“Experience is a hard, hard teacher because she gives the test first and the lesson afterwards.”
These words, attributed to American baseball player Vernon Sanders Law, may not be instantly familiar unless you’re a fan of the Pittsburgh Pirates circa 1960. But for brokers who have faced the fallout of a professional indemnity (PI) claim, the sentiment behind the quote is all too recognisable.
PI cover is often treated as a box-ticking regulatory requirement – until it isn’t. When the unexpected happens and a broker is hit with a claim, the true purpose of PI insurance becomes uncomfortably clear: it is not just about compliance; it is about survival.
Speaking at the recent CN&CO InsureTalk50 webinar, Steve von Roretz, the chairman of Leppard – specialists in PI and liability cover – did not sugarcoat the realities of risk.
“PI is the connection. It is the connection between the survival of your business and the event of a claim. But it’s a lot more than that. It’s about protecting your reputation,” he told attendees.
Yet, many brokers remain underinsured. Although regulations mandate minimum cover of R1 million to R5 million depending on specific conditions, Von Roretz was frank about the inadequacy of those figures.
“Honestly, these values don’t help at all. R1m or R5m just doesn’t help. It’s sadly pointless, and it’s certainly pointless if you’re going to buy that kind of level of cover for your own business.”
His advice? Rethink the minimum.
“You need to consider things like the size of your business, you need to consider things like a profile of your customer. You need to think about what is the worst-case scenario. Even in a personal lines policy, you could have R20m, R30m, or R40m on a liability claim.”
Von Roretz urges brokers not to make these decisions in isolation.
“Engage the services of external expert PI brokers that can talk to you and understand and give you some guidance,” he said.
The onboarding gap
Von Roretz unpacked several basic, yet frequently overlooked, risk management steps that can dramatically affect a broker’s exposure to liability – and, by extension, their PI cover.
The first moment of risk, he noted, is often the most mundane: taking on a new client.
“And right here is where things start going awry,” he warned. “When there is a gap in detail, and we’ve found this in claims – especially understanding what the customer needs are about – you create a gap. And right there, there’s a PI exposure booming.”
Although industry best practice calls for a thorough, face-to-face risk assessment before any advice is dispensed, the reality doesn’t always match. Often, brokers fall short of the requirements set by the Financial Advisory and Intermediary Services Act.
Two key legal obligations – conducting a needs analysis and maintaining a record of advice – are frequently neglected.
“These two things don’t, as such, create a liability,” said Von Roretz. “But when a claim comes along, the PI – this is the evidence of what you have done.”
A quick summary on a one-pager, even if signed by the client, is insufficient, he said.
“A record of advice is not a simple thing. It’s a collection of all the parts of what you’ve discussed with the customer and recording that properly.”
Setting the boundaries
Equally important is formalising the terms of engagement with the client.
“If I get one message over today, it is to make sure that you do have proper terms of agreement engagement with your customer,” he said.
It’s here, in the ambiguity of informal arrangements, that brokers often get dragged into services they didn’t agree to – but that clients assume they will provide.
“The gap between what you think you are doing for the customer and what their expectation is … there is a massive difference,” he said, “and that difference can’t always be made up through your relationship.”
Clear contracts don’t just define the services offered; they should also state what is not being provided.
“It is in this space that you start limiting your liability,” Von Roretz said.
Transparency in remuneration is also essential.
“These days, in the professional outfit, you should be very happy to declare the fact you’ve got 20% commission, or 15% commission, or whatever your fee is.”
Binder fees and other earnings must also be declared.
“All of those components should be set in a proper terms of engagement,” he added.
Client selection, skills and succession
Von Roretz also encouraged brokers to assess and categorise the risk profile of clients before onboarding them – from A-rated (low risk) to F-rated (high risk).
“That’s about the complexity of the customer. That’s about making sure you don’t do things that you’re not capable of doing.”
He was candid about the risks brokers assume when they take on clients or services without adequate experience.
“What you should really do is ensure that if you haven’t got the experience, work with somebody else and gain that experience.”
Technical skill and knowledge transfer within a brokerage are also critical.
“For me, it’s a duty that you have to share the knowledge that you have and empower those down the line.”
Succession planning – often neglected – can also be a hidden PI trigger.
“People do die, do retire. Sometimes they become incapacitated,” said Von Roretz.
Without a clear plan for who continues servicing clients, the business’s risk exposure can skyrocket.
“You will get to the point of running a business for years, they know the customers exceptionally well, but then something happens … and the risk for the business becomes enormous.”
Compliance, ethics, and the rise of AI fraud
Although some may grumble about regulation, Von Roretz believes compliance is simply good business.
“At its core, compliance is really about really good business, how to do business properly,” he said. “This is a space where you find PI claims do start occurring.”
Another area of concern is the lack of ethical conduct and training in some practices, Von Roretz said. He questioned whether all professionals are taking the mandatory ethics training seriously.
“It is at the root of a business. It is all about ethics and how you treat your customer,” he said. “TCF [Treating Customers Fairly] is in the background. If the customer is faced with an unfair practice, and we see this in PI claims, that there’s advantage taken and somebody does something, but it’s not really tuned to what the customer requires, or there has been a bit of dishonesty.”
He emphasised that ethical behaviour is not just a compliance requirement but is a fundamental business value that should be embedded in the culture of every financial services practice.
Finally, Von Roretz flagged a growing threat: fraud enabled by artificial intelligence, particularly impersonation fraud.
“This is an area where we’re seeing many claims. It is related, obviously, to the use of AI as it’s the impersonation issues … We are paying many claims where money has disappeared in the wrong direction.”
He warned that as fraud becomes more sophisticated, coverage might not always be available.
“Currently, we do cover this, and we double deductibles, but I have a sense that this is getting to the point where it’s so out of hand and people are not checking things properly, that coverage is soon going to be removed entirely.”
Von Roretz urged caution around any changes to bank details, email addresses, or contact numbers.
“You’ll hear my voice; you’ll see my face. It’ll be exactly me, and we need to pay great attention to anything that says I want to change bank details, I want to change my email address, I want to change my cellphone number. All of these elements start becoming and coalescing to one massive exposure to all of you.”
Disclaimer: The views expressed in this article are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and is not a substitute for professional advice on a business’s specific insurance needs.
