Cayman Islands Monetary Authority Publishes New Statement of Guidance on Professional Indemnity Insurance

Tuesday 11 October 2016

In August 2016, the Cayman Islands Monetary Authority (CIMA) published a new Statement of Guidance on Professional Indemnity (PI) Insurance for trust companies, insurance brokers, insurance managers, insurance agents, mutual fund administrators, securities investment businesses, corporate service providers and company management licence-holders, as well as corporate and professional directors doing business in the Cayman Islands.
 
The Statement of Guidance was published pursuant to section 34(1)(a) of the Cayman Islands’ Monetary Authority Law (2013 Revision), and took into account private sector feedback in response to a consultation exercise that had been started in March 2016.
 
Legal requirements for PI insurance have already been enacted for the trust, insurance, securities investments and company management sectors in the Cayman Islands, as well as corporate and professional directors.
 
The objective of CIMA’s new Statement of Guidance is to set out the minimum criteria that licensees should follow when obtaining and maintaining PI insurance in relation to those business lines that pose a risk of losses arising from civil liability claims.
 
The Statement of Guidance requires that licensees should at all times maintain adequate PI insurance, and, where practicable, coverage should be held with an insurer licensed to conduct domestic business in the Cayman Islands.
 
Unless a licensee has access to group PI insurance, for example through its parent company or other appropriate arrangements to cover risks that are equivalent or exceed the requirements of the Authority, it should at all times maintain separate PI insurance coverage.
 
Under the Statement of Guidance:

  • Any PI insurance policy should have a limit of at least $1,000,000 for any one claim and $1,500,000 in aggregate.
  • The excess or deductible should be at a level that the licensee can confidently sustain as an uninsured loss, taking into account the licensee’s financial resources.
  • The policy should indemnify the licensee against liability for loss or damage suffered because of foreseeable potential breaches by the licensee and its representatives including negligence, errors and omissions.
  • The policy should not have the effect of excluding scenarios which will undermine the policy objective. This applies especially to exclusions that relate directly to the minimum scope of coverage.
  • The policy should cover the acts of the licensee and all of its representatives (either under the policy or separately covered by a policy under which the licensee has a right of indemnity).
  • The policy should include at least one automatic reinstatement. Automatic reinstatement means that if the limit of the policy is exhausted before the end of the policy period, the limit of indemnity is reinstated for the balance of the period to cover any new claims that might arise. This is important, as licensees should ensure that their PI insurance coverage is adequate at all times.
  • Costs of defending a claim should be ‘in addition’ to the minimum limit or the level of coverage should be sufficiently increased to take into account these costs. Legal costs may be significant and ultimately erode the net value of policy coverage if not adequately provided for.
  • The policy should cover fraud, dishonesty or infidelity by directors, employees and other representatives of the licensee.
  • The PI insurance policy should include run-off coverage for claims made against relevant persons who retire during the course of the policy period.

 
The Statement of Guidance goes on to recommend that licensees should seek to select insurers that have a proven track record of being willing and able to meet their obligations as they fall due. In this regard, licensees, where available, should use the A.M. Best, Fitch, Moody’s or Standard & Poor’s financial strength rating of the insurer as the basis of insurer selection. An A.M. Best rating of B+, or its equivalent, should be the minimum rating criteria when choosing PI insurance providers that have been independently rated. The licensee should monitor and review its insurer’s financial strength at least upon the renewal of insurance coverage.
 
Amongst other CIMA recommendations, the Statement of Guidance concludes with a requirement that licensees should promptly alert their respective insurer of all potential claim(s), in line with notification requirements of their insurer and policy, as well as notify CIMA of all material claim(s) which may arise.
 
During its consultation phase, CIMA noted that Australia, Guernsey, the Isle of Man, Jersey, Malta, Singapore and the United Kingdom all provide licensee guidance on PI insurance, and that the Bahamas, Barbados, Bermuda and Malaysia have established similar mandatory requirements for PI insurance.

 

Original article part of Sedgwick’s Offshore Professional Risks Newsletter of October 2016 and included here with permission from Sedgwick LLP.

Share this page