Opinion: Who would believe it? When unrated is “good”


Roger Flaxman finds lessons for brokers in a fascinating £100,000 case where a firm faced litigation for not using unrated insurers.

A casual chat between two solicitors at a local trades Christmas lunch resulted in an extraordinary windfall for one of them.

Each represented small practices with similar turnovers of just under £1m.

Comparing the cost of their professional indemnity (PI) insurance firm A found they were paying nearly four times the premium paid by firm B.

It rather spoiled the lunch for A and on reflection of this alarming discovery A decided to call his broker to account for the difference.

Litigation against the broker followed which resulted in an out of court settlement of nearly £100,000 to A’s firm, representing “overpayment” of premiums for three consecutive years.

The difference was accounted for by firm B being insured by unrated overseas security whereas A had A-rated security.

A was able to show to the satisfaction of the broker’s PI insurers’ lawyers (it did not go to trial) that “the broker knew or ought to have known that the Insured (A) specifically asked for the least expensive qualifying cover available in the market”.

That included, or at least, did not exclude, unrated security insurers.

The broker did not, as a matter of policy, use unrated security and defended its position accordingly.

However, the broker had not made clear to A that it would not therefore cover the entire available market when seeking terms.

The firm had made it known to the broker that price was the number one priority but no–one had considered the question of use of unrated security.

The demands and needs assessment is a key component of a broker’s relationship with its client and is always a factor examined in the course of a dispute or litigation.

The broker had issued a demands and needs statement, in accordance with ICOBS, but there was no evidence that the statement was based upon actual due diligence in ascertaining the demands and needs of the insured before issuing the statement.

This serves to illustrate a risk in the issuing of generic demands and needs statements.

In the course of the litigated enquiries A was able to show that if the unrated security had failed the firm was eligible for protection by the policyholders’ protection scheme and would suffer only a small net loss itself.

A had concluded there was little real risk in using unrated security.

Whilst A had not actually communicated that reasoning to the broker it was countered by the absence of any recorded enquiries by the broker into the demands of needs of the firm.

Information is widely available to brokers concerning rated and unrated security including the Biba Litmus Test Report.

The risks to brokers of recommending unrated security need no explanation but the risk of failing to make a careful assessment of when unrated security is appropriate for a client is worth a second thought.

Roger Flaxman is principal consultant at insurance dispute advocates Flaxmans

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