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Professional indemnity insurance is often seen as a compliance tick-box exercise, and an inconvenient one at that, especially when markets are down.
"It's seen as a grudge purchase," says Jonathan Newell, chief executive of PI insurer and underwriter Barerock.
Therefore, he adds, advisers tend to have certain misconceptions when it comes to the workings of the mandatory product.
He lays out the five main myths he has encountered in his 30 years’ experience in insurance, and sets them right.
The retroactive date
"It's not uncommon for an advice firm to think if they bought a PII policy in 2022, and they get a complaint in 2024 that arises out of the advice given in 2022, that the policy they bought in 2022 will respond to that claim," says Newell.
"That's not the case," he explains. "The policy responding to that claim is the one enforced at the time the adviser received the complaint."
He explains a PI policy must have two key things:
- it needs to be in place when the firm receives a complaint, and
- it must cover the date the advice was given initially (the "retroactive" date).
Notifying the insurer
Advisers generally know they have to notify their insurer when a complaint is received by a client. But this is not all, says Newell.
"From a PI standpoint, the gamut of what we need to be told about is way wider than that," he says.
For instance, advisers should give their insurers information about all the circumstances that may give rise to a complaint, or issues they are aware of that may lead to client detriment before a claim is made.
"So that's a situation that the advice firm is aware of, but the client is not. We still need to know about that. And a decent PI product will respond to that event as well," he says.
If in any doubt the overarching advice is to notify anyway, just to cover your backside
What's more, if a firm can demonstrate it has put remedial steps in place to stop that same thing happening again, a decent PI insurer should view that "as a good thing, not as a negative," says Newell.
This means it should not hike the premium in response - though not all insurers operate in this way, he cautions.
Notifying the insurer should mean the adviser gets support throughout the process, and this acts as a vital safety net down the line, as the insurance won't pay out on things they haven't been notified of in time.
For instance, failing to notify the root cause of a claim could end up in the policy not paying out, Newell says. This could happen in the case of a fee dispute.
Fee disputes
Some advisers think their PI policy will cover them for a fee dispute with their clients, but this is not the case, says Newell.
Such disputes could take the form of a client disputing they received the service for which they thought they had paid.
Newell says: "Fee disputes are excluded across the board.
"They are considered to be commercial issues between the advice firm and the consumer. And there's a real moral hazard in providing insurance for that - we just can't do it."
However, he says advisers should still let their insurer know if there is such a dispute, event though they are not covered.
"Quite often a fee dispute can grow arms and legs and evolve into a professional indemnity claim later on down the line.
"There's a risk that if you don't notify the initial fee dispute, and it evolves 12 months later into a PI claim which is covered, you're risking voiding cover for that claim because you didn't notify the original cause."
Two types of wording
When it comes to notifying insurers of 'circumstances' there are two wordings commonly used in PI polices that advisers should know, as they have different implications.
There is policy wording which says an adviser has to notify a circumstance which is likely to give rise to a claim; or it might say notify a circumstance which may give rise to a claim.
Newell says: "The thresholds between the two are way different.
"So if your policy wording says 'likely', a reasonable layperson has got to expect that it's got a more than 50 per cent probability of that turning into a claim, whereas the 'may' language is a way lower threshold, it can be 1 per cent.
"So it is very important that advisers have a look at their policy, see what it says, and if in any doubt the overarching advice is to notify anyway, just to cover your backside really."
Not a transactional product
Finally, while PI insurance is a difficult marketplace, Newell says he would encourage advisers not to treat it as a transactional product.
Rather, they should work with their insurer to try and de-risk their business. This could help set them up for a better future.
"It is there to support them, at the end of the day, protect their balance sheet and de-risk their firms," Newell says.
He cautions against always looking for the cheapest deal while disregarding the provider.
"What I've seen, because I have been doing this for almost 30 years, is that throughout the market cycle you get overseas insurer competition come in at certain points of the cycle, because they see an opportunity.
"And when the cycle turns, they're the sorts of insurers that run for the hills when the going gets tough.
"So you want an insurer that is prepared to stand by you through thick and thin."
carmen.reichman@ft.com
