Insurers have endured a prolonged period of soft market conditions, where low premiums and relatively poor investment returns have combined to create a challenging environment. In order to return a profit to shareholders, insurers have had to diversify into higher risk products as well as review their underwriting strategies and their approach to claims management – one effect of which is that claims that might otherwise have been paid, through commercial or relationship management, have been declined.
One of the knock on effects for insurance brokers is that they have more frequently become the target for negligence claims (where insurers have avoided cover or exercised a policy right to limit their liability) and as a result, insurers’ appetite for underwriting brokers’ professional indemnity insurance has waned. Capacity in the market for brokers E&O cover has also reduced following several high profile insurer exits and, with less competition between insurers, premiums and excess levels have increased. With no sign of that changing in the short term, we ask “are insurance brokers a high risk profession?”.
Are insurance brokers a “high risk” profession?
It is fair to say that by facilitating the transfer of risk from proposer to insurer, insurance brokers operate in a risky environment. They arrange cover for risks that can easily run to millions of pounds and if they get this wrong, the simplest of mistakes – if it leads to cover being declined - may result in a large claim against the broker.
However, that is perhaps too basic an approach since brokers E&O claims more often arise from a perfect storm (no pun intended!) of events – the peril occurring, the gap in cover, the insurer declining, the broker having been negligent, there being no other reasons for the gap in cover (ie, non-negligent reasons), commercial pressures cannot be brought to bear, the insured has the inclination or the means to bring a claim…and so on…
What can brokers do to help weather the storm ?
As a profession generally (and from our experience) insurance brokers need to improve their risk management procedures given that most claims that we see against brokers boil down to failures in communication with the client and they often arise from one of the following areas:
- The client’s failure to understand the importance of insurance to its business – many businesses fail to analyse the importance of insurance and as a result, the buying process is often rushed and price is usually the biggest driver. Stopping this, educating the client and ultimately recording (and communicating) the advice given is one of the broker’s biggest challenges.
- The buying process - in particular the duty of disclosure. How is this explained? The clients, quite understandably, think that if they provide accurate answers to the questions on the proposal then they are entitled to “guaranteed” cover. This is not always the case and regardless of the whether we deal with the law as it is or as it will become (once the Insurance Act 2015 takes effect from 12 August 2016), there is still a need to ensure that the client understands what information it is required to disclose. It is for the broker to lead the client down this tricky path using carefully crafted open questioning but leaving the client (and ultimately anyone who later has to read the broker’s file) with clear and accurate descriptions of the duty of disclosure, what a material fact is, and the consequence of getting it wrong.
- Explaining the cover - what is covered? Perhaps better expressed by stating what isn’t covered? Exclusions and conditions have to be clearly explained. What is straightforward to the broker is very unlikely to be as easily understood by the client.
- The extent of the insured’s duties and obligations following inception and/or renewal - the status of warranties and conditions precedent are very different in insurance law from ordinary contract law. The current consequence of a breach of warranty cannot be remedied and can be fatal, as can the failure to abide with a condition precedent. The position will change somewhat after the Insurance Act 2015 takes effect on 12 August 2016. Equally, the broker must explain and ensure that the insured understands and is aware of all of the obligations that are imposed by the policy – such as how claims/circumstances should be notified, to whom and when etc... Again, communication is key.
Guide for best practice
The challenges with communication are both (i) client facing, and (ii) internal.
Client facing - prior to inception and before renewal
Explain the purpose of insurance and its value
- Test the clients’ reaction by giving an example of the impact that an un-insured claim could have on their ability to trade. If the clients understand the importance of insurance to their business then they are more likely to engage in the buying process and they are less likely to be driven by price.
- Ask “open” questions - invite the clients to tell you about the main threats to their business. This should help the broker to identify the scope of cover that may be required and then educate the clients. In cases of commercial insurance in particular the court is very unlikely at the end of the day to simply treat the broker of having undertaken an “execution only” role.
- Explain to the clients orally and also in writing (i) the duty of disclosure (ii) what constitutes a material fact, (iii) explain the consequences if there is a breach. Be careful that standard documentation properly deals with what are very technical terms. Record the advice in notes, letters, registers.
- One of the biggest challenges a broker faces is the “uneducated” client – even though he or she may be the finance director of a multi-million pound turnover organisation. Whilst the tide may be turning in view of the court’s approach to this in Giles v Eurokey, best practice dictates that the broker should be able to evidence that (i) the clients understand what they are buying, and (ii) it was an informed purchased. A good question to ask (and record) is the experience (and role in the business) of the person who is giving the broker the instructions. This will help inform the level of education that is required and once asked will go a long way to informing the approach needed.
- Don’t leave anything open to interpretation or unsaid. Take detailed notes of the information that the client provides. There is no harm in sending the meeting notes to the client (or asking the client to sign the notes) and again using the opportunity to remind the client in writing about its obligations. These sorts of steps are no different to those expected of any professional.
- Don’t stray into areas that are not for brokers to comment on. How do you know what the reinstatement value of a building should be? What level of Business Interruption cover is needed? However - what the broker does have to know and understand is how the policy describes and defines these areas. All too often generic descriptions are put forward when the policy requires something else.
The actual policy terms and conditions need to be understood. Particular attention should be paid to (i) the insuring clause – explain how the policy will respond in the event of a loss and on what basis, (ii) the claims notification clause (who needs to notify what, to whom, how and by when?), (iii) the warranties (explain the status of warranties, the consequence if there is a breach and the inability to remedy), and (iv) the conditions precedent (the status and consequences if there is a breach).
- As a minimum, record that the policy has been sent to the client. Better still, keep a copy of the relevant wording, just in case it is needed later…
Internal risk management
All the best practice in the world in terms of explaining the policy and obtaining the client’s understanding will come to nothing if the advice given is simply wrong. It is essential to ensure that employees are trained and properly supervised to ensure that they are giving the correct advice.
- Consider the creation of “process” maps and pro forma documents so that employees have a structure and a reference point when they give advice to the client – but importantly make sure it is understood what these processes seek to achieve.
- Have an open door policy and encourage the “grey hair” in the business to share their experience and knowledge. Encourage and support colleagues with their on-going training and development, whether through the CII or elsewhere.
- Recognise the sales environment that the broker operates in and ensure there are checks and balances on this that means the executive only deals in covers and businesses that he or she knows – encourage a collaborative culture.
- Be wary of breakdown in internal communication. The broker who “wins” the client will often not be the one who places the risk (or deals with renewal/amendments mid-term). Both will be reading the same file /notes but will they understand them the same way?
Claims happen – after all, ultimately that is what insurance is all about. However, brokers can do an awful lot to protect themselves from their potential exposures and in doing so, improve their own risk profile. An interesting question to often ask of a broker is how much is spent on traditional compliance versus the spend on risk management. Rarely are the two comparable but yet both are equally as important, especially when the broker’s own E&O insurance (and therefore their ability to continue trading) is concerned.
It stands to reason therefore in a market that is increasingly more selective that if the brokers:
- can demonstrate to the insurer that they have adopted the processes outlined above (as necessary, volunteering separate risk management information to the insurer even if it is not asked for);
- are progressive in terms of their own approach to education and training (for example are chartered or working towards that or another benchmark); and
- have learnt from previous claims or circumstances, and are willing to share in the risk (by an excess that reflects this),
then they will be the sort of professional risk that underwriters will be more readily prepared to underwrite.