MIGI 8
Professional indemnity insurance ('PII')
MIGI 8.1
Introduction
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MIGI 8.1.1
See Notes
PII helps to ensure that a firm has the
resources to meet valid claims from customers and others even when the firm
could not afford to do so out of its own resources. For example, a firm may
agree to advise a customer but do so in a way that results in the customer
acquiring a financial product that is not suitable. Most authorised insurance
and mortgage intermediaries are required to maintain PII cover that satisfies
the requirements in PRU 9.2.
If you do not have compliant PII cover you risk breaching these rules and
threshold condition 4, which is the requirement to maintain adequate resources.
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MIGI 8.1.2
See Notes
This chapter explains:
(1) which mortgage and insurance intermediaries need to hold PII;
(2) the level of cover a PII policy must provide;
(3) the level of excess a PII policy must have; and
(4) the risks a PII policy must cover.
There are some
worked examples at the end of this Chapter to help you calculate what level
of cover and what level of excess your firm's PII policy is required to have. - 01/12/2004
MIGI 8.1.3
See Notes
The PII requirements for mortgage intermediaries
and insurance intermediaries are different. If your firm carries on both regulated
activities then it will not need
to comply with both of these requirements, instead
it must have a PII policy which meets the higher of the two requirements,
which in most cases will be the requirement for insurance intermediaries.
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MIGI 8.1.4
See Notes
The requirements are minimum requirements.
In line with Principles 3 and 4 (see the table at Part I, paragraph 3.1.3),
your firm's senior management is responsible for maintaining adequate financial
resources at all times. So, the onus will be on your senior management to
ensure that the firm has such additional financial resources over and above
our requirements as they consider are necessary.
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MIGI 8.2
The requirement to hold PII
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Which mortgage and insurance intermediaries need to hold PII?
MIGI 8.2.1
See Notes
Mortgage intermediaries must hold PII cover unless:
(1) the intermediary has net tangible assets of more than £1 million; or
(2) the intermediary has a 'comparable guarantee' from an authorised person with net tangible assets of £1 million.
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MIGI 8.2.2
See Notes
Insurance intermediaries must hold PII
cover unless the intermediary has a 'comparable guarantee' from an authorised
person with
net tangible assets of £10 million.
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MIGI 8.2.3
See Notes
Broadly, a 'comparable
guarantee'
is an agreement by the guarantor to cover any claims that would be covered
by a PII policy that satisfies our rules. You should be aware that, if your
firm is a member of a group of companies that contains an authorised person, any comparable guarantee must come
from that firm. For full details about whether your firm does or does not
need to hold PII see PRU 9.2.1 R.
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MIGI 8.3
What must your firm's PII policy cover?
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Mortgage mediation: what minimum level of cover must your firm's policy provide?
MIGI 8.3.1
See Notes
Our rules require a firm's PII policy
to provide specified minimum levels of cover. In relation to the firm's mortgage
mediation activities, the minimum level is either:
(1) cover per claim equal to £100,000 or, if higher, 10% of
annual income; or
(2) aggregate cover equal to £500,000 or, if higher, 10% of
annual income;
in each case
subject to an upper limit of £1m cover. - 01/12/2004
Insurance mediation: what minimum level of cover must your firm's policy provide?
MIGI 8.3.2
See Notes
In relation to the firm's insurance mediation
activities, the policy must provide cover of at least €1m per claim. In addition, the policy must provide a minimum aggregate level of cover of
€1.5m or, if higher, 10% of annual income, subject to an upper limit
of £30m cover.
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MIGI 8.3.3
See Notes
Insurance intermediaries that hold a
policy denominated in sterling will satisfy these limits if they are at least
equivalent to our euro requirements based on the exchange rate when the policy
is agreed. We do not expect firms to build in a margin or adjust cover in
response to exchange rate movements throughout the duration of the policy.
Further information about the minimum levels of cover are in PRU 9.2.13 R to PRU 9.2.15 R.
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What counts towards your firm's annual income?
MIGI 8.3.4
See Notes
Your firm must calculate the minimum
levels of cover required of its PII policy. For this, the only income that
counts towards your firm's annual income is that from its insurance mediation
activities, mortgage mediation activities, or both, according to its most
recent annual financial statement. Income from any other source should not
be included in the calculation. So, for example, a motor dealer that is authorised
to carry on insurance mediation activities would not need to include its income
from selling cars, only its income from selling insurance.
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MIGI 8.3.5
See Notes
Annual income includes all brokerages,
fees, commissions or other related income earned by your firm. It includes
commissions and other earnings which your firm pays out of its own income
to other persons involved in
a transaction (e.g.
commission shared with a sub-agent or another intermediary).. Your firm's income does not, however,
include any amounts due to another person (e.g. the product provider),
which you have collected on its behalf. If your firm has appointed representatives
you should include in your income calculation the share of your income that
you have paid out to them or that they have retained for their activities
for which you have accepted responsibility as principal.
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MIGI 8.3.6
See Notes
Any commission income your firm receives
from a third party premium finance firm need not be included in the calculation
of your firm's minimum levels of cover.
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MIGI 8.3.7
See Notes
For full details of what we mean by annual
income, see PRU 9.3.42 R to PRU 9.3.50 R.
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What level of excess should your firm's PII policy have?
MIGI 8.3.8
See Notes
Our rules also specify the maximum levels
of excess on a firm's PII policy (although, as explained below, if the firm
holds additional capital it may increase the level of excess). The excess
limits are the same for policies covering mortgage mediation activities and
insurance mediation activities. However, firms that hold client money or client
title documents (such as bearer instruments) are permitted a higher maximum
excess than those that do not (because they will be required by our rules
to hold more capital). The details are set out in the table below. More information
on the rules that apply to insurance intermediaries when handling client money
are in Part III, Chapter 2.
There are no specific rules governing how mortgage intermediaries must handle
client money, but they must comply with our overarching Principles (see Part
I, Chapter 3) and other generally applicable rules.
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MIGI 8.3.9
See Notes
Maximum permitted excess for different
types of firm:
| Type of firm | Maximum permitted excess |
| Mortgage intermediary, insurance intermediary, or both that does not hold client money or client title documents | £2,500; or, if higher, 1.5% of annual income. |
| Mortgage intermediary, insurance intermediary, or both that does hold client money or client title documents. | £5,000 or, if higher, 3% of annual income. |
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MIGI 8.3.10
See Notes
A firm can hold an excess that is higher
than the limits in the table above provided it holds more capital than the
minimum required by our rules (see Part I, Chapter 7). So you can negotiate
how much risk to transfer to an insurance company and how much to retain,
but you will have to hold additional own funds in line with the tables in PRU
9.2.21 R and PRU 9.2.22 R.
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What risks must a PII policy cover?
MIGI 8.3.11
See Notes
Your firm's PII policy must provide cover
for claims that relate to the firm's insurance mediation activities, mortgage
mediation activities, or both. The policy should cover not only claims arising
as a result of the conduct of the firm itself, but also that of its employees
and appointed representatives. Employees include (but are not limited to)
partners, directors, individuals that are self-employed or operating under
a contract hire agreement and any other individual that is employed in connection
with the business.
- 01/12/2004
MIGI 8.3.12
See Notes
PII is a valuable means of providing
firms with additional resources if a justified claim is made against the firm.
So it is essential that a PII policy covers the potential for negligent acts
(for example, mis-selling) and the provision of inappropriate advice by all
employees, appointed representatives, agents and indeed directors and partners
of the firm. Additionally, our rules require cover for fraudulent acts by
employees, agents and appointed representatives of the firm. This is often
termed 'dishonesty cover'.
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MIGI 8.3.13
See Notes
Your firm must
have cover for:
(1) awards determined
by the Financial Ombudsman Service (FOS) (for more details about the FOS see
Part I, Chapter 18.2); and
(2) legal defence
costs.
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MIGI 8.3.14
See Notes
The required cover need not all be under the same PII policy.
So legal defence costs, for example, could be covered either under your PII
policy or under a separate insurance policy.
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MIGI 8.3.15
See Notes
Our rules specify that your firm's policy
must cover all claims that relate to business carried out from the date the
firm is authorised by the FSA.
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MIGI 8.4
Obtaining PII cover
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Who can you get PII cover from?
MIGI 8.4.1
See Notes
Broadly, you can obtain a PII policy
from:
(1) any insurance company authorised to underwrite professional indemnity
insurance policies in the European Economic Area (EEA); or
(2) a non-EEA insurance company authorised in a Zone A country, the
Channel Islands, Gibraltar, Bermuda or the Isle of Man.
(For further
details see PRU 9.2.7 R and PRU 9.2.9 G. 'Zone A country' is defined in the Handbook Glossary.) - 01/12/2004
PII policies providing cover for more than one firm
MIGI 8.4.2
See Notes
Our rules allow firms to benefit from
a policy that covers more than one firm, provided that:
(1) the minimum levels of cover of the policy are calculated on the
basis of the combined annual income of all the firms named on the policy;
and
(2) each firm named on the policy has the benefit of the required
minimum levels of cover.
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MIGI 8.4.3
See Notes
However, the maximum level of excess
permitted must be calculated on the basis of the annual income of each firm
individually, not the combined income of all the firms covered by the policy.
So if the excess on the policy exceeds the maximum permitted for a firm named
on the policy it will not meet our requirements. In such a case it may be
open to a firm to satisfy the alternative requirement of holding additional
capital as explained at paragraph 8.3.10 above. Example 2 below shows how
to calculate the required minimum levels of cover and the maximum permitted
level of excess for a PII policy that covers more than one firm.
- 01/12/2004
MIGI 8.4.4
See Notes
As well as these requirements, if you
decide to participate in such an arrangement you should ensure that the PII
policy meets your needs. This will include assessing that the combined levels
of cover are appropriate. Also, you should ensure that you are a named party
to the PII policy, to avoid any doubt about whether or not you are covered
by the policy.
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MIGI 8.4.5
See Notes
The following chapters
of this Guide are also relevant:
| The Principles - Part I, Chapter 3.1 |
| Client money - Part III, Chapter 2 |
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MIGI 8.5
PII requirements: worked examples
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MIGI 8.5.1
See Notes
Example 1: insurance intermediary that
does not hold client money
An insurance intermediary that does not hold client money, with annual income of £50,000 receives a quote for a PII policy that has a general excess of £5,000.
Minimum level of cover: €1,000,000 for a single claim AND €1,500,000 for aggregate claims.
The policy contains the following limits: £725,000 for a single claim AND £1,250,000 for aggregate claims.
Assuming an exchange rate of 1.4 when the terms of the policy are agreed, these levels of cover would be sufficient as they convert to €1,015,000 for a single claim and €1,750,000 for aggregate claims.
Excess levels: The maximum permitted excess level is £2,500 (as this is higher than 1.5% of annual income), so the excess on the policy is too high and the policy would not meet our requirements. Using the table in PRU 9.2.21 R shows that the firm would need to hold additional capital of £5,000. The extract from the table below shows how this is calculated.
An insurance intermediary that does not hold client money, with annual income of £50,000 receives a quote for a PII policy that has a general excess of £5,000.
Minimum level of cover: €1,000,000 for a single claim AND €1,500,000 for aggregate claims.
The policy contains the following limits: £725,000 for a single claim AND £1,250,000 for aggregate claims.
Assuming an exchange rate of 1.4 when the terms of the policy are agreed, these levels of cover would be sufficient as they convert to €1,015,000 for a single claim and €1,750,000 for aggregate claims.
Excess levels: The maximum permitted excess level is £2,500 (as this is higher than 1.5% of annual income), so the excess on the policy is too high and the policy would not meet our requirements. Using the table in PRU 9.2.21 R shows that the firm would need to hold additional capital of £5,000. The extract from the table below shows how this is calculated.
- 01/12/2004
MIGI 8.5.2
See Notes
Example 2: two insurance intermediaries
that both hold client money
Two unconnected insurance intermediaries, who both hold client money, wish to be covered by the same policy. Firm A has annual income of £1,250,000 and Firm B has annual income of £14,750,000. The policy quote has a general excess of £50,000.
Minimum level of cover required: €1,000,000 for a single claim AND £1,600,000 for aggregate claims. (The policy must cover single claims for €1,000,000 and it must cover aggregate claims for 10% of combined annual income (i.e. £1.6m), as this is greater than €1,500,000 (approx £1,100,000).)
Excess levels: As the £50,000 excess level is less than 3% of the annual income of firm B, the excess is acceptable for firm B. For firm A, the maximum permitted excess level is £37,500 (3% of £1,250,000). So the excess on the policy is too high for firm A and the policy would not meet our requirements. Using the table in PRU 9.2.22 R shows that firm A would need to additional capital of £16,000. The extract from the table below shows how this is calculated.
Two unconnected insurance intermediaries, who both hold client money, wish to be covered by the same policy. Firm A has annual income of £1,250,000 and Firm B has annual income of £14,750,000. The policy quote has a general excess of £50,000.
Minimum level of cover required: €1,000,000 for a single claim AND £1,600,000 for aggregate claims. (The policy must cover single claims for €1,000,000 and it must cover aggregate claims for 10% of combined annual income (i.e. £1.6m), as this is greater than €1,500,000 (approx £1,100,000).)
Excess levels: As the £50,000 excess level is less than 3% of the annual income of firm B, the excess is acceptable for firm B. For firm A, the maximum permitted excess level is £37,500 (3% of £1,250,000). So the excess on the policy is too high for firm A and the policy would not meet our requirements. Using the table in PRU 9.2.22 R shows that firm A would need to additional capital of £16,000. The extract from the table below shows how this is calculated.
- 01/12/2004
MIGI 8.5.3
See Notes
Example 3: a mortgage intermediary that
does not hold client money
A mortgage intermediary, that does not handle client money, has annual income of £3,000,000, receives a quote for a PII policy that has a general excess of £2,500.
Minimum level of cover required: £300,000 for a single claim OR £500,000 for aggregate claims (The policy must either cover single claims for 10% of annual income (i.e. £300,000) as this is higher than £100,000 or it must cover aggregate claims for £500,000, as this is higher than 10% of annual income.)
Excess levels: As the £2,500 excess level is less than the maximum permitted (1.5% of £3 million), the firm would not need to hold additional capital.
A mortgage intermediary, that does not handle client money, has annual income of £3,000,000, receives a quote for a PII policy that has a general excess of £2,500.
Minimum level of cover required: £300,000 for a single claim OR £500,000 for aggregate claims (The policy must either cover single claims for 10% of annual income (i.e. £300,000) as this is higher than £100,000 or it must cover aggregate claims for £500,000, as this is higher than 10% of annual income.)
Excess levels: As the £2,500 excess level is less than the maximum permitted (1.5% of £3 million), the firm would not need to hold additional capital.
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