Published in Cafemutual on 3rd September, 2015
Financial advisors are increasingly opting for professional indemnity insurance which protects them against any litigation due to errors or negligence in their practice. In case of financial advisors, such errors can occur due to judgmental errors.
IFAs say that this cover has come into spotlight after The New Company Law termed miss-selling as fraud. “The new Company Law covers the entire spectrum of securities. If a financial advisor makes a promise, statement or forecast which is false or misleading then there will be consequences under the Companies Law Act. This is in addition to any consequence that the advisor would face under the SEBI Law. If distributor mis-sells and has made wrongful gains he’ll also have to pay a fine which is not less than the amount involved in the fraud but which may extend to three times the amount involved in the fraud,” Prachi Manekar, Advocate, Bombay High Court had earlier told Cafemutual.
So far, professional indemnity insurance cover was only available for doctors, hospitals, lawyers, solicitors, chartered accountants, management consultants and architects. A few insurance firms have recently started providing this cover to financial advisors. “There is no specific criteria for advisors in this cover. 12 insurers are already offering professional indemnity insurance to financial advisors,” says Kapil Mehta, Founder & CEO, Secure Now Insurance Broker.
Vishal Dhawan of Plan Ahead Advisors says, “Earlier, it (professional indemnity insurance) was only available for other professionals but now financial advisors can also buy this policy. We are in the process of evaluating and buying this insurance cover for our firm.”
Such policies cover only civil liability claims, which are non-criminal breach of contract. “Any liability arising out of any criminal act or act committed in violation of any law or ordinance is not covered,” states The New India Assurance website which offers this insurance.
Since this cover has only recently been offered to financial advisors, it is not yet a complete solution for IFAs. Gaurav Mashruwala of A Cutting Edge feels that professional indemnity insurance is not designed according to the requirements of financial advisors. “Many advisors want to buy this policy but this cover is not specifically designed for IFAs just like it has been made for doctors or other professionals. So, there is no special benefit in this policy for financial advisors.”
“I do not have this (professional indemnity) cover. We make a contract with clients and the letter of appreciation protects me from any breach of contract,” adds Gaurav.
Nevertheless, some advisors have insured their companies by buying this cover. Suresh Sadagopan of Ladder7 Advisories who has bought this policy for his firm says, “Insurance brokers and insurance firms asses the risk and we are required to provide some data. After evaluation is complete we can buy this insurance policy.”
Kapil says that the premium depends on the scale and size of IFAs business which varies according to the sum insured opted by advisors. According to rough industry estimates, the premium is Rs.250 per lakh.
Gurpal Singh Dhingra of Prudent Insurance Brokers says, “While there is no limit on the sum insured, we suggest that IFAs should opt for sum insured which suits their business. We usually recommend them to buy a minimum of Rs.5 crore because HNIs can demand a higher compensation and the cost of hiring a good lawyer can be exorbitant.”
Gurpal says that advisors can buy a policy of Rs.5 crore by paying a premium of Rs.1.5- 2 lakh.
Have you bought professional indemnity insurance for your firm? Share your thoughts.