Professional indemnity insurance is a necessary evil for all people engaged in advice. The complicated nature in which PI works leads to disputes and problems.
The pension review has given a large number of headaches to advisers as the definition of a “notifiable event” is not always clear. What constitutes a notifiable event? A compliance assessment? A claim from a client?
The fine print of PI policies mean that unless notification is done promptly and within the PI policy rules, it will not be covered. This can leave firms exposed and vulnerable.
Some of the quirks make the issue very unclear. It is possible for advice to fail a compliance assessment but to pass a loss assessment. A current example could be split-capital investment trusts which work in the opposite direction. The bulk of the advice being compliant and the loss assessment failing.
The leading case on notification is Collyear
J Rothschild Assurance Plc (1998) CCH 1697. The case deals with when and where notification should occur. It deals with the insurer's right to repudiate cover. This case should not be underestimated as it has huge ramifications for financial advisers.
With the bulk of potential focused regulator lead reviews in the pipeline, notification of potential claims is key.
A good example of this would again be splits. There is an argument that any firm which has sold such investments should immediately notify their insurers of the problem. The insurers cannot then argue that the firm failed to notify.
The pension review caused a great deal of headaches due to the fact that the bulk of retrospective claims were forced on insurance providers.
After all, the initial reports into the pension review occurred in 1993. There could certainly be an argument that advisers should have immediately realised there was a problem and notified their PI insurers.
The J Rothschild case is interesting as it portrays the issues very neatly. The company received a letter from Lautro on the December 22, 1993, stating that “there is a problem which needs to be tackled”.
J Rothschild notified its insurers on January 27, 1994. The blanket notification was challenged by the insurers as incorrect notification. The insurers argued that the prior Lautro enforcement bulletin 16 should have led to notification.
Drawing the parallel, this would mean that any time that something happens which appears to be adverse in any way it should be notified. In practice, this would be nonsensical as each time a product was critic-ised whether generically or specifically, the insured would need to notify.
Fortunately, the court agreed with J Rothschild and ordered that the Lautro letter was sufficient to be the first time that notification should be considered.
If you are an appointed representative within a network, you will, in all likelihood, not be responsible for notification. That will be the role of the network. What if the network notifies incorrectly? What if a claims-made policy is renewed with higher excesses to be paid?
The issue is one which has caused financial advisers problems in the past. A good example of this is the way in which the excesses for “risky” business have increased.
One matter we looked into showed that, on the date of notifying the network of a claim, the excess was £1,000. The delay on the part of the network meant that the claim was dealt with in the subsequent policy year where an excess of £25,000 applies.
It is our contention that when a person handles claims on your behalf they have a duty to you to ensure they do so efficiently. Therefore, as a safeguard always keep copies of notifications to prove dates.
Policy construction has lead to a number of interesting judgments. The leading case on the point of excesses is Lloyds TSB Abbey National Plc (QBD October 6, 2000).
The case has very interesting ramifications. The insurers in this case tried to apply an excess to each and every claim resulting.
The insured argued that this should not occur due to the nature of the claims.
Indeed, the court made it clear that, where multiple claims occur which result from a single act or omission or a related series of acts or omissions, then they should all be dealt with as one claim.
Put this in the context of the pension review/ FSAVC review. It is very straightforward to argue that all the claims were very similar in nature.
On a logical analysis, this would mean that only one set of excesses should apply. If you have paid multi excesses then you need to undertake an analysis of your policy wording very carefully.
Professional indemnity insurance is an expensive necessity. You have a right to understand what cover you are afforded and how it works. Notification and excesses can create huge problems if you are not vigilant. It is worth assessing your cover so that you can run for cover if and when a regulatory storm occurs.
Gareth Fatchett is a partner in financial services lawyers Proact Legal