News media have been broadcasting that the recession is over. Well it certainly doesn’t feel like it to a large proportion of the business community. The impact on insurance is that clients are continuing to challenge the need for insurance. Many are reducing sums insured or choosing to self-insure for some covers.
So how does a hard pressed broker reinforce the need for professional indemnity cover? A key element to stress is the cover applies to past services, so although trading activity may have reduced, insurance claims can still arise from previous contracts, never more so than in the current economic climate. Continuation of cover is essential as the policy is written on a ‘claims made’ basis. The policy has to be in force at the time a claim is made against the client and notified to the insurer, regardless of when the wrongful act occurred (assuming there is not retroactive date restriction). So this type of legal liability cover is very different to other business insurance policies the client will have.
Clients are often prompted to seek professional liability cover by a stipulation in key contracts. Often these contracts will stipulate that PI cover should be maintained for a time beyond the completion of the contract (a run off period) generally for a minimum of six years. So again, the client needs to keep the policy in force.
Often when clients are not pressed by contractual terms to have PI cover, there is a temptation to lapse the policy as a cost saving exercise. This is a false economy for three reasons. Firstly, clients providing professional services to their customer can still incur a legal liability. As mentioned before, the policy is on a ‘claims made’ basis so it is not in the client’s interests to lapse the policy. Secondly, during the duration of the policy the client is building a relationship and record with the insurer (continuity). Insurers have records of all policies provided and quotations sought and will quickly spot a client who regards the cover as a short term fix; they may consequently be reluctant to offer cover or may impose punitive terms. Thirdly, any future contracts the client secures may also stipulate professional liability is in force and at that point the client may find the terms insurers provide are different, as well as there being a gap in cover. Insurers may not be willing to provide any retroactive cover.
Insurers have experienced a sharp increase in professional liability claims triggered by the recession. Ideally, rate increases for some trades need to be secured, but insurers have to be reasonable and be willing to adjust to client’s circumstances.
Directors’ and officers’ cover is another professional cover also being left out. With professional service users seeking any route they can to generate cash, now is not the time to cut out this protection. There has been a sharp rise in litigation during the downturn. Clients need to be advised of the implications. Where clients have not previously taken out Directors’ and Officers’ cover, this may actually be an opportunity for brokers to sell additional covers.
Working more closely with brokers and their clients, insurers should be willing to offer solutions and options. Insurance is often seen as just another expense from the client’s perspective, a requirement rather than a necessity; in a climate where expense is such a critical factor insurers need to be mindful of their assureds’ concerns. In securing the desired flexibility from the insurers, the broker should also in turn demonstrate flexibility in his earnings from the policy. The ideal situation is a long term relationship between the insurer, broker and his client. Thus all parties benefit from the inevitable peaks and troughs of trading with no gaps in cover.