Brokers need to protect both themselves and their clients more than ever during these difficult times, says Adam Tyler, NACFB chief executive.
Professional indemnity insurance (as many of you will already know) protects both the broker and the client in the event that the client sues for compensation following service provided by a broker. The insurance is tailored to the business of the broker and can also cover any legal costs arising from a claim. Different amounts of cover are available depending on the size of the business, and different levels of excess are available.
Market pressures mean that clients are becoming more litigious - and there have been some rumblings from NACFB broker members that, in some cases, lenders are also looking to recoup their losses by pursuing brokers. Increasing incidences of fraud are also coming to light and, although your policy won't protect you if you are dishonest, it may help you if you find that your staff have been less than straight in their dealings with both you and your clients.
In today's litigious society, with the added pressures caused by the credit crunch, you would think that PI cover would be a 'no-brainer'; but here at the association where PI cover is compulsory for all members there are still those who don't believe they need it.
Some brokers feel that because they are brokers pure and simple (i.e. offer no advice) that cover is not a requirement for them. There are others who say that as it's not a requirement of the industry, there's no reason for them to have it. More worryingly, there are some who simply say that they've been doing the job without a complaint for the last 15 years, therefore believe insurance is a completely unnecessary expenditure, because their experience means they never make a mistake.
Without in any way wishing to belittle their expertise, I would say that I've lived in a house for the last 15 years and dutifully followed all health and safety procedures with respect to getting my boiler serviced; gas appliances properly fitted; electrical equipment is properly wired; plug sockets are never overloaded and I can honestly say I've never left a candle unattended. But my house is still insured in case it burns down.
If something does come to light which could result in a claim - a 'notifiable event' - it's important to let your insurer know as soon as possible. Any delay could invalidate your cover. Risk is critical to PI insurers: more litigation from clients means higher premiums for brokers.
However, there are a few things a broker can do to mitigate risk. Make sure that all dealings with clients are well documented, and that you have a good complaints procedure in place which you adhere to. Also make sure that the contract you have with your client clearly sets out what you intend to do for your client; how you intend to get paid for it (whether by a fee from the client or by a commission from the lender); and when that fee becomes due. Make sure that the client signs to agree to all these terms before you begin work. The NACFB can help - we have a model complaints procedure and a 'Minimum Terms of Business Agreement' which many brokers find useful as a starting point.
As a broker, you need to be covered both at the time the claim is actually made, and at the time it becomes a 'notifiable event' by the insurance company. Often there is a delay between the time of the client taking the loan or the lease, and their discovery of their dissatisfaction with it, which in turn leads to the claim. If you plan to retire, or cease trading for any other reason it might be a good idea to arrange "run-off" cover for a period of time afterwards.
The same applies if you plan to change your insurers; you will either need to arrange run-off cover or get agreement from your new insurer to accept new claims for prior incidents. Even the most experienced broker should have PI in place to protect their business.
The pressure of the credit crunch means that even the best deals can go wrong and some clients will chase those they perceive - rightly or wrongly - to have been at fault. Knowing that it was a change in market conditions which led to the complaint will be little consolation to the broker who loses his business.
