Protecting your PI POLICY

01 April 2010 Graham Wood, ITS Insurance Services

The expectations and requirements brokers must fulfil these days in terms of the ever-increasing legislation and regulation, as well as mounting client demands, are considerable. There are no short cuts: to protect themselves and their PI cover, brokers have to go the extra mile.

The experience of a compliant, dedicated long-term broker illustrates the extent to which brokers have to go these days to ensure they meet all the legal requirements and client expectations. The broker asked many, many questions during three meetings with the client. He also requested the full completion of a proposal form, and copied quotations from three risk carriers for discussion and final acceptance.

Once the client accepted a quotation, the broker requested the client to sign a ‘File Note’ containing the details of all the discussions during numerous phone conversations and all three meetings. Only then did the broker instruct the risk carrier to ‘go on risk’, based on the instructions given by the client.

In the short-term space

To a short-term broker this may seem a bit like ‘going overboard’. However, the long-term broker was simply doing what the FAIS Act requires and, in the process, he protected his PI policy.

So how do short-term brokers comply with these requirements contained in the FAIS Act and protect their PI policy? Short-term brokers also have to extract all material facts from their clients and prepare notes for a risk carrier to read and to base their quotations on. All of this must then be discussed with the client in detail before placing the insurance cover, based on instructions from the client to place the cover.

Practical implications

A broker with 185 client portfolios may well face 100 renewals on 01 March, 25 on 01 April, 35 on 01 June, 15 on 01 September and another 10 on 01 January of each year. Or, stated differently, an average of 14 renewals a month must be done to ensure each client is properly serviced.

In practice, it is nearly impossible to comply with the law on each renewal, even for just 185 portfolios, considering the reality that brokers must still focus on securing new business and running their practices properly. Of course, new business means even more renewals next year.

Many brokers have asked me to prepare a ‘needs analysis’ set of questions for them, which they can ask their clients to answer so they will comply with the duties and requirements set out in the FAIS Act. I do have a draft ‘needs analysis’ set of questions, but I emphasise to each broker who requests this draft that the questions will have to be amended to suit both the broker’s service agreement with the client, and the client’s portfolio, including the ‘un-insured/un-insurable’ risks schedule which must be presented to the client.

Most brokers then tell me that if they must amend a ‘needs analysis’ questionnaire for each client, taking their existing portfolio into consideration, they may as well carry on doing things the way they have been doing them up to now. The majority of brokers report that clients will not complete forms and do not have time to answer questions that do not clearly pertain to their business. The concept of an ‘un-insured/un-insurable’ risks schedule is also seldom understood.

The extra mile

Let’s look at a domestic risk. The broker needs to know if there is a thatch gazebo on the property, how far it is from the main house and if there is a built-in braai. Are the vehicles parked under shade cloth during the day, and behind a locked gate or in a garage at night? How old is the geyser? Has the client added additional lights or other extras to the 4x4? Who drives the vehicles, how often and where to? There are many other questions.

For example, does the client need cover should the bath overflow? I have recently established that some domestic policy wordings fail to cover ‘water’ damage. Have you noticed that?

Several extra miles for commercial

With regard to commercial risks, the broker needs to ask about consignment stock and at which point the risk is transferred to the client. Does the client rely on imported products and to whom does the client sell their products? Are any products exported and, if so, where to? Are all deliveries made with the client’s own vehicles and what are the details of the drivers? How much money is kept on the premises and how is it safeguarded overnight? Have background checks been done on staff with access to cash and goods? When last were the security systems checked and the fire extinguishers serviced? There are many, many more questions.

Getting it right the first time

Brokers and underwriters often also ask me to supply a simple ‘closing instruction’ matrix to enable either the risk carrier or administration office to issue the policy correctly. Unfortunately, most commercial policies are not issued correctly the first time.

The broker has little time to read the document, identify the errors and issue a request to the issuer for an amended policy or endorsement. Even if the broker did take the time to read the document, the broker will not be able to identify the errors made by the issuer unless he or she is familiar with the old Multimark III policy wording (yes, the wording).

A typical example is the Buildings Combined Liability sub-section which requires an amendment included on the schedule to increase the printed limit beyond R1 million. The Multimark III wording prohibits claiming excess layer liability over this R1 million limit.

From the client’s perspective, it certainly looks terrible when a new policy is received already containing an endorsement amending it. Clients expect that the new policy document should be correct the first time and that it should be delivered within 30 days, as they experienced in terms of their domestic policy.

The proof is in the claim

We all know that it is only a claim that exposes errors in the insurance policy. If anything goes wrong with a claim, it is the broker’s fault. Thank goodness I am no longer a broker! I saw all this on the horizon some time ago and started my business to help brokers before a claim, and then after the loss to ensure that the loss was as a result of an insured ‘proximate cause’.

Bad claims experiences result in everyone looking towards the PI policy for help. Unfortunately, the PI policy expects the broker to conform to the law and to employ staff who are trained to do certain work, which should eliminate the need for a PI claim. However, due to human nature, elimination is nearly impossible. The reduction of severity is, perhaps, more important. Identifying ways of reducing the monetary value of any PI claim is vital.

Cover your back

Brokers need to cover their backs, but at the same time they must provide their clients with professional service to protect their assets and to provide cover against potential legal liabilities.

Brokers become the client when discussing insurance needs with risk carriers. This means they have to extract all the material facts the risk carrier needs. Bear in mind that every risk carrier requires different specific material facts, so the broker needs to understand their risk carriers’ specific needs over and above the industry normal needs. Do you know which risk carriers require to know the colour of the car before they will give you a premium quote?

Can brokers win? And how do brokers protect their PI policies? The answer is simply: “with extreme difficulty”. Reduction of the PI exposure is vital and all brokers should find ways to cover their backs, and by extension, their PI insurers’ backs.

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