Elizabeth Thomson explains the requirements imposed on lawyers, and shares some practical examples of how to approach the insurance distribution regime.
As a lawyer specialising in commercial property, you could be forgiven for thinking that complying with the Insurance Distribution Directive is a straightforward, if slightly irksome, administrative task.
You might believe that you can circumvent the IDD requirements entirely by purchasing insurance via an intermediary (broker). Or that the only circumstance in which you have any compliance obligations is when you are helping a client to purchase a new indemnity policy without a broker.
Unfortunately, the requirements are more nuanced than that, and lawyers need to have a much deeper level of knowledge and understanding than the above.
Background
The insurance distribution regime came into force in the UK on 1 October 2018. It is intended to ensure fairness in the insurance market and strengthen consumer protection.
The IDD defines “insurance distribution activity” as the activities of advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim.
The IDD includes an explicit requirement that all contracts proposed must be consistent with the client’s demands and needs.
Required knowledge
The Financial Conduct Authority states that those involved in insurance distribution activities must have knowledge of the following:
- the terms and conditions of policies offered;
- laws covering the distribution of policies;
- claims and complaints-handling requirements; and
- how to assess a customer’s needs.
This is a rather demanding checklist and one that some practitioners might not feel entirely confident that they can satisfy.
Solicitors Regulation Authority requirements
Alongside the IDD itself, lawyers are subject to professional requirements which apply when they are inside the scope of the IDD, including:
- registering with the FCA;
- appointing an insurance distribution officer;
- ensuring all involved staff have the necessary knowledge and skills and that these remain up to date (does your firm run a regular IDD training programme?);
- acting honestly, fairly and in the client’s best interests;
- disclosing key information as set out in the SRA’s Financial Services (Conduct of Business) Rules;
- ensuring that any insurance contract they propose meets their client’s demands and needs, matching them to available products and making sure that the client is given objective and relevant information about a policy in good time prior to the conclusion of the insurance policy (this information is given by way of a “demands and needs” letter to the client); and
- a duty to disclose any remuneration received.
In or out of scope?
The most troublesome aspect of the IDD for a lawyer is working out whether their actions fall within the scope of the IDD. This can be difficult to assess and might well lead a lawyer to conclude that the safest and easiest approach is to err on the side of caution and assume that any number of actions could potentially be within scope. Let’s consider defective title insurance and how this might look in practice:
Scenario 1: A need for defective title insurance is identified and discussed in general terms only with the client. The lawyer then introduces the client to a broker and does not take any further actions.
This is potentially exempt from the IDD, but care must be taken. You should check that the broker is registered as an insurance intermediary on the FCA’s financial register. It is important to confirm this, as some websites can lack clarity and it may be that a “broker” is in fact exclusively linked to a particular insurance provider. You should advise the client that the broker’s advice is independent of your firm, that you are not responsible for the advice, that the broker has a direct relationship with the client and that the broker should invoice the client directly.
You should not collect payment for the policy as part of the completion funds. The client should be the sole point of contact with the broker and, ideally, you should not send any further details or information to the broker. Anything beyond a mere introduction is likely to fall within the IDD and therefore you should not assist with preparing or distributing paperwork related to the insurance. Nor should you provide comments on the suitability of insurance policies. Lawyers may find that maintaining this hard boundary between insurance and legal services is both difficult and out of kilter with the client’s expectations (see Scenario 2).
Scenario 2: A need for defective title insurance is identified and the lawyer introduces the client to a broker. The client then asks the lawyer to send on the relevant paperwork to the broker. Following receipt of a draft policy, the lawyer reviews it and notices that amendments are required to properly reflect the legal risk which has been identified.
Here the lawyer is going beyond the mere provision of information. Providing copies of the relevant documents of title, setting out the nature of the defect and specifying the sum insured could possibly fall within the scope of the IDD and a cautious approach is to be advised. Any advice on or negotiation of the terms of the insurance policy will certainly be within scope, even when via a broker. The issue with lawyers attempting to limit their actions to the mere provision of information is that clients will often expect further advice and it may be perceived as poor client service to abdicate all responsibility. Few brokers are legally qualified and lawyers often find themselves in a position where it is necessary to combine their expertise with that of the broker to ensure that the policy properly addresses the risk identified. In these circumstances, the lawyer is within the scope of the IDD and must comply with the regulations.
Scenario 3: A lawyer acts for a buyer’s lender. There is an existing defective title indemnity policy which will benefit the buyer and its lender as successors in title pursuant to its boilerplate terms. The lawyer reviews the policy and finds that it covers the identified risk. However, the property has risen in value and the sum insured needs to be increased.
There are a few points to unpick here. The first is that, for the IDD to apply, a client does not have to be the original named insured under a new policy. Lawyers need to consider the IDD when they act for any client who will benefit under the terms of an insurance policy. This includes successors in title and co-insureds. If a lawyer reports on an existing policy and finds it to be entirely adequate, this is likely to be an insurance distribution activity giving rise to obligations at firm level (training, the requirement for an IDD officer, etc) but it will not be necessary to issue a demands and needs letter to the client, as no new insurance policy is being concluded. In this scenario, the sum insured needs revision and therefore it would be recommended that a demands and needs letter is issued. The careful approach must be to treat any amendment, top-up or renewal as a contract of insurance.
It is possible to factually report on an existing policy, without making any comment or giving any advice as to whether the policy is adequate. This would not be an insurance distribution activity but it is a fine line for lawyers to tread. Carefully drafted and purely factual statements given in a certificate of title could fall the correct side of this line.
Not just an issue for defective title indemnity insurance
Lawyers need to be aware that the IDD applies to all forms of insurance. It is not only relevant to defective title policies but also to no search insurance, buildings insurance, contractors’ professional indemnity insurance, public liability insurance and any other type of insurance contract. Take the case of a lawyer who advises a tenant client, having carried out due diligence, that a landlord’s buildings insurance policy has expired and requires renewal. If that policy is renewed and the tenant is to be added to the policy as a co-insured, that lawyer should comply with the IDD regime.
Sellers obtaining insurance for buyers
It is not uncommon for sellers to arrange insurance on behalf of buyers. Arguably a seller’s lawyer cannot assess the buyer’s needs and should not therefore engage in insurance distribution activities other than for its own client.
Final thought
The IDD is a minefield requiring careful navigation and using a broker’s services is not a panacea. Often, it will be very difficult for lawyers to remain entirely out of scope while still meeting the client’s expectations.
Elizabeth Thomson is a practice development lawyer in the property team at Irwin Mitchell
