Professional indemnity insurance is often seen as a compliance tick-box exercise, and an inconvenient one at that, especially when markets are down.
"It's seen as a grudge purchase," says Jonathan Newell, chief executive of PI insurer and underwriter Barerock.
Therefore, he adds, advisers tend to have certain misconceptions when it comes to the workings of the mandatory product.
He lays out the five main myths he has encountered in his 30 years’ experience in insurance, and sets them right.
The retroactive date
"It's not uncommon for an advice firm to think if they bought a PII policy in 2022, and they get a complaint in 2024 that arises out of the advice given in 2022, that the policy they bought in 2022 will respond to that claim," says Newell.
"That's not the case," he explains. "The policy responding to that claim is the one enforced at the time the adviser received the complaint."
He explains a PI policy must have two key things:
- it needs to be in place when the firm receives a complaint, and
- it must cover the date the advice was given initially (the "retroactive" date).
Notifying the insurer
Advisers generally know they have to notify their insurer when a complaint is received by a client. But this is not all, says Newell.
"From a PI standpoint, the gamut of what we need to be told about is way wider than that," he says.
For instance, advisers should give their insurers information about all the circumstances that may give rise to a complaint, or issues they are aware of that may lead to client detriment before a claim is made.
"So that's a situation that the advice firm is aware of, but the client is not. We still need to know about that. And a decent PI product will respond to that event as well," he says.
What's more, if a firm can demonstrate it has put remedial steps in place to stop that same thing happening again, a decent PI insurer should view that "as a good thing, not as a negative," says Newell.
This means it should not hike the premium in response - though not all insurers operate in this way, he cautions.
Notifying the insurer should mean the adviser gets support throughout the process, and this acts as a vital safety net down the line, as the insurance won't pay out on things they haven't been notified of in time.
For instance, failing to notify the root cause of a claim could end up in the policy not paying out, Newell says. This could happen in the case of a fee dispute.
Fee disputes
Some advisers think their PI policy will cover them for a fee dispute with their clients, but this is not the case, says Newell.
Such disputes could take the form of a client disputing they received the service for which they thought they had paid.
Newell says: "Fee disputes are excluded across the board.
