The significant increase in PII costs for firms providing investment advice in recent years and the difficulties for firms doing pension transfer business obtaining cover at any price for that type of business is well known. Issues with PII cover for GI or mortgage firms have been much more low profile.
However, it seems that PII providers have been introducing exclusions to cover for GI firms and mortgage intermediaries in relation to COVID-19 claims and in light of the outcome of the Business Interruption test case brought by the FCA last year.
As early as September 2020, the FCA issued the following alert:
Pandemic exclusions in professional indemnity insurance (PII) for general insurance (GI) and mortgage intermediaries
Some PII insurers are introducing exclusions following the Covid-19 pandemic. We remind firms of the need to meet our rules and highlight here some of the relevant requirements:
- GI and mortgage intermediaries’ PII must meet the minimum requirements in MIPRU 3.2.
- Providers should consider whether exclusions are consistent with their product governance obligations including, under PROD 4.2, whether the product is compatible with the needs, characteristics and objectives of the target market
- Firms distributing PII will need to meet ICOBS requirements. This includes the need to consider whether an exclusion is consistent with the needs of their customer under ICOBS 5.2.
(Regulation round-up 17/09/20)
What do the rules require?
Here is what MIPRU 3.2.4, referred to in the alert, has to say:
The contract of professional indemnity insurance must incorporate terms which make provision for:
- cover in respect of claims for which a firm may be liable as a result of the conduct of itself, its employees and its appointed representatives (acting within the scope of their appointment);
- the minimum limits of indemnity per year set out in this section;
- an excess as set out in this section;
- appropriate cover in respect of legal defence costs;
- continuous cover in respect of claims arising from work carried out from the date on which the firm was given Part 4A permission for the insurance distribution activity or home finance mediation activity concerned; and
- cover in respect of Ombudsman awards made against the firm.
Taking account of the rules and the alert, it is clear that, to be compliant, PII cover must not contain an exclusion relating to any business that might be written, or which has been written in the past, as it is always possible that liability might arise out of complaints in respect of that business.
Accordingly, GI firms that write or have previously written business which included non-damage business interruption and could give rise to a claim, but whose PII cover excludes any COVID-19 related claim would be in breach of MIPRU 3.2.4.