SOUTHERN CROSS PROFESSIONAL INDEMNITY INSURANCE FOR FPI MEMBERS FREQUENTLY ASKED QUESTIONS

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1 Contents What is professional Indemnity Insurance?... 2 What areas of insurance protection will I enjoy through Southern Cross?... 2 What is the difference between professional indemnity cover and fidelity cover?... 2 Who is a professional?... 3 Why does a professional need a professional indemnity policy?... 3 So, as a financial advisor it sounds prudent that I protect myself against these common law risks?... 4 So what are my regulatory requirements for cover?... 4 Who should have fidelity cover?... 5 This looks a little confusing. Which category do I fall under?... 5 So I shall be comforted if I have at least R1 million PI cover?... 5 Do I have cover if I provide tax advice?... 5 What is a 'claims made policy?... 6 What is the significance of a retroactive date?... 6 What retroactive date should I choose?... 6 Will I have any obligation to continue to purchase PI cover if I cease to operate as a FSP?... 6 What fact, situation or circumstance should I notify to an insurer?... 7 Why do I have to fill out a proposal form?... 7 When do I report a claim?... 7 In order to preserve good standing with my client can I not just admit to my mistake and tell them that any loss incurred by them will be paid my insurers?... 7 I have an attorney who understands my business and will offer a discount. May I appoint her?... 7 What exclusions apply to the Professional Indemnity Policy?... 8 The cover and advice provides me with confidence. How do I make enquiries for insurance? P a g e

2 What is professional Indemnity Insurance? PI insurance essentially provides the professional insured with indemnity in respect of legal liability arising out of the practice of the profession. This normally occurs following the result of negligent acts, errors or omissions. What areas of insurance protection will I enjoy through Southern Cross? The Southern Cross offering to FPI members entitles you to make a choice on 3 different options. The basic Option C provides cover for all damages arising out of legal liability to pay damages for Breach of professional duty Intellectual property violations Defamation Loss of documents Further extended options will additionally provide cover as follows: Option B - liability attributable to the insured as claimed by a third party following fraud perpetrated by the insured s employees ; and Option A - is the most comprehensive option and additional to Option B further provides indemnity against loss following direct fraud or theft suffered by the insured through the dishonesty of his employees. So, this option provides enhanced professional indemnity cover per B as well as fidelity guarantee insurance. What is the difference between professional indemnity cover and fidelity cover? As mentioned previously, professional indemnity insurance protects you against liability to third parties arising from errors and omissions whereas fidelity guarantee insurance covers you against any direct financial losses that you sustain as a result of the dishonesty of your employees. Let s demonstrate the difference in the form of a claim arising from employee dishonesty. 2 P a g e

3 If you have professional indemnity cover that is extended to cover your liability arising from claims attributable to the misappropriation of funds by your employees, any loss that your client incurs, for which you are legally responsible, will be covered under the professional indemnity policy. Any loss of money that you as the insured party sustain will be covered by the fidelity guarantee policy. Please refer below to your options and let us illustrate the differences based on the above example in terms of your options with Southern Cross Option of Cover Option A - Most Comprehensive Option B - Option C Basic PI Difference in Cover PI with extension on losses attributable to staff dishonesty and FG PI with an extended liability clause protecting you against a third party claim arising from your staff dishonesty PI with an extended liability clause protecting you against a third party claim arising from your staff dishonesty Payment for above claim Client will be paid for his loss Insured member will be covered for his financial loss Client will be paid for his loss There will be no cover. Who is a professional? Anyone who, for the purposes of generating revenue, provides advice and/or services of a skilful character according to an established discipline would generally be regarded as a 'Professional' This definition naturally applies to attorneys, engineers, accountants and of course financial intermediaries. Why does a professional need a professional indemnity policy? A Professional represents that he or she has a special skill, which can be relied upon by his/her client. Consequently our common law requires that such Professional exercises the required skill to an appropriate level of expertise. Any financial loss, injury or damage arising from a mistake or failure by the Professional to conduct him/herself accordingly which results in a loss will expose the Professional to legal action by the aggrieved person. It is principally for this reason that the cover is necessary. 3 P a g e

4 So, as a financial advisor it sounds prudent that I protect myself against these common law risks? FAIS codifies conduct and responsibilities that govern the financial intermediary. So, unlike the case with many other professions, your obligation is mandatory. Regulations applicable to FAIS have been introduced by the Financial Services Board in terms of Board notice 123 which directs that all practicing FSPs have PI cover (and in the prescribed cases fidelity guarantee insurance) in force in accordance with the specified limits. So, in addition to compliance with the common law, any breach of the provisions of FAIS and/or other statutory pieces of legislation that results in losses to third parties will be catered for in your professional indemnity policy. So what are my regulatory requirements for cover? These are set out in the tables below Category Cat I or IV provider who does not receive or hold clients financial products or funds Cat I or IV provider who receive or hold clients financial products or funds Cat III provider who do receive or hold clients financial products or funds Cat II provider who does not receive or hold clients financial products or funds Cat II provider who receive or hold clients financial products or funds Cat IIA provider who does not receive or hold clients financial products or funds Cat IIA provider who do receive or hold clients financial products or funds Requirement Guarantees of a minimum of R 1 million OR Professional Indemnity Cover of a minimum of R 1 million Guarantees of a minimum of R 1 million OR Professional Indemnity Cover AND Fidelity Insurance of a minimum of R 1 million Guarantees of a minimum of R 5 million OR Professional Indemnity Cover AND Fidelity Insurance of a minimum of R5 million Guarantees of a minimum of R 1 Indemnity Cover of a minimum of R 1 million Guarantees of a minimum of R 5 million OR Professional Indemnity Cover AND Fidelity Insurance of a minimum of R5 million Guarantees of a minimum of R 5 million OR Professional Indemnity Cover of R5 million Guarantees of a minimum of R 5 million OR Professional Indemnity Cover AND Fidelity Insurance of a minimum of R5 million 4 P a g e

5 Who should have fidelity cover? You will note from the above table that all FSPs who receive or hold clients products or funds must have fidelity insurance. When choosing your options please note that you may extend your cover as outlined in the answer to Q2 above. This looks a little confusing. Which category do I fall under? Although, the majority of the FPI members will fall under category I and will accordingly require a minimum limit of indemnity of R1 million, you do, however, need to be certain of where you fit. So seek clarification by reference to the licence awarded to the FSP you serve and if at all unsure please confirm this with your compliance officer! So I shall be comforted if I have at least R1 million PI cover? Provided you fall within Category I and furthermore are not required to purchase fidelity guarantee cover, you will be legally compliant. However, none of us is infallible and despite taking steps to reduce the risk, mistakes occur. Consumers are becoming more aware of their rights, access to legal funding through specifically designed insurance products is easier and proceeding through the FAIS Ombud costs nothing. And even if you do have a legitimate defence to the claim the legal costs that you will incur to rebut claims are exorbitant. These legal costs are included in the limit of indemnity. So, our advice is that you should interrogate your unique professional exposure based on your individual portfolios and purchase suitably high limits that match this exposure in an economically viable manner. The saving that you may make, say by assuming higher excesses on your personal short term insurance program, or by self insuring items where impact of loss is minimal, may better be utilised in paying premiums to protect your livelihood. Do I have cover if I provide tax advice? Yes you will be covered for this advice, provided that this business activity is disclosed in your proposal form. 5 P a g e

6 What is a 'claims made policy? Your professional indemnity policy requires that all claims and any fact, situation or circumstance that results in a claim, are to be first made against the insured within the Period of Insurance. Notification must then be made to the insurers as prescribed in the policy. What is the significance of a retroactive date? Not only must the claim first be made within the policy period for the policy to be triggered but the actual incident that gives rise to the claim must have been incurred on or after the specified retroactive date. A professional error may well have occurred some years previously but may only be discovered by the insured s client at a later stage. It will then be at the time of discovery of the loss when the claimant holds the insured legally responsible. So for example, the incident may be negligent investment advice at commencement of the policy but the loss may only be realised and identified some years later, say on maturity of an endowment. What retroactive date should I choose? Ideally one should attempt to purchase cover retrospective to commencement of business but this is not always feasible. Southern Cross can provide up to 3 years retroactive cover if no cover has previously been in force. If you have had uninterrupted cover, please send us the proof of your existing insurance and we shall ensure that no period gaps exist when changing policies. This extension will be available provided that the insured had no prior knowledge of any fact, situation or circumstance (as defined below) before the policy incepts. Will I have any obligation to continue to purchase PI cover if I cease to operate as a FSP? Your policy with Southern Cross will provide you with an extended reporting option for a further 90 days to notify insurers of claims first made against you. Thereafter you should be aware of the fact that your liability may be continuous. So we strongly recommend that you contact us for advice on this matter failing which you may well be exposed for past professional services rendered without protection. 6 P a g e

7 What fact, situation or circumstance should I notify to an insurer? Any fact, situation or circumstance, which a reasonable person in the Insured's professional position would have thought, might result in someone making a claim against him/her. Why do I have to fill out a proposal form? Before a quote can be given for Professional Indemnity Insurance, underwriters will require certain information in order to understand all the characteristics of the Insured's business. The information provided in the proposal either forms part, or all, of the information that an underwriter will rely upon to provide a quote. Generally each Insured is quoted individually, since one Insured's circumstances may vary considerably from another. When do I report a claim? You need to inform Southern Cross immediately you become aware of a fact situation or circumstance as described in question 16. We will then provide you with all the necessary support and guidance on process and procedures In order to preserve good standing with my client can I not just admit to my mistake and tell them that any loss incurred by them will be paid my insurers? All legal liability policies specifically prohibit you from engaging with complainants in any manner that may potentially prejudice their position. Failure to comply with this condition may invalidate your claim. Please refer to Southern Cross for guidance and we shall ensure that claims are professionally processed in an appropriate manner. I have an attorney who understands my business and will offer a discount. May I appoint her? You may not appoint your own attorney with regards to circumstances covered by your PI policy without the written consent of your insurer. Again, we stress that we shall direct you through the claims process to ensure that the experience is a professional one. 7 P a g e

8 What exclusions apply to the Professional Indemnity Policy? Please refer to your policy document to review the applicable exclusions in detail. Southern Cross will be delighted to further provide clarity. Certain major applicable exclusions are reflected which list is not exhaustive and apply to liability arising from Failure to disclose commissions Insolvency of Insured Insolvency of Insurer Warranties made on investment returns Contractual Liability that extends your obligations further than that required through the ordinary degree of skill and care for a professional in your position Employment Breach of patents Judgments obtained in the USA and/or Canada The cover and advice provides me with confidence. How do I make enquiries for insurance? Please contact Nicole Kern, Head of FSP facility, at for assistance or her at NicoleK@southerncrossrm.co.za and she will send a proposal form for completion. We shall be delighted to assist you at any time. 8 P a g e