The tough economic environment is squeezing everybody. Clients want to limit premiums but are more likely to make a claim, while insurers appear to be taking a harder line. The broker is being caught in the middle – and is increasingly likely to face a lawsuit over their everyday work
While the legal and property sectors have emerged as the biggest casualties of the recession when it comes to being hit by professional negligence claims, insurance brokers should prepare to be next in the firing line. Professional indemnity (PI) brokers are reporting a spike in lawsuits against brokers from clients who have failed to obtain full or adequate coverage for claims made against their commercial insurance policies.
Undoubtedly, Joe Public is not happy with the insurance industry. According to the Financial Ombudsman Service (FOS), overall insurance disputes rose by 38% in the last financial year, while the number of new insurance complaints jumped by 42%.
While many of these complaints have been driven by the fallout surrounding the payment protection insurance scandal, brokers’ practices are coming under greater scrutiny from disgruntled clients. Increasingly, they are being accused of failing to provide sufficient information about the details of insurance policies and, in some cases, sloppy customer service.
Towergate’s managing director of professional indemnity, Alan Eyre, reports that the notification of claims against brokers’ errors and omissions (E&O) insurance has risen by 20% in two years. According to the FOS, complaints about business interruption cover alone jumped 72% from 129 in 2009 to 222 in 2010, while complaints about commercial vehicle and property insurance rose 51% from 493 to 777.
While this might seem small fry when compared with the thousands of recorded PPI complaints, PI specialists warn that E&O claims tend to be more sizeable – with a greater chance of success – compared with other types of claim notifications.
What’s driving the claims?
The question of what is behind this trend is a contentious one. Critics accuse brokers of poor practices in the name of making a quick buck, while brokers’ champions argue that they are the victims of an increasingly litigious culture and insurers’ hard-line approach to claims during a recession. Either way, commentators warn that brokers are more open to litigation from clients than ever before.
Who is to blame? There is no question that in a tough market brokers come under pressure from cash-strapped clients to do their best to limit any increase on premium. This temptation to retain a client at the cost of turning a blind eye can, however, come back to haunt them. “Clients are looking to save money. That brings pressure onto the broker not to increase the sum insured, and not to press the client on the fact that they may be under-insured,” says Eyre.
In addition, recession-hit clients are much more likely to make claims – and to enter into a dispute if they are knocked back. Legal experts are warning that there is a trend for clients to make spurious claims with the expectation that they will be turned down, and to then turn on the broker. Berrymans Lace Mawer partner Chris Fitton says more companies are making claims around the boundaries of their cover. “They look to make recovery for losses that the insurance was not designed to cover.”
Furthermore, it is a widely held view that insurers are taking a harder approach to claims. This, say PI specialists, can put brokers into the firing line of angry clients and their lawyers. Flaxman Partners managing director Roger Flaxman says: “Insurers are being much tougher. When they refuse to pay the claims or don’t pay the claims in full, the tendency for the insured is to seek legal advice.” He believes that both claimant law firms and clients have cottoned on to a broker being an easier target than an insurer. “Lawyers are often suggesting suing the broker because it is easier and cheaper,” he says.
Biba corporate and technical affairs executive Graeme Trudgill believes that, in many cases, brokers are a scapegoat for disgruntled clients and tight-fisted insurers.
“There is pressure from clients and insurers that potentially creates more PI claims for brokers. I don’t think brokers are, all of a sudden, not sticking to the practices that they have always used to try to limit errors and omissions claims.”
However, some suggest that brokers can bring a lot of trouble on themselves. Compliance expert and consultant Branko Bjelobaba argues that brokers owe a fundamental duty to clients that is not always fulfilled. “There is a misunderstanding of the client’s exposure, something is missed out or there is a mistake in the sum insured. There are general cock-ups … sometimes that is down to the lack of competence of the individual.”
Bjelobaba also believes that brokers’ failure to fully disclose commission to clients at the outset can erode the quality of relationship between broker and client. “If a broker is paid a commission by an insurer and they don’t have to pre-notify the client, the broker might be motivated by greed. They might sell an unsuitable policy driven by what they are going to earn, rather than considering the best policy for the client.”
He argues that this approach is fundamentally unfair. “A client coming to a broker has a specific need for insurance. He or she doesn’t know what they want, what they should do and how much they should pay, so they go to an insurance broker who is meant to be a specialist at the placement of insurance policies.”
Eyre, too, believes that professional standards remain a problem. “The industry is starting to address this issue, but there has been a period in the last decade where it has slipped off the agenda. The quality of people is not always what it should be.”
Error and trial
As competition grows, brokers can be increasingly tempted to wade into business territories with which they are unfamiliar, increasing the likelihood of litigation. PI broker Howden executive director Lance Rigby believes that the competitive market has led brokers to move into other areas, and some have strayed from their core expertise. He says: “This always presents difficulties, so sticking to what they understand is key.”
Meanwhile, and unsurprisingly, insurers refute suggestions of a hard-line approach to claims. Brit claims director Stephen Roberts says: “If insurers have misrated their businesses, there might be an attempt not to pay claims in the last throes of the failure of that business. That, however, would not be the view or the methodology of the majority of the market.”
Regardless of who or what is the driving force behind this increase in PI claims, the courts are increasingly tough with regard to a broker’s duty to inform clients. Fitton explains that the main pitfall for brokers can be a perceived failure to fully inform clients of the rules surrounding material disclosure. This is when the client fails to disclose a fact to the insurer that leads to the rejection of the claim at a later date.
PI experts believe that the recent case of Environcom v Miles Smith sets a new standard for brokers. When recycling plant Environcom failed to receive coverage from Woodstock Insurance following a fire on the grounds of non-disclosure, the company sued broker Miles Smith for failing to properly explain this principle. Smith argued that he had sent these details in a letter, but the court was unsympathetic. Although the suit was eventually unsuccessful, the court ruled that it was not enough for a broker to point to information he had provided to the client; he had to show he had fully explained the principle.
“The courts appear to be widening the brokers’ responsibilities,” explains Eyre. “It is not enough to have a paragraph in a letter that says you have a duty to materially disclose any facts: the broker has to fully explain what it means.”
Fitton adds that brokers are also being taken to court over failure to fully explain exclusions within policies and the limits of their indemnity.
It seems that brokers have to be aware that they are in the spotlight as never before, and while they may be relieved at the stability of PI rates, increasing litigation could see them facing similar problems to today’s solicitors and surveyors.
Lockton director Brian Boehmer says: “Unless the broker has a complete series of events that are documented, they could be liable for negligence. Society is more litigious and, irrespective of the professional service you offer, you are going to be under more scrutiny.”
Eyre echoes this message. “Because of the perceived change in their duties by the court, brokers have to look more closely at how they conduct their business with clients. They need clear systems processes, and must maintain their records correctly and accurately.
He warns: “Everything has to be documented. Once an insurer has said they are declining a claim, the broker is really going to be in the spotlight.” IT