Professional indemnity insurance: What advisers need to know
Good Returns spoke to industry insiders who believe that just because PI insurance isn’t compulsory, it is still crucial for advisers.
Friday, November 20th 2020, 6:14AM 
7 Comments
by Daniel Smith
Steve Burgess
When the FMA released its full licence guide, many advisers breathed a sigh of relief that professional indemnity insurance was not one of the seven requirements. But Steven Burgess, CEO of Compliance Refinery believes that just because PI insurance isn’t compulsory, doesn’t mean advisers should not be thinking about it.
In a 90-minute video discussion dedicated to the topic, Burgess sat down with Clinton Stanger and Michael Robertson to discuss the ins and outs of professional indemnity insurance and why advisers should care.
They came away with four key tips that all FAPs should consider when thinking about PI insurance.
1. Read your policy: Know and understand the wording, manage the risks and understand the areas not covered by your PI.
2. Notify, notify, notify: Call your PI provider early in the complaints process.
3. Keep good records: Client file notes are often the difference between a short defence and a long, stressful, expensive one.
4. Review your business structure: Assess your business structure and who needs PI cover. If you have a complex model, engage your PI provider now. A complex structure would include a structure where an adviser is in two different FAPs.
Burgess told Good Returns that PI insurance is “extremely important for advisers to be considering. Costs can get to the point of essentially ending your business if you don’t have it. PI more than anything provides defence against claims against your business, there is not much [that is] more important than that.
Important for Burgess is the level of professional support that PI insurance provides, “What we see a lot of the time is that advisers will attempt to defend against claims themselves and quite often make it worse. A PI insurer will have, or can hire people who have, an extremely high level of particular expertise. Whereas an adviser, often because they have a personal stake in the claim, can behave in a way that doesn't provide good outcomes to them.”
Burgess doesn’t mince words where PI insurance is concerned, “If you are considering a more complex business structure you need to engage with PI providers.”
Katrina Shanks CEO of Financial Advice New Zealand also agrees with the importance of PI insurance. “Part of being a professional is having PI insurance. This new world that we are entering is about professionalism, both yourself as an adviser and your business. There is an expectation that advisers have PI insurance like other professionals do.
“We recommend that all advisers [have] PI insurance because that is what is expected of them.”
Considering the importance of PI insurance, a big concern for Burgess is that the New Zealand insurance space is not large enough for everyone to be covered.
“This is one of the things that New Zealand is really struggling with. Essentially we are competing for a very small piece of the pie. These large insurers have been massively impacted by Covid which has seriously affected how they operate globally. If you are in a complex business or a high risk area the bigger companies are not too interested in getting involved with you.”
With the new regime bringing with it different FAPs, business and advice models, Burgess is concerned that not everyone who needs to be covered by PI insurance is going to be able to get it.
Shanks is slightly more hopeful about the New Zealand insurance market’s ability to offer widespread PI insurance. “It is certainly a changing market. We are watching what is happening with PI. In many instances it isn’t New Zealand or the claims that are influencing the price and availability of PI, it’s the levels of risk that these global insurers are prepared to have within their own portfolios.
“Because a lot of it is out of our control, we do have concerns with the hardening of the market. We are working actively with insurers to make sure we have the right programmes in place, but it is a moving market and it is moving rapidly.”
Ross Sheerin, Secretary of SIFA confirmed that it is looking into providing PI insurance for its members. “We are looking into the possibility of a group scheme. On a group buying principle we might be able to get something at a better price than somebody just buying it themselves.”
Sheerin says that regarding PI insurance “value for money is certainly a question. Prices have gone up and cover has ebbed away over the years. Something different is needed than what is currently on offer.”
For advisers concerned about the future of PI insurance, Shanks says that many are in a “wait and watch” to see which way the market plays out for New Zealand advisers. But one thing all of these people agree on is just because PI isn’t compulsory, it is still a vital component for FAPs to consider under the new regime.
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Comments from our readers
The market is hardening, but it is a free market and new capacity may appear. I firmly believe the new regime will lead to a more professional environment for our clients just as it will lead to better risk management by advisers and in turn a better risk profile for PI insurers.
I thought PI traditionally was to cover negligence and mistakes made by a professional when the client suffered loss as a result of the advisers negligence or mistake. Arguably, that risk is the same as it always has been.
The new risk that arises for financial advisers and FAPs is regulatory risk vs the requirements of the FMCA licensing regime with all its ancillary bits - my address to SIFA earlier this month was "753 things an adviser now has to take into account...."
I foresee future charges against advisers in situations where the client isn't even aware that the charge has been made - the charges will be alleged offences against the regulatory regime. The client won't necessarily have suffered a loss (may have even made a profit), but the adviser will be alleged to have something wrong wrt their policies processes procedures and systems.
I can see why insurers will be reluctant to take on this new risk.
Anecdotally some of the group PI schemes have been renewed till say June 30, but the regime will barely be underway then and its hard to see even the FMA rushing out of the gates to ping advisers - although I do remember the "we have rottweilers straining at their leashes) from 2011. I thought the person who told me about that was both first hand and impeccable, and I reckon the person who is alleged to have uttered such words hopes to remain anonymous given his or her current calling.
Given the policies are "claims made" basis, I reckon the fun will start when group schemes go to renew from 1 July next year.
The cover required by the FAP and its advisers to cover this new risk seems to me to be more akin to statutory liability than professional indemnity.
Maybe I am looking to apply terms with more precision than they are used in everyday speech - a true insurance expert commentator ought to be able to clarify such things in minutes.
Is it hoping too much for such an expert to opine here?
"Professional Indemnity insurance can help protect you and your organisation against the financial strain of litigation. It covers your legal liability to compensate third parties for losses caused by a breach of professional duty or negligence in the performance of your professional services."
Most PI cover has the stat liability included. However, the mix, focus, and response from it may need to change. Many renewals expecting the 29 June start date should have already taken this into account. Have they? Pass, I too need to double-check that. I think it did when it renewed...
One of the many thousand paper it's of death we are likely to see...
That said, all insurers require PI for life agencies, enforcement has been a bit slack, something else that's going to create noise... Typically when the renewal arrives I send it on to my providers, it solves some of the noose... But that's going to be a minor part of it going forward
Under the new regime will $1m be adequate and appropriate for the FAP’s size?
This is where good advice is needed.
Also yesterday I discovered there are some shocks just around the PI availability corner for FAPs with 2 or fewer advisers. Don't know if they are public yet so will have to stay cryptic in the meantime.
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when prospects become your clients, there will have long lasting trouble free relationship.
suspects are short term gain and long term pain who should be avoided at all costs.
note: this rule only apply to honest and ethical advisers. nothing will protect unethical advisers.
in short, choose your clients wisely, be honest and put your clients' interests before yourself, and there won't be trouble.