Professional indemnity insurance is a legal requirement for many within the financial services industry, but not, as yet, for commercial finance brokers. However as an Association we insist that all full members can demonstrate that they have cover in place, and there is a block PI cover available at a very competitive cost under this NACFB policy. Our Associates members must take out PI cover as well, but through their own sources.
There are still pockets of resistance though. Some brokers feel that because they are brokers pure and simple (i.e. offer no advice) that cover is not a requirement for them. There are others who say that as it’s not a requirement of the industry, there’s no reason for them to have it. More worryingly, there are some who simply say that they’ve been doing the job without a complaint for the last 15 years, therefore they believe insurance is a completely unnecessary expenditure, because their experience means they never make a mistake.
Without in any way wishing to belittle their expertise, I would say that I’ve lived in a house for the last 15 years and dutifully followed all health and safety procedures with respect to getting my boiler serviced; gas appliances properly fitted; electrical equipment is properly wired; plug sockets are never overloaded and I can honestly say I’ve never left a candle unattended. But my house is still insured in case it burns down.
Professional indemnity protects not only the broker and the client in the event that the client sues for compensation following service provided by a broker to a client, but can stretch as far as the lender. The insurance is tailored to the business of the broker and can also cover any legal costs arising from a claim. Different amounts of cover are available depending on the size of the business; different levels of excess are available; and it’s also important to bear in mind the kinds of business which are covered by your policy. If you are an FSA regulated residential broker, does your PI cover any liability which may arise from non-FSA regulated, commercial work?
Sometimes, if you have your PI as part of a residential mortgage network, it’s worth checking this out as many don’t cover any commercial finance work or work outside the broker’s normal remit. Check with your network, or your PI policy provider directly if you’re not part of a network, to make sure that you are covered for all your business activities. It is possible to buy additional cover to supplement anything you have in place, but some networks have preferred ways of dealing with business which falls outside their PI cover – for example they may have a preferred broker outside the network to whom all deals get referred – so it’s a good idea to check so you don’t breach your own cover.
Market pressures mean that clients are becoming more litigious – and there have been some rumblings from NACFB broker members that lenders are also looking in some cases to recoup their losses by pursuing brokers. Increasing incidences of fraud are also coming to light. Scarcely a day goes by without the trade press reporting another crackdown on a dishonest broker by the FSA, and although your policy won’t protect you if you are dishonest, it will may help you if you find that your staff have been less than straight in their dealings with both you and your clients. If something does come to light which could result in a claim – a “notifiable event” – it’s important to let your insurer know as soon as possible. Any delay could invalidate your cover.
Risk is critical to PI insurers. Market pressure has effectively increased the risk with more disgruntled clients looking for some kind of redress for the money they have lost due (at least in part) to the current financial crisis. More litigation from clients means higher premiums for brokers. There are a few things a broker can do to mitigate risk and ease insurers’ worries. Make sure that all dealings with clients are well documented, and that you have a good complaints procedure in place and that you adhere to it. Also make sure that the contract you have with your client clearly sets out what you intend to do for your client; how you intend to get paid for it (whether by a fee from the client or by a commission from the lender); and when that fee becomes due. Make sure that the client signs to agree to all these terms before you begin work. The NACFB can help – we have a model complaints procedure and a minimum terms of business agreement which many brokers find useful as a starting point.
One often overlooked fact is that, as a broker, you need to be covered at the time the claim is actually made and becomes a notifiable event by the Insurance company. Because of the nature of the business, there is often a delay between the time of the client taking the loan or the lease, and their discovery of their dissatisfaction with it, which leads to the claim. If you plan to retire, or cease trading for any other reason it might be a good idea to arrange “run-off” cover for a period of time afterwards. The same applies if for any reason you plan to change your insurers; you will either need to arrange run-off cover or get agreement from your new insurer to accept new claims for prior incidents.
The final word of advice comes from the FSA who produce a fact sheet (“Buying Professional Indemnity Insurance” which is available on their website) on professional indemnity insurance, its importance and how a broker should go about arranging cover. The FSA points out that PI is a specialist area, and much as your clients rely on you for your specialist commercial finance knowledge and guidance, you need to seek out a specialist PI insurance broker to arrange your cover for you. Aside from this, many insurers only deal through brokers, so it’s the only way to make sure you get the options of the best cover. The FSA recommends that in order to get good cover you will need to:
· Know who you are dealing with and who they represent.
• Check if your broker deals directly with the PII market, or through another broker and how much it will cost you.
• Find out what service the broker is offering, for example will they provide advice?
• Find out which insurers can be accessed.
• Check if they are specialists/knowledgeable about your sector.
Even the most experienced broker should have PI in place to protect their business. The pressure of the credit crunch means that even the best deals can go wrong and some clients will chase those they perceive – rightly or wrongly – to have been at fault. The fact that the market had some bearing will be little consolation to those who lose their businesses.