Binding failures

It has been a fascinating week and we have had many requests from readers to cover certain subjects. I am sorry that it is not possible to respond to every email and letter but do please rest assured that we do read and register every one of your comments and suggestions.

We can certainly reassure the regulators that Insurance Times readers at least, are a group of practitioners thirsty for up-to-date knowledge and opinion, and this is a good sign for the future and the whole topic of proactively seeking to maintain competence and market knowledge.

This week I want to deal with a couple of subjects that are 'hot topics' and there are some important learning points. The first is binding authorities.

There seems to be little doubt that a well-managed binding authority provides a cost effective benefit to the public and an important part to play in the general insurance industry but, at the same time, it is perhaps worthwhile for all of us to consider that well managed is a key requirement.

Our work in the industry tells us that the matter of binding authorities presents specific areas of risk that brokers need to address. The following is a list of actual problems that have arisen. If your firm does operate any form of delegated authority from underwriters, you might do well to start your internal audit now.

Authorities that are out of date:

We have come across authorities that have never been renewed or are out of date. Insurers who are already authorised and regulated should be keeping a close eye on delegated authorities, but do make sure that the written authority under which you hold a 'pen' is current and that you understand the terms and comply with them.

Cover being bound by non-authorised signatories

This is very common and we have even seen examples of forged signatories (fortunately very rare), authorised signatories who have left the company and, in one case, an authorised signatory who had passed on (literally) some time ago.

We have no reason to believe that the intermediaries concerned acted for any reason other than to give benefit to the customer, but it is worth noting that the underwriter might have a right to avoid the cover if the terms of the authority are not strictly complied with.

Cover being bound in excess of binder limits

Not uncommon. Often the excuse is that limits have been raised and agreed verbally by the underwriter (or the underwriter's agent). Of course, we know that much business has been conducted on trust over the years, but that might be difficult to prove in the event of a dispute.

The worst case we came across was a broker who agreed an extension of authority at lunch with an underwriter, bound a risk that afternoon that was destroyed by fire a day later. The underwriter (not a well known firm or at Lloyd's, I hasten to add) denied the agreement. The broker's PI insurer asked the expert whether he thought giving cover to a client in such a situation was reckless without first obtaining confirmation of the increased authority in writing.

Turning down legitimate claims under claims settlement authorities.

This seems to happen for two reasons. The first is to improve the intermediaries' cut under a profit-sharing arrangement. This is of course a disgraceful and dishonest practice and one does wonder whether discovery by the relevant authorities might lead to criminal proceedings.

Incompetence is not as uncommon as one might imagine. It is important that any firm that has a binding authority of any kind makes absolutely sure that the job specification of anyone making these decisions is broad enough to cover all aspects of the role, and that supervision and monitoring is to a very high standard.

Decisions made by practitioners other than agreed signatories

Delegation is a feature of good management, but do make sure that you read the wording of any agreements carefully. They will in almost all cases restrict the decision-making to named individuals.

Our opinion is that to protect the public, only appointed people should be authorised to hold the ultimate 'pen', but this is a matter for the underwriter.

A fantastic range of delegated authorities exist in the market. As each week passes, new situations of agents granting cover to the public arise. In the last few weeks we have been looking at the situation of freight forwarders and removal firms. We would appreciate any views you have on this one.

If a member of the public moves house and the removal firm gives insurance cover without reference to the insurer or underwriter, is that not a delegated authority? The argument that was put to me was that as the removal firm offered this service not as its main business it would be exempt from authorisation.

Surely this cannot be right where someone effectively has the authority to grant cover? What do you think?

The first exercise this week is to take a close look at your own firm's business operation, and the standards that are maintained if delegated authorities exist.

The second is to take time to make a list of all the situations you can think of within the industry where a third party to the actual underwriter is granting cover. Surely, the minimum the public should expect is that any individual with such authority should be regularly assessed as competent?

Finally, a worrying point that has come up on a number of occasions over the past few months. That is the discovery of the expression "remains competitive" (or similar) on files, either as a written note or in letters to customers at renewal with absolutely no evidence of a re-broking or re-quote exercise having taken place.

These are practices intended to deceive either a third party reading the file or the customer into believing that the competitiveness of terms offered have been checked.

Be warned that such practice is indicative of a non-compliant culture and casts into doubt the integrity of any firm where it is discovered. A broker has no duty to obtain the cheapest or the most competitive terms unless instructed to do so (the duty is to reasonably ensure that the customers insurance needs are met), but a broker does have a duty to be honest and act with integrity.

Do not seek to give the impression that a re-broking exercise has taken place when it has not.

This page is edited by RW Associates, specialists in training, compliance and competence.

ruy.lopez@brokercompliance.co.uk

Using this CPD page
For the vast majority of practitioners and indeed support and supervisory staff in our industry, CPD is about regular learning and study that is planned, recorded, timed and evaluated.

If you are a member of a professional body with a CPD requirement then there will be certain rules regarding the quality and nature of study material, and the way in which it is recorded.

For staff of GISC members this means recording on your individual training file what the learning was, who provided it and when.

It might be structured, such as a course, a learning programme or exam study. But it can be unstructured. This form of study encompasses reading the trade press, technical material or taking part in activities to support your professional body.

Some CPD requirements are points related (a little antiquated) and others require a time value to be allocated.

For example, it might take one hour to read Insurance Times each week. Most of that could be put as a time value but, in reality, perhaps only an half hour was devoted to learning something. The rule is to be honest with yourself and record the time that is relevant.

Always take time to make a note of what you felt you gained from the activity. This is useful information for anyone else considering the same activity.

In response to the popularity of our CPD programme each week's CPD page can now be downloaded from our website. We will be preparing a binder for you to keep these in alongside the results of the exercises.

To download a PDF of this article as it appears in the magazine click here .