Six taboo words that brokers should never tell their clients

Brokers can’t guarantee fines and penalties are covered in a policy. If they do, many risks can be exposed.

Brokers always want to please their clients. But if you go too far, you may be putting them – not to mention your reputation and career – in a dangerous position.

So you may want to avoid telling them: ‘Yes, fines and penalties are covered.’

Extreme care is needed when it comes to coverage for fines and penalties. For Brian Rosenbaum, national director of legal and research practice at Aon in Toronto, this discussion creates a precarious situation for brokers. He made a presentation about the topic from the client perspective at the RIMS Canada Conference in Edmonton last month. He spoke to Canadian Underwriter last week about the issue from the broker perspective and the precautions needed.

It’s no surprise that clients will insist on having their directors and officers, cyber, fiduciary or employment practices liability insurance policies cover fines and penalties, he explained. “The tendency for a lot of brokers is to say, when there is positive language in the policy, ‘Yes, fines and penalties are covered.’”

But brokers shouldn’t actually say those words. Instead, Rosenbaum advises, brokers should tell their clients: “’We have created language in your policy that gives you the best opportunity to have fines and penalties covered.’”

Telling clients they’re fully covered is a case of over-promising. “We can never actually guarantee,” Rosenbaum stressed. So when brokers see policy wording that says “insurable under the law,” it’s wrong to assume everything is well and good.

Brokers may not “really focus on or understand what ‘insurable under the law’ means,” Rosenbaum said, “and [so] they say: ‘Yeah, we’ve got fines and penalties coverage for you.’ Then along comes a fine or penalty and, lo and behold, there’s an issue as to whether or not it’s covered.”

Positive wording in a policy simply gives the client a fighting chance, Rosenbaum said. “The best a broker can say is, ‘We’ve taken out the black-and-white language that would preclude coverage from the start. But we can’t guarantee that there will be coverage.’”

If you don’t, the risks for yourself run the gamut from having an unhappy client and losing them to facing a lawsuit. “The worst-case scenario is you could have an error or omission and be subject to a lawsuit where you misrepresented what the coverage was,” Rosenbaum said. “You could also have the reputational damage that goes along with that. And you’re probably going to go back to your insurer partner and try to negotiate for coverage; that can lead to the deterioration of the relationship with the market.”

He offered three steps:

• Get the best possible wording for your client so that fines and penalties that are fair can be paid. “So create that elastic language,” he said.
• Get a clear understanding of what is and isn’t covered. “Educate yourself before you talk to the client as to what insurability is with respect to fines and penalties so you can intelligently have that discussion.”
• After the discussion, follow up with an email asking them to confirm they understand the details. Get that written confirmation.

“Fines and penalties are tricky because even a great broker – the one who is trying to do the best for their client – has to recognize that there are certain things in society that are not acceptable, and the client is going to have to bear the financial ramifications of that activity,” Rosenbaum said.