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Understanding the difference between professional indemnity insurance and client money protection

It’s not unusual for letting agents and their insurance brokers to experience some confusion when it comes to understanding the difference between professional indemnity insurance (PII) and client money protection (CMP). On several occasions our agent clients, particularly in Scotland, have been reassured by their insurance brokers that their PII provides the same cover as CMP. It does not. But if this is you, rest assured that you are not alone.


Do I need client money protection if I already have professional indemnity insurance?

Now that CMP is a mandatory requirement in Scotland, Wales and England, it is a good time to clarify how it differs from the protection offered by PII, which is a requirement for CMP membership.

As an agent operating in today’s strict legislative environment, you need to ensure you have both types of cover.  This is to ensure that both your client's money is protected and your business is protected if it has to defend itself following a claim, or in some cases pay compensation to a third party. Most agents recognise that it is considered best practice to have PII in place.

Let’s take a closer look at how PII differs from CMP when it relates to monies held by the business.


How does a professional indemnity insurance policy respond to theft of client money?


PII is generally purchased by a business to protect itself in the event that a client (third party) brings a claim for financial loss as a result of professional negligence, errors and omissions, which can include misappropriation of client monies.  It is the business that raises the claim once it becomes aware of the complaint.


Most PII policies include an element of staff dishonesty cover (known as fidelity insurance), which will indemnify the policyholder (the owner or principal of the business) should an employee, director or partner misappropriate client or business monies without the knowledge of the business. That loss is compensated by the PII insurer to ensure that the business remains solvent for the benefit of the policyholder and his/her clients.


However, this cover will also be subject to certain sub-limits within the overall limit of indemnity purchased by the policyholder e.g. £10,000, which generally will not cover the entire monies held by that business.  You should check your internal limits and policy exclusions to find out more.  


For an insurer to honour a claim under this extension, the business must make the claim and remain solvent.  Fidelity cover will generally exclude theft of monies by the business owner or where the business owner colludes with another individual related to the theft.   


How does client money protection differ from professional indemnity insurance?


CMP insurance indemnifies the landlord or tenant (not the letting agent), whose funds have been misappropriated by the owners of the business and that business is no longer trading or is insolvent. The insurance reimburses landlords, tenants and other clients/suppliers in respect of their rent, deposit or other client funds following dishonesty.


CMP is a specific insurance that provides no direct benefit to the agent. Unlike PII, it is there purely for the protection of the client should the agent become insolvent or cease trading and there is no intention by that business to repay the monies.   


CMP insurance is purchased by a specific client money protection scheme such as those operated by trade bodies like ARLA and RICS to cover the potential loss of client money caused by their members. More recently, commercial organisations such as Client Money Protect, operated by Hamilton Fraser, has also provided CMP for those agents who are not members of a trade body. These schemes, which have been set up to provide the relevant protection for consumers, are all approved by the UK government in England, and are open to Scottish based agents as well as those agents operating in Wales under the Rent Smart regulations. A landlord or tenant makes the claim against the scheme, rather than the agent, and the scheme pays out to them for their loss on relevant claims.  Schemes then pursue their member for recovery of any outlay made, by legal means if necessary.    


In summary, PII policies are designed to recompense the business (policyholder) should it suffer financial loss due to its’ unintentional actions.  They are not designed to cover criminal acts carried out by the owners of the business.  The presumption made by an insurer is that the business will still trade and service its clients. 


CMP, on the other hand, will pay out when the business fails due to the theft of client money by the owner or principal. In such a scenario, the business owners deliberately cause the business to become insolvent or to cease trading, with no intention to repay the clients. 


Hopefully this article has helped to explain the difference between PII and CMP, not only to provide further clarity to letting agents, but also to insurance brokers should they insist that CMP is in place when they are actually referring to cover provided through a PII policy.


You can find out more information about both CMP scheme membership and Professional Indemnity Insurance here.