E&O insurance must be on the level

Indemnity insurance has been steadily increasing in price during the past year and directors' and officers' insurance premiums have just gone up by a further 20%. Brokers are facing similar increases for their errors and omissions cover and, not surprisingly, many are consequently abandoning this type of cover.[QQ]

Brokers that do so are unwise, however. Each stage of a broker's work contains potential traps and claims for the unwary or unlucky broker.

The smallest of errors can lead to a substantial damages claim and put the viability of the broker's entire business at risk. Effective E&O insurance with an appropriate level of cover is essential.

Many brokers have recognised this risk and have made sure they have the safety net of appropriate professional indemnity cover. Adequate indemnity cover also has the advantage of allowing brokers to continue to concentrate on their business, while their insurers and claims handlers deal with claims.

The Financial Services Authority clearly believes E&O cover is necessary - its final rules include a minimum professional indemnity requirement of EUR1m (£685,000), with EUR1.5m euros in aggregate.

The FSA originally proposed a minimum cover of more than £685,000 but recognised the difficulties brokers would face in acquiring this in a hard market. It also felt the lower level of cover was proportionate to brokers' risks.

But the British Insurance Brokers' Association is concerned that these levels are too low, and many brokers agree. There is a risk that these minimum levels would not cover the larger risks placed by brokers, putting the survival of their businesses at risk.

In addition, claimants whose costs are not covered by the brokers' insurance policies look set to recover damages from the Financial Services Compensation Scheme. Ultimately, brokers would have to pick up the tab for this, by paying higher levies. Brokers should think twice about scraping by on the mere minimum.