PI Expert, to manage this for you.

Your broker should work with you to firstly understand and then present your business effectively to insurers. The broker should use their expertise to narrow down the markets which are appropriate to your business. You should expect the broker to go to a number of markets on your behalf to get the best price for you, It is surprising how many brokers (including some of the largest players) only use a limited market for placing business – this might be just one or two insurers. Whilst limiting their market to a few players will result in higher commission for the broker it is unlikely to result in a better premium for your business.

When instructing a broker it is wise to take time to find out which markets they will use. Ideally use a whole of market broker. Brokers such as PI Expert are totally independent and will carry out a full market search. Ask also to see proof of alternative quotes.

Your broker should be reassessing your business every year. This does not necessarily mean that they should go to market every year to see if cover can be obtained more cheaply – in some cases this is counterproductive – the broker should use their knowledge of whether you are on good rate or not. You should however ask your broker what they plan to do with your renewal and ask them to justify their decision if they are only going to a limited market or not marketing your renewal at all. Be very suspicious of the broker who simply offers up the same insurer year on year with a small price increase each time.

You should test your broker out every now and again. Do not do this every year, because not only does it annoy insurers to see the same piece of business more than once, brokers also take a view on the client that goes to market every year too. If you are going to go out to market with another broker be sure to give your holding broker a chance to quote for your cover first – there is nothing more frustrating for a broker who has worked with a client over a period of time to find all of the markets that will quote have been blocked by an attacking broker prior to being given the chance to do the job properly for the client. A simple rule of thumb is to let your holding broker have a few days head start on the quote process before you ask an alternative broker to come up with a quote.

Be fair to all parties. If you have instructed an alternative broker to obtain competitive quotes for you be prepared to move your business. In common with many brokers PI Expert does not charge a fee for obtaining quotes and this can be a costly and time consuming job. It is only fair therefore for you to be prepared to move your business if the alternative broker is able to obtain significantly better terms. You will do your business no favours by sticking with a broker whose strategy is to allow another broker to do the hard work of obtaining the best price for your cover and then price matching the best deal you are able to obtain elsewhere. The broker who has done all of the hard work and not obtained your business is unlikely to want to try again the following year and there is no pressure on your holding broker to do more than offer up existing insurers terms.

Be claim aware. If you have had a claim during the year it is sensible to stay with your holding insurer at renewal. If there is a problem with the claim then insurers are more inclined to look favourably on it if you have shown loyalty to them at renewal. There is an unwritten understanding between insurers that expects policyholders to give the holding insurers at least some opportunity to make their money back after a claim has been paid out and many will take a dim view of an insured who tries to move their cover at the renewal which immediately follows a claim being made. This may affect your chances of obtaining a quote at all in the future.