Roger Flaxman outlines the key points from the CII's Faculty of Insurance Broking Professional Indemnity Masterclasses

Professional indemnity (PI) insurance rates are still in decline with premiums in some cases being up to 30% less than the same time in 2005. Insurers are, of course, free to charge whatever price the market will bear, but if the old saying "you get what you pay for" applies, and there is no reason why it should not, then there are hidden dangers to the buyer, the intermediary and indeed the seller.

PI is often the next highest overhead to the firm after accommodation and employment costs, so declining premiums are naturally welcome by insureds.

But there is a danger in not recognising that the value of a policy cannot be measured by the sum insured, the premium and terms, alone. The real value of the insurance is ultimately in the integrity, skill and commitment of the claims service. That is, after all, what insureds are relying on.

Bad reputation
The principal danger to the seller, the insurer, is in getting a bad reputation for treating the insured unfairly in defending and settling their claims.

The pressure on insurers to cut costs in a soft market is understandable, to the insurer, but the insured trusts that, whatever premium the insurer is willing to accept, it will have no detrimental effect on its claims service.

The dangers to the intermediary are in the complex duties owed to the insured and, sometimes to the insurer as well, in both the procurement of the insurance in the first place and the advice and support given in the event of a claim. These duties exist in common law as well as having to comply with onerous obligations imposed by the FSA.

So, what can the buyer, the seller and the intermediary do to avoid the dangers and become better informed and so better protected?

The buyer needs the expertise and considered support of the insurers and their legal advisers in defending their reputation and assets. Further, they need certainty of the cover they have bought and of the security of the insurer's ability to pay up to the full limit of indemnity in settlement of the claim and attendant costs and expenses. Above all, the buyer wants to be reassured that it is in good and competent hands; that the insurer and the lawyer are working for it and always acting in its best interests.

The seller - the insurer - needs to attract business from policyholders that take care to avoid having a claim made against it and to have the full cooperation of the insured in defending the claim when it happens. Both are apparently very reasonable expectations but reality can create a gulf between the buyer and the seller that can too easily end in dispute and litigation.

The role and responsibilities of the intermediary is of paramount importance. The intermediary understands market practice and can act to interpret and reassure its client. It can often mediate with the insurer to obtain the best commercial compromise to close the gulf of expectation by a considerable margin, if not entirely.

Experienced intermediaries are key to managing expectations between insured and insurer. They have the ability to understand both the insured's expectations and needs and the insurer's.

A contract of insurance is an agreement to provide what is described in that contract, no more and no less. But when the insured is in trouble they expect, first and foremost, the unstinting help and support of its insurers. So what will be the impact upon them when the insurer refuses to accept the notification of a "circumstance", issues a letter of "reservation of rights" or simply fails to enter into any correspondence?

It is analogous to an ambulance turning up at the scene of a road accident only to find that the casualty is "lying in the wrong position" on the road and so it turns around and drives away.

Not only is this kind of disappointment devastating to the insured but it also sends out entirely the wrong signals about the insurance industry. While the insurer is entitled to act within the terms of the contract, the manner in which it does so can make the difference between attracting preferred policyholders and getting a bad reputation.

What is a reservation of rights? When can an insurer refuse indemnity and when this happens what should the insured or the intermediary do?

Proper inquiry
The implications of the demands and needs statements of ICOB 4.3 require the intermediary to make a proper inquiry into the purpose of the insurance to ensure that it satisfied the client's proper needs. This will require increasing skill and judgment on behalf of the intermediary if it is to avoid the pitfalls of legal liability.

So too with the requirement to ensure that all material information is provided to the insurer. What is all material information? How can an intermediary make that assessment?

With contract certainty looming on the horizon what are the duties of the intermediary when negotiating final terms under intense competition at the eleventh hour in the knowledge that the terms and conditions of the policy will not be certain at that moment of inception? IT

' Roger Flaxman of Flaxman Partners is leader of the Faculty of Insurance Broking Professional Indemnity Masterclass. For more details visit