Issue: March 2012 / May 2012
Editorials

FIDELITY INSURANCE

Be prepared

Trustees can be seriously affected by changes, including much higher premiums, in the market for fidelity and professional indemnity insurance. Teri Solomon and Ian Haigh offer fair warning.

Again there are major changes in the insurance industry. Some of them particularly concern the crime, liability and personal-indemnity insurance for retirement funds and their trustees.

This year sees critical revisions to both the cost and the scope of cover. It’s vital that the boards of retirement funds, or their nominated committees, urgently revisit and reassess them.

The insurance is designed to cover:

  • Loss to the fund as a result of theft or fraud, including by electronic means, of fund assets by an officer of the fund;
  • Loss to the fund as a result of a negligent act, error or omission committed by an officer of the fund;
  • Loss -- including legal-defence costs and damages -- for which a trustee, principal officer or committee member becomes personally liable to pay as a result of their own individual negligence or breach of duty.

The definition of “officer” had always included “fund administrators and third-party service providers”. This makes the cover extremely wide. It also increases the risk to insurers of paying claims arising from third-party fault.

Such risk did indeed increase during the 2010-11 period. There were claims running into several million rand. Camargue Underwriting Managers, the lead insurer for this class of insurance, has accordingly amended its coverage terms.

Rates have increased by 50% on average. Moreover, cover has been restricted to exclude all losses caused by investment managers. Cover has also been severely restricted for losses caused by third-party administrators.

These changes in cover have resulted in the need for fund boards to address, amongst other things, the:

  • Level and scope of all third-party providers’ crime and professional liability insurance;
  • Indemnity provisions in all service-level agreements. Boards should not accept limitations of liability by providers unless their insurance is considered adequate;
  • Level and scope of the fund’s cover. This should be addressed and properly recorded by the board at least annually. Trustees must also feel comfortable that their personal liability is sufficiently insured;
  • Comprehensiveness of advice that boards are receiving from their insurance advisors.

Fidelity and professional indemnity is an extremely technical class of insurance, with extremely complex claims scenarios. Boards should therefore seek specialist broking and legal advice not only on their fund’s insurance requirements but also on their risk profiles.

Teri Solomon is a divisional director at Marsh & McLennan. Ian Haigh is a senior consultant at Old Mutual Corporate. They write in their personal capacities.