How much Professional Indemnity cover is enough?

Professional Indemnity (PI) cover is a “mandatory” requirement in terms of the Financial Advisory and Intermediary Services act of 2002 (FAIS Act) for all Financial Services Providers (FSPs). Generally, the things that are “mandatory” in life are usually the things one wants the least. Unfortunately, this same principle can follow one in life and also FSPs purchasing PI insurance.

The FAIS Act stipulates that FSPs should have an adequate level of PI insurance, and that it is the responsibility of the FSP to assess the risk associated with their own professional services. FSPs are also required to determine what level of cover is required over and above the minimum levels set out by the FSB. The minimum levels set out by the FSB are:

 

Besides compliance issues, insurance brokers require PI cover in order to protect themselves against unforeseeable and unexpected PI exposures. It is designed to protect you against legal costs and claims for damages to third parties which may arise out of an act, omission or breach of professional duty in the course of your business. PI risk exposures emanate from the provision of professional advice to insurance policy holders such as individuals (in respect of home owners and motor insurance) as well as businesses (in respect of public or products liability) amongst others.
In this case, PI covers the insurance broker against:

• Negligent errors, negligent omissions

• Negligent wrongful act

• Negligent breach of professional duty or contract

• Breach of respective warranty

• Breach of trust committed in good faith

• Defamation or injuria

• Loss or damage to any documents assigned to the insurance broker

• Related defence costs

• Any other costs incurred in mitigating or preventing a claim that is likely to occur

In this respect, if an incident were to occur that results in a financial loss to a third party, and legal action is taken against your FSP to recover losses, your PI insurance will protect both the assets and reputation of your FSP.
The question which an FSP needs to ask is whether the minimum will be sufficient cover. If one looks at the number of complaints that are being heard by the FAIS Ombud, it becomes apparent that South African consumers are very eager to take intermediaries to court if they feel they are not being treated fairly. Our society is a lot more litigious than we both like to believe, or remember.

Consumers who feel compromised that their claim was rejected or that their savings were misappropriated, may now feel that their intermediary did not treat them fairly or did not act in their best interest.

Insurance and Financial products are complex and what can be assumed as common knowledge one day as to the definition of x, can actually mean y when push comes to shove. There will be a time when not all exclusions, definitions or some minor details are explained or made understood to a consumer, Murphy’s Law interjects, and your PI cover comes into play. The cover will ensure that you are guided accordingly and legal advice is provided should you need to be defended.

The “mandatory” requirement for how much you may need when that ominous day should come, may not suffice. Adequate cover has become the overwhelmingly important determinant in a day and age where there are not only higher claims frequency, but the severity of these claims has also increased. A natural result of this is more claims resulting in litigation between parties. Defence costs are covered by your PI policy, but are limited to the amount of cover you have purchased. Litigation usually consumes a large chunk of the limit available, if not all of it, leaving you underinsured for a certain portion of the loss incurred. It is important to remember that defending your FSP from a professional conduct claim costs extensive time and money, regardless of whether the allegations are founded or not.

In deciding how much PI cover is enough, the following factors should be considered:

How big is your book?

Does your FSP advise 10 clients or 100 clients? How many individual policies does your FSP have on their books? The question is really relating to how many times your FSP could potentially be, or have given negligent advice. The likelihood increasing with the greater the amount of clients your FSP has, and the greater the number of products your FSP advises those clients on.

How complex are the products you sell?

All insurance products and investment schemes have a degree of complexity to them, some more than others. The question really is: how complex are some of these products to the Representatives within your FSP? Some products may be less frequently dealt with and a bit of a touch up on one’s knowledge is needed. It is important to remember here that a potential claim may arise from how well your client understands the product. As an intermediary with the licence to provide advice, the responsibility falls upon you and your FSP to make sure your client understands exactly what they are buying and what they are not buying. Ensuring, therefore, that each representative within your FSP is proficient in respect of giving advice on the products being sold or investment vehicles being utilised is essential. For this exact reason, in respect of specialised liability products, Camargue offers Liability Academy for Brokers (LAB Training), free of charge, aimed at building brokers’ skill levels quickly and effortlessly. For more information or details on how to attend visit our website.

What’s your highest sum insured?

If perhaps your FSP has been the intermediary on say a R10 million Public Liability policy, what are the chances that the advice rendered was incorrect? If such was the case, and the insurer involved rejected the claim, would your PI Cover be sufficient to cover the claim should the third party hold your FSP responsible? With this regard, the idea is to ensure that the PI limit that your FSP has, is sufficient enough to cover the highest limit of indemnity that your FSP has brokered or highest value of investment placed.

What is the nature of the financial services you provide?

Is the FSP licence with which your FSP trades under a licence to render advice? Or only that of an intermediary? Or both? The answer being of importance when establishing in a claim situation whether the claim is as a result of the wrong advice being given, or the correct advice being given, but your FSP failing to render the correct documents to the third parties insurers. The discretionary mandate that your FSP has been given by a client is also a very important consideration. Insuring that your FSP does not act outside of this mandate, or does not fulfil all the requirements of this mandate is vital.

What is the degree of the risk involved?

The degree of the risk involved really relates to all of the above and the amalgamation that these factors have on whether or not your FSP is adequately protected. So when reviewing your own FSP’s PI Limit, perhaps take some time to consider the above when deciding.

For any further information or queries on Masthead’s PI Cover Scheme, contact your Masthead regional office.