Advisory intermediaries urged to draw up agreements to limit their liability

The risk landscape in which FSPs are operating is becoming more complex and difficult, and advisory intermediaries should take steps to protect themselves by entering into service contracts that will limit their liability, says Steve von Roretz, director of Leppard Underwriting.

In a presentation at a recent InsureTalk webinar, Von Roretz said FSPs are not in a position, nor can they be paid enough, to guarantee their clients immunity from the expanding list of systemic risks – cyber breaches, climate change, infrastructure failure, to name but a few.

Without agreements clarifying what they do and what they do not do, FSPs will find it extremely difficult to protect their reputation and the sustainability of their businesses, as well as source affordable professional indemnity cover.

“The core objective of an agreement is to set out what you are going to do and what you are not going to do. It protects your business when things go awry,” Von Roretz said.

The larger insurance brokers do establish agreements openly and transparently with their customers, and discretionary mandate FSPs have agreements that set out clear warnings to customers: “you give us your money; we’re going to look after it as best we can, but please be aware that you are at risk, and you remain at risk, and you can potentially lose everything if it goes wrong”.

Von Roretz believes that smaller advisory intermediary practices need to adopt a similar disciplined approach to manage their exposure.

Agreements are about “making sure you park the responsibility in the right place and don’t take on the responsibilities that you should not be taking on”.

Limiting liability relative to customers and insurers

Although many types of contracts come into view in the context of limiting an advisory intermediary’s liability, Von Roretz focused on two: those with clients and those with insurers, specifically outsource and binder agreements.

Customers have to accept that you need to limit your liability; “you cannot provide the customer with a blank guaranteed cheque when something goes wrong”.

Von Roretz said advisory intermediaries should revisit every customer relationship, condense it into a proper agreement and set out a limitation of liability that is manageable in the context of their business.

Other professionals, such consulting engineers and accountants, limit their liability in relation to their customers, and there was no reason FSPs should not do likewise, he said.

Insurers pass on work to intermediaries that they do not want to do internally, by way of a binder or outsource agreement. These contracts are set out in writing, as required by regulation.

Von Roretz believes insurers should remain at risk in these contracts.

“They pass on the work to you. You do it as best you can, and unless you are being reckless or deliberately dishonest, the risk should stay with the insurers. Make a mistake; the risk should stay with the insurers. They should provide you with a complete ‘hold harmless’ in terms of your act, unless it is reckless, dishonest or deliberately disregarding good practice on your part.”

FSPs will never be able to buy enough PI cover for those exposures, and generally the claim made by the principal will be excluded under most PI policies, he said. Therefore, FSPs should obtain an indemnity “hold harmless” when entering into binder or outsource agreements.

Admit your limitations

Von Roretz said another important way for advisory intermediaries to limit their liability was never to take on responsibilities or tasks for which they have neither the skills nor the capacity. They should be prudent and admit their limitations instead of doing anything for the sake of revenue, he said.

He also found it “surprising” that intermediaries spend years building up their businesses yet buy relatively little indemnity cover.

It seemed that the minimum requirements set by the FSCA have become the default, whereas Von Roretz said intermediaries should buy PI cover that will be sufficient for the worst-case scenario they can imagine.

In his view, PI cover was cheap. For example, a small practitioner who buys R10 million in cover will pay a premium of R1 250 a month, or R15 000 a year – “that’s two bottles of wine a week in my currency”.

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4 Responses to Advisory intermediaries urged to draw up agreements to limit their liability

  1. Andre 1 July 2022 at 4:14 pm #

    I sincerely hope that Leppard and the likes stop their nonsense by underwriting the profession rather than each individual brokerage. They also bullshit us by increasing the rates every year, once again citing bad loss ratios gor the professsion and then there is a double increase via increased turnover. They do NOT treat individual brokerages fairly in terms of TCF?????

    • Steve von Roretz 13 July 2022 at 3:56 pm #

      Hi Andre,

      Very important point made by you about underwriting individual brokerage exposure. That is exactly what Leppard Underwriting do. Like every market we have a base rating model, then we overlay the individual brokerage risk profile. I am very happy to be be criticised and learn from any positive contribution. Why don’t you get hold of me directly and tell me how you are different? Or better still, assuming you are in Johannesburg, let’s meet face to face. Finally when it comes to TCF and especially when it comes to claims, I am not able to talk about other markets, but this is an absolute non-negotiable part of the Leppard Underwriting culture.

  2. Philip Whitfield 4 July 2022 at 10:17 am #

    Could we see an example or proforma of a suitable limited liability agreement?

    • Mark Bechard 4 July 2022 at 10:20 am #

      Steve von Roretz has told that he is in discussions with the Financial Intermediaries Association about exactly that: drawing up limited liability template that can be used/adapted.

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