Finance Monthly’s Spotlight On… Insurance – with MFL Professional
MFL director Jon Leese discusses insurance sector developments and the particular needs of Private Equity businesses in Finance Monthly’s December 2015 edition. Click here to read the digital version of the magazine or visit the link on the right-hand side of this web page. The full article is reproduced with permission below.
Jon Leese has been a Director of McParland Finn Limited (MFL), a niche commercial insurance broking house in the Professional, Medical and Science & Technology sectors, for eighteen years. Prior to that, he spent nine years with a major insurance company in various underwriting and management roles, followed by six years running the specialist Professional Indemnity Department of a large provincial insurance broker. Here he talks to Finance Monthly about developments in the insurance sector and the particular needs of Private Equity businesses.
You have worked in the insurance sector for many years. In your experience what are the common areas of dispute between coverage providers and the policyholders?
As a specialist Professional Indemnity (PII) and Directors’ & Officers’ Liability (D&O) insurance broker, I handle complex insurances that have a number of traps for the unwary client. Most disputes tend to involve assertions by the insurers that clients have failed to notify potential claims in accordance with the policy requirements, have broken the onerous claims handling conditions, or have failed to comply with their duty to disclose all material facts about their business when the policy was originally set up. Since all these obligations can potentially remove or reduce the right of the policyholder to obtain an indemnity under the policy in the event of a claim, we provide handson advice and assistance to the clients throughout the insurance process to minimise that risk.
How can potential disputes be minimised in relation to coverage, so that litigation can be avoided?
It is vital that the client firm should appoint an expert insurance broker in his/her field from whom it can obtain appropriate guidance, and that it should itself take the whole insurance process seriously. The appointment of the right insurance broker is a decision equally as important for a business as choosing a suitable lawyer or accountant: this will avoid potential disappointment later on when coverage under the policy does not necessarily match the client’s expectations in the event of a claim.
The broker’s first duty is to identify the client’s “demands and needs”, matching the risk exposures faced by the client to the appropriate potential insurance solutions. Very few clients will be able to identify all those exposures without a broker’s expert assistance. Secondly, the information required by insurers when considering client insurance applications is becoming more and more complex and detailed, and the client requires a specialist adviser to guide them through this minefield in order to interpret the questions asked by insurers and to identify what is material information to disclose. This minimises the risk of claims being turned down later on for non-disclosure. Thirdly, a good broker will be able to source the appropriate solutions from the insurance market and to make suitable recommendations to the client based on the client’s “demands and needs”. In other words, the broker will recommend policies that will respond correctly in the event of a claim, thus minimising the risk of coverage disputes.
What are the key considerations in relation to the coverage under the policies you arrange? How can businesses ensure that they are fully covered?
With all insurances for a business, the key is to identify the assets and earnings that need to be protected and the potential legal liabilities to which it may be exposed. This is what is called, in regulatory jargon, the client’s “demands and needs”. As I deal predominantly with professional clients, their assets are usually fairly straightforward to identify: office buildings, contents, computer equipment and the like. Material damage to such assets can be easily covered under an Office Insurance package, which will also pick up coverage for Employers’ Liability (compulsory by law), Public Liability, and loss of earnings owing to an interruption to the business caused by any material damage to insured assets. Coverage may also be required for any motor cars owned by the business.
However, our particular niche is in advising our professional clients on the potential liabilities faced by their businesses, especially those relating to professional or managerial liability. Professional Indemnity Insurance (PII) covers the legal liability of policyholders for breach of professional duty, breach of statutory duty or other civil liabilities that may arise from professional activities of the business. Key considerations for PII coverage include any regulatory requirements, selection of an adequate limit of indemnity to match the identified potential liability exposures, ensuring all exposed entities are covered (including those firms whose past liabilities have been inherited), and the strength or otherwise of the insurer, particularly in relation to its claims handling capabilities. Directors’ & Officers’ Liability (D&O) policies are designed to cover individual directors and officers of limited companies for their personal liability arising out of the exercise of their managerial functions as well as protecting the firm itself for situations where it is permitted or required to indemnify its directors and officers under the Articles of Association.
Key considerations for D&O coverage include the proper definition of directors and officers to take into account all relevant appointments, including external directorships arising out of the activities of the firm, the need to ensure full corporate and individual protection for share prospectus issues, and overseas considerations.
Can you tell us more about your specialist insurance services to Private Equity businesses?
MFL offers a fully bespoke service to the full range of professionals and managers involved in Private Equity, Crowd Funding and Venture Capital investments.
Such investments involve a number of professional disciplines, all of which may be vulnerable to claims for professional negligence in the event of financial loss. For example, investors in a private equity fund may rely on an Information Memorandum as the basis of their decision to invest and, if that information is misleading or inaccurate, may seek to make claims against those responsible for it. Claims may also be made for inadequate due diligence of potential investment targets, or for unsuitable investment recommendations or decisions made by an Advisory Committee or Fund Manager.
Equally, personal liabilities for managerial or trustee responsibilities may also be incurred by the directors and officers of private equity advisers, managers and administrators either in their primary roles for their private equity, VC or crowd funding firms or in their roles as directors of fund entities or investee/portfolio companies.
Private equity investment remains a “high-risk” activity in the eyes of the law and regulators, and professionals in this field are therefore in need of appropriate insurance cover to protect them against such claims. Unfortunately, professional business exposures in this sector tend to be “pigeon-holed” into the PII, D&O and Financial Institution insurance markets, whereas the activities of private equity professionals cut across these artificial lines of demarcation and require individual and careful consideration. This is where MFL can help. Our specialist knowledge enables us to tailor appropriate insurance solutions to those involved in this sector.
What have been the recent changes in the regulatory environment regarding insurance? What tends to drive regulatory changes?
As general insurance brokers, we are regulated by the Financial Conduct Authority, which took over from the Financial Services Authority on 1st April 2013. The change of regulator seems to have introduced a more pragmatic and risk-based approach to our sector, focussing on the risks associated with client money and client advice, which we welcome. Most of the regulatory activity in our sector tends to be concentrated on those insurers and brokers who are involved in selling insurance to consumers, rather than to commercial clients, and we do not get involved in this area.
However, there is a big change for commercial insurance brokers and their clients looming on the horizon. This is the implementation of the Insurance Act 2015, which will come into effect for policies incepted, renewed or varied after 12th August 2016. The Act replaces the duty to disclose material information to insurers with a new “duty of fair presentation”. The core obligation remains similar, but there is much greater specificity about whose knowledge needs to be captured when preparing an insurance presentation to the insurance market.
The new Act also makes important changes to how certain warranties and conditions apply under a commercial insurance policy: conditions in policies which currently make the truth of the answers in proposal forms the “basis of the contract”, and therefore render policies voidable from inception, are to be abolished. This is a good thing for insured firms, as are some of the changes to the law on policy warranties, where a breach will no longer automatically terminate the policy. We will be adapting our procedures to take into account these changes and providing further guidance to clients. As specialist advisers to professionals, we also have to monitor very closely the regulatory changes in our clients’ own fields, which often have a direct impact on their insurance “demands and needs”.
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