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Professional indemnity insurance through the pandemic – and beyond

Posted: 23 November 2020

How does the land lie for the professional indemnity sector in these troubled times?
In this assessment from Allianz Insurance, we examine the impact of the current situation and view the emerging risks on the horizon 

Advice is something everyone needs occasionally and certainly, many of us are aware of it during this time of Covid-19, whether it’s being guided on ways to protect heath, on travel matters, or on the regulations as they affect areas regionally and nationally. There may be differing views when it comes to managing the pandemic, but there’s no doubt that advice is everywhere.

What’s more, advice is at the heart of professional indemnity (PI) insurance. Currently, with so much uncertainty and businesses potentially facing more litigation as a recession looms1, having the right and sufficient cover in place is more important than ever.

The PI market can be particularly sensitive to change, such as changes in legislation or a sudden influx in claims. It’s a sector where a high level of claims expertise is required and where insurers need to be able to respond quickly to events. So, what is the current state of the PI sector and what are some of the factors influencing capacity and premiums?

A number of brokers have reported that the PI market is undergoing a tough period2, in some but not all sectors – meaning that demand for affordable cover has not always matched supply. This may not always be welcome for policyholders but in a cyclical market like insurance, this is necessary to return premiums to more sustainable levels.

The soft market had become entrenched, but with some markets proving unprofitable, the end result was shrinking capacity as insurers withdrew, particularly from sectors such as legal and construction.3

Rising premiums may be unpopular, but they should signal more sustainability. Difficult economic times are ahead, but so far it’s too early to say if business failures could mean a contracting PI market.

There will likely be ongoing measures in place to support firms - as far as possible from the government -  but already, we’re seeing evidence of more businesses failing and growing numbers of redundancies.4 It’s unknown if this is going to translate into rising PI claims, but it certainly adds to uncertainty.

However, no matter what the state of the market, PI remains a mandatory requirement for certain professions. Even where it’s not, many businesses are only too aware of the risks they face. Errors can be unavoidable and customer complaints can escalate into legal action. It’s not only the cost of mounting a legal defence which can cripple a business – a quality PI policy can provide invaluable support services to help a firm mitigate the impact of a damaging claim.

Even when not compulsory, most firms that provide advice and handle data will want PI protection; examples include PR and marketing firms, recruitment agencies, IT contractors and management consultants to name but a few.

Homeworking

The pandemic has had an almost universal impact and in business terms, the UK has seen a major shift towards homeworking. There has been some speculation as to whether this could prompt a rise in employee negligence claims.5 However, it’s too early to see if this will materialise and overall, it appears that many firms have successfully transitioned to home working. Clearly, firms do need to ensure that they continue to maintain high standards, and document new and modified processes accurately, but we also need to keep a sense of proportion since so far there is no evidence of a marked rise in risk.

Historically, the solicitors’ PI market has faced some distress, where capacity has been able to pull out with little notice and it’s often been hit by high levels of claims.

Insurance brokers have not traditionally been seen as a higher risk sector, but are now seemingly moving into this category following the FCA’s business interruption (BI) test case.

On 15 September, the High Court ruled that in certain cases, claimants could receive payments for Covid-19 related non-damage business interruption claims. The regulator has not yet managed to reach full agreement with all the insurers involved and the Court has now given its permission for the appeal to proceed direct to the Supreme Court.  The hearing will last 4 days from 16 November. This matter continues to be discussed and the view from certain insurers involved in the test case is that they do not believe their policies were ever designed to respond to a pandemic.

At present Insurers have taken a case by case view on whether their policy responds based on specific policy wording. Policyholders that have been disappointed at their claim being turned down for BI, may turn to their broker  to question whether they were sold the most appropriate policy for their business at the time. This may prompt a rise in indemnity claims against insurance brokers and may also attract the attention of some claims management companies.  Brokers are likely to robustly defend their position, but this may inadvertently bring focus on broker’ PI policies going forward.

The construction market is a large and complex sector which has seen rising PI premiums, particularly since the Grenfell Tower tragedy in 2017. There’s been a reduction in capacity in the market6 and higher premiums for construction firms, both for new builds and refurbishment work.

It’s likely this will take some time to settle down and the UK is now subject to new regulations which ban combustible materials on high rise structures. Overall, the UK is seeing more infrastructure projects underway7 as well as remedial work, for example to remove combustible cladding. Risks are proving difficult to control and the Grenfell case has also led to repercussions for related professions such as architects and engineers. While PI cover remains available, some insurers have, unsurprisingly, sought to limit their exposure.

Although the UK has left the EU, it’s presently unclear as to how this will impact PI risks. As yet, there’s no agreement on what the future trading relationship will be. Insurers will continue to make preparations but it’s impossible to know absolutely whether the landscape will change specifically within PI. Much will depend on insureds’ exposures to EU markets and perhaps if they are required to restructure as a result of Brexit. For now, it remains a watching brief.

These are not the easiest of times, but PI insurance plays a vital and enabling role for thousands of UK businesses. In a challenging market, knowledge of how the cover works is even more important.

Although some may view PI as a more complex type of insurance, its purpose is straightforward and indeed, highly practical. The more businesses can work with their brokers and insurers to ensure they have the right protection and manage their risks, the more they can continue to advise and serve their clients - and work towards a UK recovery.