An interview with Miles Smith’s Nick Pauley (Divisional director – professional risk) on the impact of the discount rate change on a broker’s professional indemnity cover
How do you think that the change to the Discount Rate exposes commercial retail insurance brokers across the UK?
This change increases the burden on insurance brokers to explain the consequences of the rate decrease to its affected clients and the advice they give to them.
Miles Smith recently published a guide demonstrating how some employers’ liability claim notifications have increased overnight. In the example we gave, the reserve jumped from £7.5m to £14.5m; if the insured was only covered for £10,000,000 under their liability insurance, their business would have been responsible for the shortfall of £4,500,000, rendering most SME businesses bankrupt.
So what does this mean in practice?
Knowing the impact and not relaying it to clients potentially exposes brokers to breaching their duty of care and their own errors and omissions (E&O) insurance could be exposed if they haven’t highlighted to their clients the risk of underinsurance.
If a client’s insurer declines a claim, or declines to offer full indemnity, there is a possibility that the broker will be brought into the dispute and be blamed for the insurance not responding fully. The duty of care on brokers is so onerous and Courts have often found in the policyholder’s favour, despite the best efforts of the broker to look after their client’s best interests. However, brokers should be able to defend themselves if they ensure that contact is made with all clients making them aware of the change and advising them to review their insurance needs with their broker, accordingly. This communication should be properly documented and if the client chooses not to take action upon the advice given by the broker, this should be recorded in writing…if its not in writing, it didn’t happen!
What should brokers do?
It is of utmost importance that brokers alert their client base to the likely exposures to their business if they fail to purchase higher policy limits on policies which could be affected by the change to the Discount Rate.
And what is the minimum PI Limit required for brokers?
The minimum professional indemnity (PI) policy limits for insurance brokers required by the FCA under the IMD rules are modest, starting at the sterling equivalent of EUR 1,120,200 (any one claim) or EUR 1,680,300 if the policy limit is expressed as an aggregate. These limits bear no relation to the size of the claim a broker may face in the event of their negligence or breach of professional duty. For example, it would be naïve of a broker to continue to maintain a PI limit of £2m when they are regularly placing property insurance with sums insured of £50m.
In the past few months Miles Smith’s Professional Risks team have seen evidence of many brokers reviewing their own PI policy limits and purchasing much higher limits. Excess layers are still relatively cheap and brokers face further uncertainty arising from their responsibilities under the, as yet untested, Insurance Act 2015.
How can Miles Smith help?
As PI specialists, the Miles Smith Professional Risks team can review broker’s E&O insurance arrangements to protect their business against the uncertainties of the Discount Rate change and other professional risks they may face.
To access our easy-to-read guide on the Discount Rate changes, please follow the link.