From Adviser Guide: Getting Professional Indemnity Insurance
Q: What is professional indemnity insurance?
PII policies provide cover for any claims payments, or indemnities and will also cover the defence costs associated with a claim.
Professional indemnity insurance for financial advisory firms provides protection against client claims due to mistakes or negligence, such as giving incorrect advice or making a mistake in your work.
PII policies provide cover for any claims payments, or indemnities, ruled by the Financial Ombudsman Service, the courts, or agreed directly with the claimant and will also cover the defence costs associated with a claim.
Like other professions such as accountants and lawyers, whose professional bodies or regulators stipulate that they must have PII, for financial advisers, the requirement to have PII is set by the FSA.
“The reason why regulators mandate professional indemnity is to protect the wider public against financial loss caused by an error of an adviser,” says Teresa Brewer, Sales and Services Director, Aon UK.
“In the financial investment industry, this can cause far more complications as some financial losses are due to a client’s attitude to risk and not the adviser’s error or omission. Unfortunately, as you may have experienced, if a client suffers a loss they will usually look to blame someone, hence the need for PII to either respond to a claim or help you defend yourself.”
Financial advisers are required to hold continuous cover and the FSA expects firms to always have a valid policy in place.
“PII policies are constructed on a claims-made basis,” he/she adds. “This means that the policy in place, at the time of the notification, will provide cover and not the policy when the work was carried out.
“You will need to check if an insurer has applied a retroactive date, if a retroactive date has been applied cover will only be provided for work carried out after this date. This is common in situations where a firm may be leaving a network or before the firm was regulated by the FSA.”
The FSA sets a specified minimum levels of indemnity for both a single claim and aggregate claims per annum. The minimum indemnity for intermediaries that give advice on or sell insurance based products tends to follow the Insurance Mediation Directive and are given in euros. The minimum is currently €1.12m for any one claim or €1.68m in aggregate.
Currently, the limit basis offered to IFAs is on an aggregate basis, explains Ms Brewer: “An aggregate limit means the total amount payable under the policy will not exceed the stated limit in any one policy year regardless of the number of claims made against the firm.”
The FSA expects firms, as a matter of good practice, to notify their insurers of a potential claim at the earliest opportunity. The terms and conditions of an IFA firm’s individual insurance policy are not standard, some will specify particular notification requirements, especially if late notification or failure to notify causes repercussions.