Brokers at risk
The ever-growing list of non-life insurance exclusions, and the inconsistent treatment of these exclusions by insurers, could introduce significant risk to brokers plying their trade in the commercial market. Law firm Webber Wentzel recently warned brokers to pay close attention to changes to policy wordings as insurers and reinsurers seek to limit their exposure to systemic-type risk events rooted in climate change, cybercrime and pandemic.
“Events such as the COVID-19 pandemic and rising levels of cybercrime are encouraging insurers to revisit their policy wording to exclude certain events,” wrote Sandra Sithole, a Partner at the law firm.
An emphatic “no” to cover
The local insurance industry has been emphatic in its response to future pandemic risks by removing the so-called Infectious and Contagious Diseases (ICD) extensions from the Contingent Business Interruption (CBI) sections of their policy wordings. This cover was, however, available pre-pandemic, prompting what Sithole described as “a significant shift towards litigation against insurance brokers for failures to adequately assess their client’s risk and advise on and recommend ICD extensions.”
Leppard and Associates is an Underwriting Management Agency (UMA) that offers Professional Indemnity (PI) cover to non-life insurance brokers. Steve von Roretz, a Director at Leppard said there was a flood of claims against brokers following local Supreme Court decisions in CBI matters brought against Guardrisk and Santam. Brokers are being charged, retrospectively, on the basis that they did not inform clients of the wider coverage available alongside traditional pre-pandemic BI covers.
Von Roretz took care to differentiate between ICD-related PI claims and claims that might arise from advice missteps around newly introduced exclusions. “There is a very big difference between a broker who never sold a non-physical damage BI extension versus a broker who today misrepresents that the client has BI cover following a national grid failure,” he said. Among his concerns is that insureds are blaming brokers for their cover shortfalls in a last-ditch attempt to get some pay-out for an event they may not have bought cover for, even had they been advised to do so.
Best practice advice for brokers
“Insurers are within their rights to reject claims based on in-force exclusions,” said Barry Taylor, Chair of the Financial Intermediaries Association of South Africa (FIA) Non-Life Insurance Exco. “There should, however, be no liability for brokers who have carried out a proper risk needs analysis and informed their clients of all policy terms, conditions and exclusions; brokers cannot be expected to act as insurers for excluded risks, and especially so, when cover is not readily available in the market”.
The FIA offered some ‘best practice’ advice for its intermediary members, including that they understand their clients’ businesses; conduct a proper risk assessment; and offer the client appropriate solutions for the transfer of risk that may include insurance cover, self-insurance and alternate risk transfer. “Clients should be informed of all the potential gaps in the risk protection solution and told what is covered by insurance and what is not,” Taylor said.
Brokers should confirm all discussions between themselves and the client and offer a summary of such interactions. Most importantly, the narrative contained in the broker’s correspondence should be sufficiently clear to demonstrate that the client has understood the implications of uninsured and uninsurable risks; a brief verbal discussion will not suffice. Taylor said that a ‘terms of trade agreement’ should be put in place and urged brokers to consider limiting their liability.
An eye on internal risk management
Von Roretz echoed the FIA’s advice but also encouraged brokers to focus on their internal risk management processes. In a world where brokers are potentially blamed for any future shortcomings in the insurance coverage they sell, they must pay close attention to the risk profile of the clients they conduct business with. “Brokers must think about limitation of liability; entering proper contracts with clients; and telling the client precisely what is on cover and what is not,” he said.
Both Taylor and Von Roretz stressed that brokers had to keep up to date on new exclusions. Case in point, Webber Wentzel warned that the “cyber insurance market has not yet caught up with the challenges introduced by, among other things, new war tactics such as cyber war and terrorism, which may not be adequately dealt with in traditional war and terrorism exclusions.”
Taylor pointed out that insurers and reinsurers were concerned that the available insurance capital would not be sufficient to cover the resultant economic losses resulting from a systemic cyber event. “The risks of war and terrorism have not been the domain of the general insurer, and therefore should also not be an expectation under cyber cover,” Taylor said.
However, each advance in technology leads to a potential increase in acts of electronic aggression by nation-states, posing serious challenges to insurance markets. “Since acts of cyber terror by nation states are not always aimed at government institutions and may be targeted at private persons or enterprises, it becomes extremely important to gain clarity around this issue,” he said.
No standard wordings to fall back on
In the past, commercial non-life insurance brokers could give advice safe in the knowledge that all of their insurance partners used a standard policy wording known as Multi-Mark; nowadays each insurer uses its own complex and often lengthy policy wording that, although based off Multi-Mark, holds little semblance to the original.
“Assuming the broker gets three quotations from three different insurers, each policy has its own nuances, and the broker is supposed to advise the customer about each of those,” Von Roretz said. These nuances cause huge challenges for brokers when switching from one insurer to another because they cannot dare to assume that the covers offered on any two quotes are identical.
Returning to the cyber insurance matter, Taylor questioned whether commercial brokers were qualified to advise on cyber risk exposures, let alone whether the solutions available in the market offered adequate coverage. “Product training on a particular cyber product does not qualify you as a cyber liability subject matter expert,” he said. “Risk quantification and mitigation are better carried out by those more qualified to do so, following which you can align their insights with the insurance coverage on offer.” Furthermore, clients need to be advised that war exposures, irrespective of the origin and intended targets, may not be covered under cyber, as is the case for other covers.
Brokers in the UK market have become so concerned about the potential hiccups around cyber liability advice that Lloyd's of London released Market Bulletin Y5381, requiring its syndicates to include baseline exclusions clauses for state-supported cyberattacks in their policies, from 31 March 2023. Unfortunately, this level of collaboration is not possible in the South African market.
Collaboration is seen as anti-competitive
Von Roretz commented that the South African Insurance Association (SAIA) could not emulate Lloyd’s due to concerns around competition legislation, before reminding readers that the Lloyd’s market has so-called London Market Agreement (LMA) clauses which all brokers are required to include in their policy wordings.
“The world of cyber insurance coverage is in a stage of continuous development and the question is whether the insurance industry can keep pace with the speed at which the risk exposures arise,” concluded Taylor. Webber Wentzel, meanwhile, encouraged “insurers to take care in wording exclusions to ensure that the policies clearly indicate what is covered and what is not [because our] courts interpret exclusion clauses restrictively, and any ambiguity will be interpreted against the drafter.”
As for non-life commercial insurance brokers, the writing is on the wall. “From a South African insurance perspective, there is certainly a need for businesses, led by brokers, to scrutinise current policy wordings to determine whether there is sufficient cyber cover, either in their All-Risks or standalone cyber policies,” Sithole wrote. An analogy that these brokers might keep top of mind is that brokers are to financial services what architects are to engineering.
Taking a swipe at insurers
As a parting shot, Von Roretz would like to see insurers step up and accept liability when issues crop up. “Insurers should accept responsibility unless they can demonstrate the broker has deliberately or fraudulently done something wrong,” he concluded. Why, for example, should a broker be held liable when selling an insurance product under a binder arrangement with an insurer? The policy wording in such arrangements is standard and predetermined, and the broker should have confidence that the insurance product they sell, as an agent of that insurer, is fit for purpose.
Writer’s thoughts:
Frequent changes to insurer T&Cs create a world of hurt for non-life insurance brokers. Have you run into unexpected exclusions or limit issues when renewing or writing commercial policies? And do you believe your PI cover provider will respond in the event your risk advice is challenged? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
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