Insurance for Mortgage Brokers: The Essentials Guide
Every Australian broker aggregator will approach its membership and the requirements on its brokers differently. At Connective, professional indemnity insurance policy for our credit representatives is arranged, but there are other important types of insurance that we like our brokers to consider.
Here's a short summary of the various insurances your mortgage broking business may require.
Professional Indemnity Insurance
What is Professional Indemnity Insurance for brokers?
Professional indemnity insurance, or commonly known as PI, protects a brokerage business against claims of negligence or breach of duty made by clients because of the services you provide. This could include:
- Unintentional mistakes made;
- Critical information missed or omitted;
- Advice or assistance a client has misinterpreted; and
- Actions taken in the course of your services that have resulted in your client suffering financial loss (or alleging they have suffered loss).
PI insurance will cover related costs such as legal fees, settlement amounts even if those allegations are not true, allowing your business to continue operating without the financial stress that may come with these claims.
Why is Professional Indemnity Insurance (PI) important for mortgage brokers?
Holding a valid and adequate Professional Indemnity (PI) insurance is a regulatory requirement and you cannot operate as a mortgage broker without it.
Usually, cover of at least $2 million per single event, $6 million in aggregate with sufficient run-off cover is considered “adequate” for the finance and mortgage broking industries in Australia. To obtain industry body membership and accreditations with lenders, the production of proof of your Professional Indemnity insurance is required.
What does Professional Indemnity Insurance not cover?
It is important to review your insurance policy very carefully to understand the scope of the PI cover you need. This scope should match the business you engage in – mortgage broking.
But be aware that your PI insurance is unlikely to cover other areas such as:
- Fines and penalties,
- Acts of fraud or dishonesty,
- Refunds of professional fees, or
- Cyber-related losses (this may depend on the scope of your policy).
As a mortgage broker, the scope of your professional indemnity insurance should consider who is insured under your policy. If it is your business, should your PI cover:
- You?
- Your loan writers?
- Your employees?
- Your contractors?
Circumstances that were known before the period of insurance of your policy may not be covered. It is critical that, as soon as you are aware of a circumstance that may give rise to a claim under your PI policy, that you notify your insurer immediately.
Notification is not the same as making an actual claim (which triggers the payment of the excess of that PI policy) and will not impact your ability to obtain PI insurance in the future if it does not materialise into a claim.
What it does is ensure that you will have cover under the current policy at the time of notification. If you do not notify your insurer at the time and subsequently want to make a claim for that event under a different professional indemnity policy, the current PI insurer is likely to refuse to cover you in this situation.
Public Liability Insurance
What is Public Liability Insurance for mortgage brokers?
Public liability insurance, also known as PL, covers your liability to a third party if they suffer an injury in your brokerage business premises or because of your business activities.
This could include first aid, continuing medical costs, claims for compensation from injury and repair of any damage to those premises. Public liability insurance also covers legal fees associated with defending claims and investigation costs related to those claims.
Some insurance providers will offer mortgage brokers a more broader business insurance pack which includes other business-related coverage such as business building and contents, business interruption, portable contents and tools and equipment breakdown as part of its cover.
Why do mortgage brokers need Public Liability insurance?
Unlike professional indemnity insurance, public liability insurance is not required by law to operate as a mortgage broker. You need to consider how you operate your broking business on a daily basis and whether those operations could give rise to a claim covered by PL insurance.
The following – non-exhaustive – factors may be considered when deciding whether you should obtain PL insurance:
- You have a (physical) business office.
- You run your business from home and clients visit you there (note: it is unlikely your home insurance will cover this activity).
PI Insurance covers losses arising from you providing professional services or credit assistance to your client.
On the other hand, the trigger for a claim under public liability insurance for a broker is different. A public liability claim is triggered by a demand for compensation because of either third-party property damage or personal injury at your business premises.
What public liability insurance does not cover for mortgage brokers
PL is specifically not covering things like:
- Injuries to your employees and contractors,
- Damage to your own property,
- Professional negligence (cf. PI insurance),
- Contractual liability (e.g. breach of contract),
- Asbestos/gradual pollution, or
- Penalties or fines.
Cyber Insurance
What is cyber insurance and what mortgage brokers need to know about it
In a digital world growing in financial scams, cyber-attacks, and increasingly savvy hackers targeting SMEs, cyber insurance is a growing need for mortgage brokers who want to protect their business against both the legal costs and expenses related to cyber-crime incidents.
This type of insurance is still evolving and to be eligible for it, your mortgage broking business will need to meet certain standards from a cyber security perspective. We recommend speaking to an insurance broker first to understand whether you do meet these standards or if some improvement to your IT practices is required.
It is relatively expensive compared to the cost of professional indemnity and public liability insurance so, when considering it, it is critical to understand exactly what sort of cyber insurance coverage you need for your business and whether the policy purchased meets those needs adequately.
How does cyber insurance apply to a mortgage broking business?
Here are some of the areas covered under cyber insurance:
- Data breaches including theft or loss of client information;
- Network security breaches;
- Business interruption costs;
- Forensic investigation into the cause or scope of a breach;
- Data recovery costs;
- Cyber extortion (policies can differ on this);
- Crisis management costs to protect or mitigate damage to your business reputation arising from a cyber event; and
- Loss and legal costs (fines, penalties, third party claims).
What does cyber insurance exclude?
Typically, cyber insurance does not cover the following areas:
- Physical injury and property damage,
- Prior known facts or intentional or fraudulent acts,
- Damage to computer hardware,
- Upgrading applications, systems or networks, or
- Failure or outage of power, utilities, satellites or telecommunications services (e.g. loss suffered as a result of the recent Optus outage).
Get your house in order now and protect your business through 2024 (and beyond)
Although you may consider insurance as an expensive burden to your mortgage broking business operations, it is critical for your peace of mind that you understand what type of insurance is required to protect your livelihood effectively.
Connective arranges PI cover for its credit representatives as part of their membership, however, it is always a good idea to have all your business-related insurance looked at on a regular basis.
Book a review of your insurances to start 2024 on the right foot with our insurance partner www.insurance.com.au who can provide more detailed advice and quotes for insurance products.
A discount is applicable for Connective brokers. To request it, contact support@insurance.com.au.
Disclaimer: The information contained in this article is general and is not intended to serve as advice as your personal and business circumstances have not been considered. Connective group recommends you obtain advice concerning specific matters before making a decision.