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What is professional negligence?

Insurance brokers have a basic mandate to provide professional advice and services to clients concerned with the management of assets and risks. As representatives of an insurance broking company, the broker, as the agent of the insured, is obliged to ascertain the risks and liabilities of clients and to provide them with effective risk transfer solutions.

This not only involves competently carrying out the instructions of clients and giving the best possible advice and service, but also running an efficient and effective workplace that reflects sound management practices and procedures.

Professional negligence, whether intentional or unintentional, occurs in all industries, no matter how well prepared and how effectively work is carried out. There will inevitably be a time when an error or omission occurs. Nobody is perfect. However, the important point is that in some industries, an error or omission will have little effect on events or life in general. The insurance industry is not one of those industries.

For this reason, it is essential that industry representatives, especially brokers, are fully informed as to what constitutes professional negligence, how to avoid it and the consequences in the event that a circumstance which could give rise to a potential error or omission is identified.

What are some of the causes of professional negligence?

Potential problems for insurance brokers arise more from the failure to follow office procedures, sloppy work practices or lack of supervision than from inadequate knowledge of what should be done and how it should be done, or from ignorance of insurance law.

The most common causes of negligence are:

  • Failure to effect cover;
  • Coverage disputes with underwriters;
  • Inadequate cover;
  • Material non-disclosure.

Other significant causes of negligence are:

  • Failure to act in accordance with a client's instructions;
  • Failure to document and provide written confirmation of advice provided;
  • Failure to maintain adequate file notes and records;
  • Failure to comply with time restraints;
  • Ignorance and lack of experience;
  • Failure to effect and enforce staff controls;
  • Lack of organisation;
  • Greed;
  • Failure to educate and keep ahead of developments;
  • Acting outside of and beyond the role of a professional insurance broker.

The effects of professional negligence

The most immediate and obvious effects of a professional indemnity claim on a broker are personal, such as anxiety, confusion, worry and stress. However, the costs may also include:

  • Loss of valuable time in managing and defending the claim;
  • Potential loss of the client;
  • Potential loss of prestige and reputation;
  • Embarrassment for the broker and the broker's family, even loss of employment;
  • Possible loss of money through legal costs;
  • Payment of the client's loss, if the court holds the broker responsible;
  • Payment of the excess, even if the broker is able to claim against his own professional indemnity insurance, with possibly increased future premiums.

The potential costs of professional negligence to the insurance business are considerable, and can send a small brokerage out of business. It is essential that brokers make themselves fully aware of the causes and effects of potential negligence acts and put in place strategies to avoid the possibility of a claim being made against them.