Insurance Brokers
Insurance broking is one of the more established professions and as such is regarded by insurers as a ‘traditional’ profession. All Insurance brokers and intermediaries are regulated by the Financial Services Authority (FSA). Mediation Activities is an all inclusive term used by FSA to describe all work carried out by a broker for his clients.
The FSA is the regulatory body for the insurance broking industry and the British
Insurance Brokers Association (BIBA)
is the main organisation for the promotion of members to the public. Anyone transacting
insurance of any type must have a current FSA authorisation.
Insurance brokers transact and provide advice on all aspects of insurance for their clients. Some brokers have a financial services division and it is in this area where there can be problems in obtaining cover.
In terms of potential legal liability, it is as well to remember some of the main
duties owed by an insurance broker to his client, particularly:
* In the conduct of their business to provide advice objectively and independently
* To explain the differences in, and the relevant costs of and the principal types
of insurance which, in the opinion of the insurance broker, will suit a client’s
needs
* To inform the client of the name of the insurer
* To conduct business with utmost good faith
What do Insurers look for?
Size of the firm – One of the major factors that determine insurers’ rating and underwriting criteria is the size of the firm, the number of directors and staff and the gross commission/fee income of the firm.
Qualifications and experience – In line with underwriting philosophy across the professions, insurers need to satisfy themselves that a broker is suitably qualified and/or experienced to carry out the work on behalf of his client.
Type of work – Insurers will be particularly interested in what type of work the broker is involved in and the split of annual income derived from each discipline.
- Personal lines – Involves the broker in placing insurance for individuals and families. Such policies typically might be private motor, home and contents cover and travel insurance. Considered low risk as the sums insured are often low and the working process has been automated.
- Commercial lines – The placing of insurance for corporate clients, often business related policies such as buildings, plant, fleet motor and liability. Medium to high risk depending on the work being done and the values being insured.
- Financial services – Involves advice about and the sale of investment related products such as pensions, savings schemes and life insurances. High risk as historically this area has been the cause of many claims
- Related services – Such as risk assessment for clients, loss adjusting and claims assessing and carrying out certain functions for insurers such as underwriting and making claims payments. Low to high risk depending on what exactly is being done.
Other Factors
High risk work – Areas of insurance requiring special expertise such as aviation and marine. Placing cover under binding authorities is studied in detail by insurers, especially where the broker actually puts together a policy wording, decides on a rating structure, finds an insurer to write the business and where the insurer allows the broker full authority to vary the rates and / or policy terms.
Sums Insured – Insurers will look at the largest sums insured handled by a broker. The larger the numbers the more concerned an insurer will be.
Technology – Is the broker operating traditionally through its offices or interactively via the web?
Overseas exposure – Does the broker act for overseas clients or place policies with overseas insurers? Careful consideration would be paid to any work carried out in the USA or Canada or for North American clients.
Retroactive exposure – Does the broker have an exposure to claims arising from past work, whether in the current firm or a predecessor?
Claims experience - The claims experience is an important determining factor in the assessment of risk. This information usually reflects the type of work carried out by a practice. It also reflects the quality of the practice's work, staff, internal risk management and experience.
Download
Insurance Brokers brochure.
Examples of claims
Not on cover – A broker tells his client that cover is in force when in fact insurers have not been instructed – a loss occurs and insurers refuse to pay.
Lack of communication – A broker fails to communicate with his client the existence of conditions or warranties. A break-in occurs at a premises and a warranty requires a burglar alarm to be installed insurers will not pay when they discover one not installed.
Non-disclosure – A broker fails to pass on to insurers some details given to him by the client. As a result the insurer declines to pay a claim stating they were unable to correctly assess the risk without the full data.
Breach of Binding Authority conditions – A broker exceeds his authority granted by the insurer and the claim is not paid.
Poor risk assessment advice – A broker gives incorrect advice resulting in under insurance and the loss, when it occurs, is not fully covered and the client pursues the broker for the difference.
Use of unauthorised markets – A broker places a risk with an insurer who is not FSA approved.
Wording
Cover - The policy must indemnify the broker, as a minimum, for
losses arising in the course of its General Insurance activities and those of its
Appointed Agents and Appointed Sub-Agents arising from:
- A breach of duty by reason of any negligent act, error or omission.
- Libel or slander.
- Any loss of money or other property arising out of the dishonest or fraudulent acts or omissions of Employees or former Employees for which the Intermediary is legally liable.
- Legal liability incurred by the Intermediary, Appointed Agent, or Appointed Sub-Agent by reason of loss of documents.
- Any award of compensation imposed by any dispute resolution body to which the Intermediary belongs.
Limit of Indemnity - The minimum limits of indemnity are €1,000,000 for a single claim or €1,500,000 in the aggregate or, if higher, 10% of annual income up to £30M. Many firms will carry limits higher than the minimum requirements.
If the policy is to be in a currency other than Euros i.e. GBP (£) then the appropriate conversion rate has to be stated on the quote/slip. The firm’s senior management needs to take reasonable steps to ensure that the currency limit of indemnity is the correct Euro equivalent at the time firm order instructions are given and at renewal.
Excess - For a firm that does not hold client money, excess not more than £2,500 and 1.5% of annual income. For a firm that holds client money, excess not more than £5,000 and 3% annual income.
The usual cover
The main areas of protection under a broker’s professional indemnity policy are:
- Legal costs and expenses in defending an allegation of negligence
- Court awards and damages in the event of full or contributory negligence
- Economic and consequential losses
- Third party legal costs and expenses awarded against the broker if found liable. Insurers often pay claims where the total legal costs exceed the amount of the initial claim against the broker!
There are often additional sections of cover, which could include:
- Libel and slander
- Loss of documents
- Dishonesty of employees
All policies will carry a number of exclusions and it is important to check each wording. A couple of typical examples are:
Financial Services - The policy will exclude all liability arising out of, or in connection with life assurance, pensions and investment activities as more fully described in the Financial Services Act 1986 and the Financial Services and Markets Act 2000. Some insurers will provide this cover if requested.
Suitability of Insurance Companies - The policy will exclude cover on the suitability of any insurance company, agent or Underwriter, with whom insurance or reinsurance is placed. Of particular concern here might be the placing of policies with overseas insurers who are not regulated in the UK.
Other exclusions will include:
- Employers and public liability
- North American and Canadian jurisdiction
- Nuclear risks
- Claims and circumstances known at inception of the cover
- Onerous collateral warranties
