PI is necessary but so is avoiding the courts altogether

There used to be an unofficial public awards category in the US called the Stella Awards. These awards were assigned to the weirdest and wackiest court cases which took place during the year. In fact, there is a long standing joke that in America you can be taken to court for just about anything.

We need to ask ourselves if this is a trend that is creeping into other markets as well.

If we look at the complaints which are streaming through the Office of the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud), it is clear that South African consumers are just as eager to take companies and intermediaries to court if they feel they are not being treated fairly. This means that it is vital for companies and intermediaries to have Professional Indemnity (PI) cover.

Defining the need

When one reads the majority of the determinations handed down by the various Ombuds, one of the issues at the heart of many matters is that of disclosure. Insurance products are complex, and there are times when an intermediary does not explain every single aspect of a product and its exclusions when it comes to claims stage.

While clients may think that the intermediary purposely failed to mention the policy wording which is affecting them, the intermediary may have merely neglected to mention some detail. Alexander Pope once famously quoted that ‘to err is human’ meaning that it is human nature to make mistakes, and that is why PI cover is necessary.

Lisa Swaine, Partner in the Dispute Resolution department at Webber Wentzel, points out that PI, otherwise known as Errors and Omissions Liability Cover, provides protection for professional persons in respect of their legal liability and is there to pay compensatory damages incurred in the provision of their professional services.

“Allegations of negligence must be defended or admitted and either way there will be cost implications. In today's litigious age, where claim often follows blame, having adequate PI cover, which can protect the professional and the business from the financial fallout of such claims, is imperative,” says Swaine.

Anticipating a complaint

According to the outcomes outlined in the Treating Customers Fairly (TCF) document, an intermediary must explain a product to a client in great detail at policy inception stage, and then make relevant disclosures when it comes to the underwriting stage should a claim arise. This sounds easy in principle, but is difficult in practice. Therefore, anticipation of a PI claim is imperative.

“A claim is usually defined as a written demand or the institution of some form of legal proceeding by a third party against the professional for compensation or damages. Whether a circumstance exists that may give rise to a claim it has nothing to do with what the insured thinks regarding liability; it is an objective test based on whether the reasonable insured would determine that a claim may eventuate. Brokers must educate their clients on this aspect,” says Swaine.

Avoid a PI claim at all costs

Non-disclosure is a complex issue in the industry. Clients often do not know what constitutes full disclosure and brokers are at times unclear as to the lengths they need to go in order to ensure that their clients are making full disclosure. This is an issue which is a cause of great confusion in the industry.

Swaine points out that one of South Africa’s largest insurers shows that claims experience involving claims against brokers often involves brokers not informing clients properly about their duty to make disclosure and to notify the insurer of circumstances. The broker is also not properly communicating with the client regarding issues of cover under the policy, and poor policy wording and exclusions to cover are not understood by the broker and the insured.

This will often lead to a court proceeding. How will the courts handle such matters? In the 2010 matter of Jones versus Environcom, the policyholder failed to make a disclosure to his insurer and Justice David Steel leaned hard on the broker.

The brokers duty according to law

“A broker must advise his client of the duty to disclose all material circumstances, and explain the consequences of failing to do so. He must also indicate the sort of matters which ought to be disclosed as being material (or at least arguably material) and must take reasonable care to elicit matters which ought to be disclosed but which the client might not think it necessary to mention,” said Justice Steel.

This goes beyond written communication. Elicit means that the broker literally needs to draw out of the client possible situations or issues that need to be disclosed to the insurer. Justice Steel is of the opinion that this may need to be in the form of many written and telephonic conversations. This also needs to take place through the claims process.

“Further, in cases where the client does not appreciate what may be material, as will often be the situation, he needs to be advised to err on the side of caution so as to disclose anything that might influence the judgment of a competent underwriter in assessing the risk and be helped to unearth such matters," said Justice Steel.

Editor’s Thoughts:
Disclosure is a major issue in the industry. Some suggest that a line exists between reasonable doubt when it comes to disclosure as common sense should dictate to a client whether he needs to disclose an issue or not. If we go by the judgement of Justice Steel, it seems as if that line is very thin. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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