Insure of yourself

We all arrange insurance in our personal lives. Whether car, home, life or pet insurance, the vast majority of us take personal responsibility for procuring our insurances without recourse to a broker. There is always a nagging doubt, though, that without the advice of a qualified professional, we are taking part in an unequal contest. On one side is the insurer, which knows the terms of its policy inside out, and on the other side is us, the consumer, with little or no knowledge of the small print, trying to work out whether the cheapest policy really is the best. We suspect the cover offered by the cheapest policy probably isn’t as extensive as the more expensive offerings, but we often lack the time, expertise or, frankly, the inclination to pore over the terms of a range of policies in the market to establish which is best suited to our needs.

It’s one thing to take this approach to procuring insurance for ourselves, but as lawyers, we certainly cannot afford to adopt the same stance when arranging insurance for our clients, unless we want to run the dual risks of a negligence claim and a criminal conviction under section 23 of the Financial Services and Markets Act 2000.

The Insurance Distribution Directive (IDD) is the EU legislation that gave rise to new Solicitors Regulation Authority (SRA) rules on insurance distribution activities (SRA Financial Services (Conduct of Business) Rules 2001, Appendix 1: Insurance Distribution Activities), which have now been with us for more than six months. The disincentives for lawyers to engage in such activities are now greater than ever.

If you are arranging title or other insurances in relation to a property transaction, these rules apply to you

Any lawyer “advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance” is caught by the rules. If you are arranging title or other insurances in relation to a property transaction, these rules apply to you.

How to make sure you comply

Knowing that the rules apply is one thing. Ensuring compliance is quite another, and it’s fair to say that compliance cannot be achieved by individual lawyers alone. This is something law firms need to tackle at an organisational level.

Notification

I’m taking it as read that your firm has already notified the SRA that it is undertaking insurance distribution activities, as the notification requirement also applied under the old insurance mediation rules and there is no requirement to re-notify under the new rules.

Knowledge and training

All persons in the firm undertaking insurance distribution activities (depending on how your property department is organised, this could include secretaries, paralegals, trainee solicitors and solicitors) must have appropriate knowledge. The SRA suggests the starting point for firms in assessing what knowledge is required should be the requirements of the Financial Conduct Authority (FCA). The FCA suggests that knowledge of the following is required:

• the terms and conditions of policies offered
• laws covering the distribution of policies
• claims and complaints-handling requirements
• how to assess a customer’s needs.

Training all relevant members of staff on the above (non-exhaustive) list is quite a challenge, but that is simply the starting point. Firms must also obtain information about the insurance products it thinks are suitable for clients, and understand the key features of those products.

Making recommendations

If, having read this far, you are still considering undertaking insurance distribution activities, the next stage to address is the nature of the advice required to be provided to clients. The most significant change under the new rules relates to the concept of a “personal recommendation” of an insurance product. The rules state that where the firm has provided a personal recommendation in relation to a product, it must also provide a personalised explanation of why a particular contract of insurance would best meet the client’s demands and needs, and this must be based on an analysis of a sufficiently large number of insurance contracts available on the market.

This begs the question as to when a firm is deemed to be making a “personal” recommendation. The SRA Handbook glossary states that a personal recommendation is “a recommendation that is presented as suitable for the person to whom it is made or is based on a consideration of the circumstances of that person”. It’s difficult to imagine how a firm could argue that any recommendation it now makes to a client could be anything other than a personal recommendation; if it claimed it were not making a personal recommendation, it would be suggesting that it has not considered the personal needs of its client (in direct contravention of its obligation to ensure any contract of insurance proposed by the firm must be consistent with the client’s demands and needs).

Any firm which relies on a single insurer to provide insurances for its clients must now be exposing itself to an allegation that it is in breach of its obligations under the new rules, unless it can show that it has reviewed the terms of insurance offered by a range of insurers and is satisfied that the terms of all the various insurances offered by one insurer best suit the various needs of all of its clients.

In theory, if undertaking insurance distribution activities, the general knowledge requirements would dictate that firms are regularly updating themselves on changes to the terms of insurance of a range of insurers. Should we also be assessing the financial strength of those insurers and their respective records in relation to paying out when claims are made? Presumably a need of any client is that the insurer is financially sound and likely to pay up.

There is, seemingly, a simple solution to picking our way through this minefield, however, and that is to enlist the services of an insurance broker. There are still a few traps for the unwary, however.

Another option: using a broker

If using a broker, it is essential that you check that the broker is, itself, registered for the purposes of the IDD.

It is also important to consider the nature of our role as the interface between the client and the broker. To take ourselves outside the scope of the IDD, we must limit what we do to “introducing” activities. The IDD states that “introducing” covers two activities:

• “the mere provision of data and information on potential policyholders to insurance intermediaries, reinsurance intermediaries, insurance undertakings or reinsurance undertakings where the provider does not take any additional steps to assist in the conclusion of an insurance or reinsurance contract”
• “the mere provision of information about insurance or reinsurance products, an insurance intermediary, a reinsurance intermediary, an insurance undertaking or a reinsurance undertaking to potential policyholders where the provider does not take any additional steps to assist in the conclusion of an insurance or reinsurance contract”.

The likelihood is that most firms, even if they make use of a broker, will make the initial approach to the broker to request a quotation for a particular insurance policy, such as for defective title insurance. The lawyer will almost certainly set out the nature of the defect; provide copies of the relevant documents of title; and specify the required sum insured. Are those activities mere “introducing”? On the face of it, even these limited activities still pull the firm within the scope of the IDD.

 Some guidance from the SRA on this issue would be welcome

The only approach which avoids us accidentally falling within the IDD regime is to simply pass the broker’s details on to our clients (having checked the broker is appropriately registered), and leave the client to liaise directly with the broker. How realistic is it, though, to expect our clients to undertake this exercise without any involvement from us? It is, after all, the lawyers who spot the defects which give rise to the need for insurance. These can often be highly technical legal issues, and establishing that the broker has properly understood the nature of the defect so that the correct policy can be obtained is essential. It’s difficult to escape the conclusion that we need to have a certain level of interaction with the broker, but on the basis that we cannot do that without ourselves being deemed to be engaging in insurance distribution activities, is the use of a broker sufficient to discharge our responsibilities under the IDD? Some guidance from the SRA on this issue would be welcome.

If you do remain as the interface between client and broker, it’s not unusual for the broker to provide you with a range of policies, and then invite you to pick one. Avoid making this decision at all costs. The whole point of the IDD and the related SRA rules is that the consumer is given sufficient information to choose the product themselves (albeit based on the personal recommendation made to them).

Finally, a last word about the practice in conveyancing transactions of the buyer’s solicitor inviting the seller’s solicitor to procure insurance for a title or other defect. This is surely a practice that must now end. The seller’s solicitor, even if they have complied in full with the general knowledge requirements of the rules, cannot undertake an assessment of the buyer’s needs. If we are engaging in insurance distribution activities at all, then at the very least, we must limit those activities to our own clients.