Careful – they might sue you

Just about every professional body in Australia lists the availability and cost of professional indemnity (PI) insurance as one of the key issues confronting their members and all of them are seeking answers.

Why should we regard the crisis as the ongoing legacy of the HIH collapse? Simple. The removal of HIH from the market was the catalyst that saw the number of insurers offering PI cover reduced by almost two-thirds.

According to a submission developed by theFinancial Planning Association(FPA), a survey of principal members in 2000-01 showed there were 23 PI underwriters.

“The number of underwriters in the market providing PI insurance has dropped to eight insurers, of whom only four currently write financial planning business,” the FPA says.

The corollary of that reduction in competition has been a substantial rise in premiums, with the Australian Competition and Consumer Commission (ACCC) recently producing data to show that public liability insurance premiums rose by 44 per cent last year (2002) while PI premiums rose by 36 per cent.

However, at the same time as pointing to these steep hikes in premiums, the ACCC says there has also been an improvement in the profitability of both public liability and professional liability insurance.

Commenting on the data, ACCC chairman Graeme Samuel says: “Importantly, in a turnaround from recent years, insurers are expected to make an underwriting profit in these classes for the year ending December 31, 2002.

“Underwriting profit (where premium income exceeds claims costs and other direct costs attributable to a class of insurance) is just one part of the overall profit picture for a particular class of insurance. This underwriting profit has been secured, in large part, by recent premium increases.”

These may have been heartening words for bodies such as the FPA and theInstitute of Chartered Accountants in Australia(ICAA), but they hardly allayed the concerns of those bodies about the cost of PI cover to their members or the impact those costs were having on businesses within the industry.

According to the chief executive of the ICAA Stephen Harrison, the ACCC report simply didn’t fully reflect the dimensions of the problem confronting his members, some of whom he claims have experienced premium rises of up to 1,000 per cent.

Commenting on the ACCC report he says: “If you look at the cost of an insurance policy year-on-year it doesn’t give an indication that, at the same time as the costs have gone up, the cover has gone down, areas have been excluded and excesses have been increased.”

The ICAA is among those organisations that have sought a range of legislative and regulatory remedies to their industry’s PI problems. These remedies include amendments to the Trade Practices Act to facilitate the introduction of state-based professional standards legislation, and amendments to liability provisions.

However, other organisations have gone further, particularly those with the luxury of being in unique legislative jurisdictions.

A case in point is the building and construction industry in the Australian Capital Territory (ACT) where, confronted by problems in obtaining housing indemnity insurance, the industry negotiated with the ACT Government for introduction of legislation allowing for the establishment of a fidelity fund.

The Master Builders Fidelity Fund, run under the auspices of the Master Builders Association of the ACT (MBA-ACT), has now been in place for more than 14 months and is credited with ensuring that residential builders operating in Canberra have not been subjected to the same uncertainties as their colleagues in Sydney and Melbourne.

The executive director of the MBA-ACT David Dawes says the fidelity fund has been an outstanding success and has been strongly supported by builders operating in the ACT.

He acknowledges, however, that the ACT was fortunate that the ACT’s pre-existing regulatory environment was conducive to the establishment of such a regime.

For the insurance industry, professional bodies such as accountants, financial advisers and builders represent a captive audience. All are required by law to carry such insurance.

Perhaps unsurprisingly given the high representation of risk advisers within its ranks, theAssociation of Financial Advisers(AFA) managed to secure access to professional indemnity insurance at rates lower than those confronting other people in the financial services sector.

AFA stalwart Joe Nowak attributes the lower premiums to the essential understanding by the underwriters that risk advisers operate in a different environment to financial planners.

Where financial planners are concerned, the FPA says that current legislation requires members who have an Insurance Brokers Licence to obtain PI insurance, while the Insurance Agents and Brokers Act 1984 requires insurance brokers and agents of unauthorised foreign insurers to have insurance covering breach of their professional duty as an insurance intermediary.

What is more, the Financial Services Reform Act (FSRA) requires Australian Financial Services Licensee (AFSL) applicants to certify that they currently have, and will maintain, compensation arrangements that will comply with the FSRA.

The FPA’s position on PI cover has not altered since the ACCC report was handed down, and the organisation continues to warn that premium levels are impacting costs and forcing some licensee members out of the industry.

However, at least some of the answers for financial planners and accountants might reside in the final shape of the FSRA, particularly the application of adequate compensation arrangements.

Some experts are suggesting that the FSRA does, in fact, have the potential to reduce the impact for some planners.

A director with a law firm providing advice to the FPA,the Argyle Partnership’s Peter Bobbin, says that, fundamentally, the FSRA has changed the requirements as they relate to planners working for dealers, and planners need to make sure their insurance underwriters understand those changes and that they are reflected in the policies.

“If you’re a planner working as an agent within a dealer group and you work within your authorisation then you should be covered by the licensee’s professional indemnity — the licensee is liable for the actions of the representative and that seems to be the clear intent of FSR,” he says.

“What is problematic, however, is ‘run-off cover’ — the status of the planner when they leave the dealer group,” Bobbin says.

“This makes it imperative that planners understand the nature of their PI policy — what they’re covered for and what they’re not covered for — and whether the underwriter understands the intent of the FSR.”