FSPs are required by law to “maintain in force suitable guarantees or professional indemnity or fidelity insurance cover”. The minimum amount which an FSP is required to have in place is determined in BN123 of 2009 and differs according to the categories of FSPs and various activities, such as holding of client funds.
PI Cover is one way in which FSPs can address some of the risks they face by transferring the risk to the PI provider. PI Cover should therefore not only be viewed as a ‘compliance requirement’, but form an important part of an FSP’s risk management framework.
FSPs should familiarise themselves with how their cover works, for example when will it pay out and what is excluded and ask themselves whether they have enough cover in place.
Case Study
In a matter heard by the Western Cape High Court of South Africa, the Court held that the advisor had neglected to ensure that his client was insured for the correct value of the property, had failed to act in good faith towards the client and had breached his contractual liability.
In this matter, the advisor arranged for the property in question to be insured based on average building replacement costs. The building, however, had exquisite historic features, which would cost significantly more to replace. When a fire severely damaged the building, the client submitted a claim to the insurer. The insurer found the property to be underinsured and applied the law of averages and the client received far less compensation than the actual cost of restoring the building. The client then claimed damages from the advisor for failing in his duty to provide appropriate advice regarding the correct replacement costs of the building. The court ordered the advisor to pay the client for loss suffered in the amount of R17 152 981 plus interest and the costs of the suit.
For many FSPs, the minimum prescribed amount of professional indemnity insurance is R1 million. A client may claim far more than that, as illustrated in the case above. Although PI Cover has exclusions and excesses, FSPs that only have enough cover to meet their regulatory obligations may not have carefully considered whether their cover is enough or if it is structured in the right way to keep them in business should a claim occur. It is important to understand the risks of the business and the terms and conditions of the PI Policy.
PI Cover should not replace the responsibilities of an advisor to manage and conduct business with the general duty of due care, skill and diligence and to ensure fair outcomes for customers. It can however safeguard a business should an unlikely event occur.