When Aesop wrote his fables (perhaps the earliest example of risk management), humans were advised to avoid the pitfalls of life or suffer some unfortunate consequence that would be a salutary lesson to them to modify their future conduct. Regrettably, today human weaknesses that prompt folly all too often give rise to a claim on an adviser's professional indemnity policy.
One such example was to be found recently in our casebook. The insured had arranged for many years a professional indemnity policy on behalf of a client. The client needless to say was not happy with the premiums, and alternative cover was sought. It was duly found and the business was moved away from a major composite insurer. The premium was indeed competitive.
The clients acted as managing agents of premises. They were faced with a claim from a Lessee who had fallen and injured himself on the steps giving access to the premises. He was claiming damages from the Lessors for personal injury. The Lessors sought to hold the managing agents responsible, and they in turn notified their PI insurers. They then discovered that the new policy was retroactive to its date of inception and therefore did not cover claims arising from negligence that predated the inception of the policy. The managing agents then brought in the insurance broker as the fourth party to the action.
The intermediary was of course adamant that the full terms and conditions had been brought to the client's attention at the time of the change of insurer and that the client had not been told to change because "the terms were more favourable". A perusal of the file gave no confirmation that this was the case, although the letter enclosing the policy did ask the insured to confirm that the policy met its requirements.
In view of the lack of evidence it was felt a compromise should be attempted relying on the purported conversation between the insured and his client, as well as the possible application of the Associated Companies exclusion within the policy. However, the insured was brought into the proceedings and the legal advice was that "the insured has overlooked the fact that the previous year's insurance was a 'claims made' policy and if the Claimant knew that fact, liability would undoubtedly ensue".
Unlike most of Aesop's fables, the story has a happy ending at least for the intermediary's PI insurers. They agreed to assume the defence of the managing agents in the action. Video evidence was obtained which contradicted the extent to which the Claimant and his supporting medical evidence alleged he had been injured. The Claimant's Legal Aid Certificate has now been revoked. If he wishes to continue the action he is exposed to the defence costs as well as allegations that he had exaggerated his injuries and therefore presented a fraudulent claim. No doubt Aesop would have had some words of advice to the gentleman about the consequences of greed.
The moral from the insurance broker's point of view is to remember that "all that glisters is not gold" and whilst competitive forces can drive down prices, a 50% differential may in fact indicate that the client is being asked to compare "apples with pears" and will have reasonable grounds for complaint if he subsequently discovers (or is able to allege) that he did not realise the defective nature of what he was buying.