The Insurance Distribution Directive and Conveyancing - Are you ready ?

The Insurance Distribution Directive (IDD) will introduce  as from the 1st October, 2018 a new regime for those involved in insurance sales, even if selling insurance is not your primary business.

The IDD is designed to strengthen insurance customer protection, and will also apply to all businesses involved in the insurance supply chain, including where insurance is sold alongside other products.

So this will cover, for instance, the proposal and supply of defective title indemnity insurance. In this article I will look at the role adopted by most conveyancers when it comes to acting as a facilitator of indemnity insurance products. 

The SRA advised: “All firms should therefore assess their own individual practices and make sure they are… able to comply with the revised rules.”  The SRA has yet to issue confirmation of final rule change, though this is expected to be published shortly. 

Suppliers of indemnity insurance have also been slow off the mark to provide guidance and revised documentation even though these changes were due to be introduced back in February of this year. 

What is meant by insurance distribution activities?  

This will cover advising on and proposing contracts of insurance as well as carrying out work preparatory to the conclusion of contracts of insurance.  Most conveyancers who facilitate  indemnity insurance will fall within the category of “Ancillary Insurance Intermediary’. That is service providers and distributors of goods who distribute insurance products on an ancillary basis.

What are the requirements for engaging in insurance distribution activities as an ancillary insurance intermediate?

There needs to be evidence of registration with the your regulator to undertake such activities. 

Those involved need to be of good repute and possess  appropriate knowledge and ability to advise on and propose insurance products.   

This will entail training on products and on what formalities need to be addressed when engaging with clients.  The specific requirements for individuals to undertake 15 hours CPD relating to the provision of Insurance Intermediary Activities do not apply.

A  manager must be appointed to ensure compliance and records must also be kept to demonstrate  compliance. 

What are the rules on remuneration?

The IDD is keen to avoid conflict of interests when it comes to advising and supplying insurance products.    

This will therefore prevent a conveyancer from making  any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to the conveyancer or their employees to recommend a particular insurance product to a client when the solicitor could offer a different insurance product which would better meet the client's needs.

This will also mean a conveyancer will to be able to be paid a commission  or other advantage  for the supply of indemnity insurance without full accountability to the client. 

What information needs to be given to the client at the point of the retainer?

The client care agreement will need to be reviewed. Precise and clear information on the what what the conveyancer can do and not do under the IDD needs to be given.  The conveyancer’s regulator must be stated and the complaints procedure for dealing with complaints about the provision of and advise on insurance products must  be made clear. 

What information must be given before the indemnity insurance cover is put into force?

The requirement for a demand and needs statement remains and is extended. 

(a) sets out the client's demands and needs on the basis of the information provided by the client;

{b) where a recommendation has been made, explains the reason for recommending that contract of insurance;

(c) reflects the complexity of the insurance contract being proposed;

There is an obligation  to also provide the client with objective and relevant information about the insurance product in a comprehensible form to allow that client to make an informed decision while taking into account the complexity of the insurance product and the type of client. This shall be provided by way of a standardised insurance product information document ("IPID") on paper

The IPID 

This will be supplied by the  indemnity insurance supplier and shall include:

(a) information about the type of insurance;

(b) a summary of the insurance cover, including the main risks insured, the insured sum and, where applicable, the geographical scope and a summary of the excluded risks;

(c) the means of payment of premiums and the duration of payments;

(d) main exclusions where claims cannot be made;

(e) obligations at the start of the contract;

(f) obligations in the event that a claim is made;

(g) the terms of the contract including the start and end dates of the contract; and

(h) the means of terminating the contract.

What obligations are there when recommending to a client which insurance cover to run with?

Where a conveyancer recommends a contract of insurance, the client must be informed this is made on the basis of a fair analysis of the products available within the market.  This will involve looking at a  sufficiently large number of insurance contracts to enable a recommendation of a product which would be adequate to meet the clients' needs.   This will for example involve looking at the extent of the cover, whether the cover has an escalation clause, the rating of the insurer within the market and the conditions of the cover.  In other words making sure the client can make an informed decision about the product. 

If you are only using one provider of indemnity insurance the time may have come to look to other providers for comparable products or to a provider that can supply you with a list of  number of similar products for selection. 

Conclusion 

In practice if an indemnity policy is required it is often requested by the buyers conveyancer. If this is the case and you are acting for the seller given the above you should be saying it is for the buyers conveyancer to look for the policy and to determine which policy would be suitable for their client.  It would not be appropriate nor advisable for the buyer’s conveyancer to allow the buyer to accept a policy put forward by the seller without checking its suitability and carrying out an analysis of the market. 

If a policy is required the key is to ensure the client is presented with all of the information required under the IDD and is left to make the decision on which policy  designed to address the relevant defect he or she wishes to take out.   Providing  the appropriate policy required to address the defect is correctly identified  one should be  looking to only provide general advice to clients on the difference in insurer ratings and   the benefits of escalation clauses  when proposing insurance options. It should be made clear that cheaper cover may not always be the best option. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

How many conveyancers give the correct advice on building insurance ?

Do you advise your client on insurance or do you make it clear that you are not an expert on insurance matters and that the client is better talking to an insurance expert?  If you do advise I suspect  you make think differently when  you read through what follows.

In line with current conveyancing practice if you are instructed by the client to check an insurance policy and you agree to do so there is an obligation on you to check the following issues:

1. Is the amount of cover adequate?
2. Is the sum index linked?
3. Are the risks insured adequate?  Cross referencing perhaps to the result of your environmental search result. 
4. Have all particular features  of the property such as a thatched roof been disclosed and are they adequately insured?
5. Is the property attached to an adjoining property, if so does the insurance extend to damage to a neighbouring property where practicable? 
6. Does the policy comply with the buyers lender requirements?

Most leasehold properties are cowered by insurance put into effect by the Freehold owner.  The policy still  needs however to be checked in the same way.  Additionally there may need to be extra cover put into effect to cover damage caused by an uninsured risk.  The client may remain liable under the lease including the covenants to repair and pay rent.  Some policies do not extend to flats where a resident is claiming social security benefits. 

Though the need to check where a lender is not involved is something which I would not offer to do ( I am not an expert in this field ) I would always make sure that where the client is borrowing  the client is made aware of the lender requirements for insurance.  It would be negligent not to do so. 

A lender’s particular requirements, set out in part 2 of the CML handbook, will stipulate:

-whether the buildings insurance policy must be in the joint names of the lender and the owners of the property, or whether it is sufficient for the lender’s interest to just be noted on the policy the maximum excess which is acceptable to the lender

-whether the lender requires written confirmation from the insurance company that they will notify the lender if the policy is not renewed, or is cancelled; and

-whether the lender requires a copy of the buildings insurance policy, and the last premium receipt, to be sent to them

It is also necessary to make the client aware of the need to take care and not to make a misrepresentation to the insurer. 

So next time you come to consider insurance as part of the exchange process do keep in mind the above and make a clear decision on whether to take on responsibility for advising or whether to make it clear to the client that the time has come for the client to take advice from an insurance specialist.   This is something which you may wish to address and make clear in the terms of your retainer. 

MJP Conveyancing  are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Flood risk alert for future home owners and coveyancers

Buying a property that may be within the range of a flood plain has become even riskier due to the news that around 200,000 homes at risk from flooding could face problems getting insurance from next year.

Properties that have a 75% chance of flooding in any one year are those most at risk. Boston and Skegness in Lincolnshire is the constituency with the most homes at significant risk of  flooding with 7,550 properties under threat, followed by the Vale of Clwyd (7,339 homes), Folkestone and Hythe (7,196), and Windsor (7,125). Some properties in Great Yarmouth also fall into this category.

The reason for this is that an existing deal with the Government expires in 2013 and time is running out for ongoing talks about a new safety net arrangement.

The Association of British Insurers’ director-general Otto Thoresen said: "Insurers want to make sure that every home has access to affordable insurance, should the worst happen, and we're concerned that those people most at risk will lose out unless the Government considers a safety net.

"We are frustrated with the progress of our talks with the Government on this issue and want it to look urgently at a model that would allow flood cover to remain widely available and competitively priced. No country in the world has an entirely free market providing universal affordable flood insurance, and action is needed now to avoid 200,000 high-risk homes struggling to afford cover."

The possible non - availability of insurance may make it more difficult for people to find a mortgage for properties in the affected area and may lead to current home owners in those areas feeling trapped. 

Those acting for prospective owners of such property need to keep a close eye on this development and to warn clients of the what is happening and how this could affect the future value of the property.    Looking more closely at environmental reports and assessing the risk of flooding will clearly be needed as will the requirement to report the risk if indentified to the lender.

Unless Government acts quickly to extend the current arrangement we could see a large number of transactions failing over the next 12 months. 

By David Pett Solicitor and Partner

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Solicitors face rise in professional indemnity premiums

There was an interesting article in Mortgage Strategy recently which caught my attention. The article predicted that around 50% of Lloyd’s customers could fall victim to negative equity if property prices decline by a further 10-15%. If this is correct then as is happening in Southern Ireland institutional lenders will inevitably be seeking recovery from somewhere or someone when they begin to suffer loss.  In Southern Ireland it is known that Conveyancing now counts for 70% of all professional indemnity insurance claims.

What is happening in the background should be taken seriously particularly at a time when many solicitors are now looking to renew their professional indemnity cover.

There is no doubt that premiums will rise.

The problem practitioners’ face is that there is a complete and total lack of transparency within the professional indemnity insurance arena.  Many of us are asked to complete quite detailed risk assessment documents. These are required by the insurers to that they can access the risk each firm presents and to then tailor a quote accordingly.

The problem is that when completing these forms there is little understanding on how an answer to a particularly question will affect the risk assessment and consequently the size of the premium to be paid. There is no guidance within the proposal form or risk assessment form that helps to understand how risk is assessed.

Knowing how membership of one particular accreditation scheme can affect the level of premium is important because it will encourage firms to invest time and money into obtaining ‘badges’ of this type.

Surely it is in the interests of the insurers to be transparent to make it clear what percentage reduction certain actions will result in so that all of us can then do all that we can to make sure those actions are taken in the  knowledge that this will result in lower premiums in the future.

I question what the Law Society is doing to assist in brining pressure on insurers to make this information available. Our insurer broker mentioned that being a member of the Conveyancing Quality Scheme is of importance but could not say whether it would actually result in a significant reduction in future premiums.

The other issue I have with insurance is that there are so many brokers out there looking for your business but the majority of these are tied in with certain insurance companies. Surely this must present a conflict of interest and not always lead to the best deal.

It would be better use of Law Society resources if it took the time to review and investigate this market and to bring in measures to improve the situation for practitioners who are for the majority of the time working very much in the dark.  Is this likely to happen?  No.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk