With practitioners facing increasing public pressure to deliver the very best return to creditors, Insolvency Today asks IPs whether the insurance market is delivering value for money.
Insolvency practitioners have become comfortable using open cover insurance facilities arranged through their broker, but few have the time to question the cost of such facilities when they start a job on day one.
With this in mind, practitioners at the recent Insolvency Today insurance roundtable called for more transparency in the market and considered potential alternatives to the current open cover facilities used by most IPs.
Maurice Moses, partner in Ernst & Young’s London mid-market restructuring team, said the insurance market remains opaque and that policy terms and conditions are set in stone but few practitioners have the time to sit down and read them.
“It makes it very difficult to compare what we are getting,” he said. “We are busy with the insolvency and appointed on day one so there are more important things for us to deal with. Therefore, push the button on Open Cover. The cost is small in relation to the various other costs at that stage so you just run with it.”
While Moses said he believed that the issue of opaqueness is not unique to the insolvency insurance market, he felt that more needs to be done to give IPs the power to verify their quotations.
“My point about the opaqueness is still there, although not uniquely specific to the insolvency market, but more generally,” he said. “If ever I threaten to leave my insurance company, they always find a way to reduce my premium. Within insolvency, there isn’t freedom in the market to compare quotations, so how do you know if you are being overcharged?
“I don’t think that we, as a profession, spend enough time looking at the insurers and the brokers. We say that we don’t know what we are getting into and, therefore, need Open Cover, but we are still not clear about what is not covered.”
Moses’ concerns were acknowledged by many in attendance at the event, including John Milsom, chief operating officer at KPMG’s UK and European restructuring practice. “The difficulty for us as IPs is that we want complete cover from day one with very little notice,” said Milsom. “Insurance isn’t very high on the list of things to do. We want cover for things that we might not even know about.”
Milsom felt that the concerns related to insurance policies for insolvency practitioners could be eased if IPs were told more about how brokers go about finding the best insurance deal.
“Our brokers don’t come back to us and say we have two sorts of insurance policies open to us. Surely they should be saying, ‘Why is it X or why is it Y?’”
Moses said this illustrated the concerns practitioners in the market have about who exactly is the client of an insurance brokerage: the insurance company or the practitioner. “Who is the broker working for? I would like to think they are acting for us, but I can’t be sure.”
Jeremy Willmont, partner at Moore Stephens, agreed, asking why more options are not offered by the various brokers. “You want to make sure that you have the range of cover for all of the risks and you want to arrange cover against things you may not have thought about,” he said.
“We found that brokers say, ‘We found you this policy’ but they don’t say, ‘We have found you these six policies.’ Is the cover better for us or is it better for the insurance company?”
Adam Loveitt, director of AUA Insolvency Risk Services, a subsidiary of insurance company Amlin, insisted that there is no question that the broker acts on behalf of the practitioner first and foremost. “The client is who the broker is acting for,” he said. “Our primary focus is on the client and finding the best insurance solution for that client.”
Broadly speaking, most delegates at the event agreed that insurance broking services for insolvency practitioners have improved in recent years with site visits now playing a major part when IPs begin their first day on the job.
These visits ensure that as much information about the case is collected
as possible and IPs should, therefore, be covered to the best of their knowledge as soon as they begin work on a new case.
“One of the best things that has happened is people coming on site visits,” said Nick O’Reilly director of HW Fisher. “Having someone from the insurance company and broker on site early on is very helpful.”
Such visits are designed to ensure that the practitioner doesn’t end up with a policy that under or over insurers the necessary risk.
Loveitt added: “The difficulty with insolvency, certainly at the beginning, is that you want cover on something and you don’t really know what you have – and there are occasions when it would be dangerous to rely on existing policies which were already in force at the time of the appointment.”
Unlike certain other professionals in the financial services sector, insolvency practitioners are obliged to have bond cover before taking appointments.
This cover means that the bond’s issuer will potentially be liable with the insolvency practitioner for any losses in relation to the insolvent estate as a result of fraud or IP dishonesty.
The bond is not a form of professional indemnity, however, and does not provide cover against professional negligence. As a result, practitioners will need to arrange for separate professional indemnity cover.
The availability of bond cover for insolvency practitioners is a thorny issue – particularly for smaller firms or IPs with limited experience.
The delegates noted that smaller practitioners were vulnerable and questioned whether insurers should be compelled to cover any practitioner if they have already been authorised by a recognised professional body (RPB).
Nick O’Reilly, director at HW Fisher, said he was aware of cases where IPs had struggled to obtain cover. “I know of a case where an IP could not get their bond and could not get cover,” he said. “They kicked up a fuss at judicial review and the insurer had to back down. But the difficulty is that there are only two or three people that you can go to, to get that cover. If you get turned down by one, it can be difficult to get approved by another.”
Benjamin Wiles, managing director of Duff & Phelps’ London office, agreed, and stressed that practitioners with a long professional history will always find it easier to get bonded.
“We know the insurance brokers very well, historically, therefore the relationship we have is very good and bonding is never an issue,” he said. “That said, I can see it being a real problem for other firms where they don’t have the relationship with brokers and are struggling to get direct premiums.”
For those companies without the all-important broker relationships, it is possible that these hurdles may still need to be overcome. However, this has angered some insolvency practitioners who believe that an insurer should never have the right to prevent an IP practising if they have qualified and subsequently been licenced with an as yet unblemished record.
Moses explained: “You have the RPBs who are issuing the licences but the insurers do effectively not trust their judgment.”
Given the current economic climate, how the insurance market responds to these concerns, will be the subject of debate for some months to come.