Emerging risks in Professional Liability: An insurance broker's insights

In today's rapidly transforming business environment, professionals across various sectors are encountering evolving challenges and risks. As a director of the Professional Indemnity (PI) Risk and Broking team at WTW, I have observed firsthand the complexities that technological advancements, societal shifts, and economic fluctuations bring to the professional liability landscape. These transformations are not just altering how businesses operate but are reshaping the risks they face.

From the lens of a risk management professional, it becomes increasingly clear that the traditional approaches to managing professional liability may no longer be sufficient. As technologies like artificial intelligence (AI) become more integrated into professional services, the nature of exposure itself changes. For example, AI's role in data handling and decision-making introduces new layers of risk concerning accuracy, privacy, and security. Each of these aspects demands a more nuanced understanding and a proactive management strategy.

The rising importance of ESG

Economic pressures and societal expectations are also shifting the baseline for what is considered adequate diligence and transparency in professional conduct. The rising importance of environmental, social, and governance (ESG) factors has introduced new criteria for evaluating corporate behaviour, influencing everything from investor relations to public perceptions and legal standards. These changes require firms to adapt their risk management frameworks to accommodate these broader accountability and compliance issues.

Moreover, as the global market continues to grow more interconnected, the implications of these shifts are magnified. What was once a localized issue can now have global repercussions, affecting operations, reputation, and financial stability on an international scale. This global perspective is crucial in understanding the full scope of potential risks and in crafting strategies that are both robust and flexible enough to handle the unpredictability of today's market dynamics.

In this article, we will explore these emerging risks in greater detail, offering strategic insights and highlighting illustrative examples that, while not drawn from specific real-world incidents, effectively demonstrate the types of challenges professionals may encounter. These scenarios are designed to enhance understanding and facilitate the development of robust risk management practices. Our aim is to arm professionals and firms with the necessary tools and knowledge to address these challenges confidently and competently, fostering opportunities for innovation and growth.

Artificial intelligence and liability

• Copyright infringement:
  AI’s capacity to create content autonomously can sometimes lead to unintended replication of existing works, resulting in copyright infringement claims. A notable case involved a tech company whose AI system inadvertently generated marketing materials closely resembling those of a competitor, sparking legal action. This incident underscores the critical need for AI systems to be equipped with sophisticated algorithms capable of identifying and circumventing potential copyright violations.
• Data privacy and security:
  AI systems, which frequently handle vast amounts of personal data, are prime targets for cybersecurity threats. A significant breach occurred at a healthcare facility where an AI-powered diagnostic tool was compromised, exposing sensitive patient information. This breach accentuates the essential need for implementing stringent security measures such as advanced encryption and relentless system monitoring to thwart unauthorized access.
• Accuracy and supervision:
  The liability associated with AI-generated errors is a major concern, especially in fields requiring precision like legal services, for instance. An instance where a law firm utilized an AI tool for legal research resulted in the use of bogus previous court cases/decisions to (try to) prove precedent in a process. An individual from the firm made the decision to research on a chatbot for similar cases to generate precedent on a lawsuit they were working on, without following any protocol or best practice policy developed to use the tool in a diligent manner.

ESG considerations and liability

• Contractual risk:
  Economic constraints frequently compel firms to agree to unfavourable contract terms. An architecture firm incurred heavy penalties after accepting a contract with unrealistic deadlines and budget constraints, emphasizing the importance of comprehensive contract reviews to avoid such pitfalls.
• Supply chain and inflation:
  The construction sector is particularly susceptible to inflationary pressures. A notable incident involved a company that faced significant financial losses due to a sharp increase in steel prices, which were not accounted for in a fixed-price contract. This experience has led to the adoption of contractual clauses that allow for adjustments based on material cost fluctuations, mitigating future financial risks.
• Auditing and valuation services:
  Economic downturns can highlight deficiencies in auditing and valuation practices. An audit firm was accused of negligence after it failed to detect financial discrepancies in a client's records, which were later revealed when the company declared bankruptcy. This case underscores the critical importance of maintaining rigorous standards in auditing and valuation to prevent such oversights.

Mergers and Acquisitions (M&A)

• Integration challenges:
  Effective integration is crucial following M&A activities. A technology firm encountered significant challenges when it failed to properly amalgamate the IT systems of an acquired company, resulting in data fragmentation and operational inefficiencies. This example stresses the importance of a meticulously planned integration strategy that prioritizes technological, cultural, and procedural harmonization.
• Latent liability:
  With an economic downturn, there may be an increase in firms looking to grow inorganically and taking advantage of possible good deals in the market. Newly acquired firms usually come with a latent legacy liability that has, on occasion, brought considerable headache to a few insurers. Therefore, underwriters are constantly scrutinising the firm’s appetite to grow inorganically and understanding their steps to minimise this risk.

Legislative changes

The recent enactment of the New Building Safety Act (BSA) in the UK has imposed more stringent safety standards on construction firms. All building control professionals are affected by the Act. A higher level of competency is being required for the regulated roles referred to in the Act, incl. principal designer, contractor, and client. However, the BSA has also made the market broaden their horizon on what risks are impacted, moving away from just construction only to other professions like solicitors, surveyors, etc. While this is currently limited to the UK, it could signal a trend towards stricter regulations in other regions.

Conclusion

Insurance has always been an enabler of innovation. However, the sheer pace of change is starting to challenge that longstanding position and as minimum requires insureds to significantly raise their game when it comes to the management of these developing risk.

Professionals and firms must adapt their risk management strategies to meet new technological, societal, and economic challenges. Engaging continuously with your risk and broking advisory teams is essential to keep risk frameworks robust and agile, ready to tackle global market challenges, improve risk management, and find growth opportunities.

Our team is prepared to support you with the essential management needed. Utilising cutting-edge data analytics, we can identify emerging risks and create adaptable insurance solutions to reduce liabilities and enhance operational strength.

Contact

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Roberto Felipe

Director, FINEX Global

email Email phone +44 20 3124 6167

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