Professional indemnity insurance (PII) is common in all professions and recently became a compulsory requirement for mortgage advisers.
The Mortgage Code Compliance Board (MCCB) made PII compulsory under its membership rules in 1999, so mortgage intermediaries have no choice but to buy annual cover ‘ although there is an exemption for companies that have a share capital of £50m.
The rules state that a member must, at a minimum, cover all activities relating to their UK mortgage business but the MCCB strongly recommends that companies cover all their business activities.
The MCCB’s head of communications, Brad Baker, explains the reasoning behind the rule. He says: ‘The MCCB introduced it as a way of increasing consumer protection, to make sure that firms that were ordered to pay out compensation to customers under the arbitration scheme had the means to do so. Although there are wider issues, that was the main reason. The mortgage industry is a professional industry and should have these arrangements in place.’
Unlike lawyers and accountants, mortgage intermediaries are far more reticent when it comes to paying PII premiums. With procuration fees not very high, there is currently not a huge amount of money to be made in mortgages. However, going for a cheaper deal may be counter productive. PII policies are complex and there are ways an insurer can wriggle out of a claim ‘ some can become invalidated with a minor administrative breach.
Rob Clifford, managing director of mortgageforce, says: ‘We have a block deal for our members, which costs only £295 per year, for insuring three times their annual turnover. But, if you consider what it is insuring, PII needs to be quite a robust policy. As it happens, we negotiated the low cost because we have hundreds of buyers, but there are some policies in the market that cost up to £400 and are not worth the paper they are written on. Brokers should remember that generally you get what you pay for ‘ cheap premiums can sometimes mean policies with all sorts of complexities and loop holes.’
One of the key requirements of a PII policy is the notifiable event clause. This means that the insurer needs to be told about certain elements that may invalidate the claim if left unheeded. If policyholders become aware of any claims or circumstances which could lead to a claim being made, they must notify their insurer immediately, in writing. Failure to do so could allow insurers to void the policy, leaving the policyholder uninsured. Notification of any changes that could affect the policy should be made directly to the insurer.
Mortgageforce issues advice to their franchisees, giving examples of the warning signs that should trigger a notification and advise that when in doubt, a notification should be made. Many situations can be recognised as potential claims before they become formal legal actions.
It is important that the warning signs are noticed and acted upon as soon as possible to reduce the chances of the claim developing further ‘ and to ensure that the policyholder’s interests are fully protected.
Examples of incidences that could lead to claim include the following:
• Verbal complaint from a customer or a threat of ‘taking the matter further’.
• A letter of complaint alleging neglect, error or omission.
• A customer refusing to settle or delaying settlement of an account.
However, excessive notification could result in rising premiums. Jim Gaskin, product manager for PII at St Paul International, says: ‘If we were receiving a regular level of notifications that do not result in actual claims, I would want to know why. Maybe the style of the intermediary’s selling, or their approach to their clients is irritating enough to make people complain, but there is no genuine act of negligence. Maybe it is just a style of business. Nevertheless, I would take it on board and be concerned about it.’
Apart from notifying insurers immediately when they become aware of a circumstance, policyholders should also be careful not to prejudice their own or their insurers’ position. Sometimes, what may appear sensible could, with hindsight, appear to have aggravated the situation. This may leave them without cover if the insurer did not sanction their action.
Insurance is not a substitute for good management practices and disciplines. It is a safety net for those occasions when mistakes, oversights and errors of judgement occur in spite of controls being put in place.
Demands on time can make it difficult to stay on top of important aspects of professional life such as office administration, staff training and updating technical knowledge. However, it is precisely these aspects of the business that can lead to claims. Some insurers offer risk management advice, which may be worth considering.
The best policies are the ones that do not have too many notifiable events and complex administrative rules, so at the end of the day there is not much room for the insurer to not pay out. If an intermediary is a member of a mortgage club, franchise or network then they are almost certain to offer a deal, with premiums often negotiated lower for bulk. But as Clifford says: ‘As with all insurance policies, the moment of truth is when you come to make a claim.’