11th April 2007

Compensation Act 'could increase need for PI'

Compensation Act 'could increase need for PI'

Companies may wish to increase their professional indemnity (PI) insurance coverage, or take cover for the first time, following the introduction of the Compensation Act 2006 on April 23rd 2007.

While some terms of the act were brought into power on December 1st 2006, the remaining provisions are effective from April 23rd, including a tightening of the regulations relating to claims management services.

In particular, businesses which provide claims management services are required under the Act to be authorised by the Financial Services Authority (FSA).

According to the Department for Constitutional Affairs (DCA), "the act allows the regulator to make rules in respect of professional indemnity insurance".

The DCA suggests that businesses which do not currently hold PI cover may be required to obtain the insurance in the coming months.

"PI insurance would help to protect consumers who might otherwise suffer loss in the event that an authorised business was unable to meet its liabilities," the department explains in a consultation document.

Proposals are currently being considered by the DCA, with a consultation period in effect until May 25th.

If the proposals were to be implemented as outlined, this would result in businesses offering claims management services being subject to similar stipulations as general insurance intermediaries.

This could include mandatory PI cover for all authorised businesses with client contracts, regardless of whether or not they represent those clients.

Cover would be required for individual claims of up to €1 million (with the DCA proposing this should be considered in terms of a sterling equivalent of approximately £650,000), with an aggregate limit of €1.5 million or ten per cent of the annual income of the firm.

If passed, the proposals are expected to come into effect on January 1st 2008, in order to give companies enough time to purchase the necessary PI insurance.

Section 9 of the Compensation Act 2006 commenced on December 1st, 2006 permits the FSA to insist that a business obtain PI cover.

Further regulations in sub-paragraph (1) of that section state that the FSA should be able to "make provision about the level or nature of insurance cover to be provided by the policy".

The Law Society advises companies to comply with the terms of the Act in order to avoid being banned from trading.

"As with any referral arrangement, you must comply with your regulatory requirements," the society warns.

These requirements extend beyond direct client contact, a Law Society practice statement suggests.

Where a client is introduced to a company by a third party which is not exempt from the need for authorisation, the firm may be exposed to liability if the third party is not authorised, the statement advises.

Meanwhile, if the introducer is believed to be exempt, the onus of responsibility could remain with the firm to "ensure that the introducer complies with the rules on advertising, marketing and soliciting business".

The guidance advises brokers that they may need to be authorised if referring an uninsured personal injury loss to a claims management company.

Similarly, independent financial advisers are told that they may be exempt from authorisation if referring a compensation claim, but will require authorisation if acting as a claims management business or referring the case to a claims management company.

The Law Society stresses the need to act in the client's best interests in any instance in order to avoid any accusations of having breached regulations.

According to the society, this obligation should be observed "particularly if you receive a significant number of referrals from a single source".

While the requirement is likely to be phased in gradually over the course of the year, as "it would be unreasonable to impose a requirement for PI cover immediately", the DCA consultation reports widespread support for the suggestion.

"There was general acceptance of the need for authorised businesses to have professional indemnity insurance," it found in a previous consultation in December 2006.