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Liable for loss

The whole point of having professional indemnity insurance is to cover against advice-based risks. The policies require claims to be “notified” in the relevant policy year.

The biggest test to the whole pension review debacle has yet to be applied. The simple fact is that having investigated the way in which networks handled pension review leads me to the simple conclusion that questions need to be answered.

I base this on a real-life situation which I believe will span the whole industry. The basis will be an analysis of the position of the networks when passing on review costs and excesses.

Can networks pass on review costs and professional indemnity excesses? The simple answer is “yes”. The standard appointed representative contract provides a general indemnity to allow the network to pass on costs and excesses. This point has been tried in law and more often than not results in a favourable result for the network.

What is needed is a little more creativity to defend and/or recover monies alr-eady paid.

Obligations

The primary obligation is to provide a level of service to members although this does vary from network to network. The umbrella of the network is there to allow members to be trained and complied.

What if this fails the member? What if their advice is negligent by virtue of inadequate training or compliance?

It is my contention (which has been supported by counsel) that where a member has given negligent advice by virtue of negligent provision of service then there is a prima facie claim.

The simple contention is that where any claim arises under the general indemnity, then the member has the right to counterclaim an equal amount for breach of obligation. This argument has not been tested sufficiently to create precedent.

The simple analogy is that if IFA firms have been deemed to have acted negligently, then by implication so must the network. From our inspection of network compliance manuals, very few were updated between 1988 and 1994 in relation to transfers, opt-outs and non-joiners.

When you consider that numerous reports were produced before the definitive October 1994 SIB report, then you do have to enquire why such issues were missed.

Professional indemnity insurance was varied soon after the October 1994 SIB report was received for the bulk of networks. The insurers could see the writing on the wall and changed their policies to a “per claimant” basis rather than a “per single cause” basis.

Putting this in context, rather than one excess per type (for example, non-joiner, opt-out, transfer) the basis changed to one excess per claimant. The latter cover is significantly worse for the member and the network.

You do have to wonder why such a material change went unnoticed by members. There are two arguments:

•The members were fully aware and accepted the risk.

•The members were not adequately informed of the change.

It is my contention that if the latter occurred, then there is a prima facie case for negligence. If this turns out to be true when members inspect their professional indemnity policies, then a whole raft of claims are likely. After all, the network was under an obligation to arrange adequate PI.

Notification

The more serious legal issue relates to the notification of claims under Collyear

•Rothschild. This case looked at the date when the “notification” was effectively made. Let me paint this picture.

When the October 1994 SIB report was announced, it would be reasonable to assume that a network should have bulk notified. If they had done, then the single excess per cause would have applied. The simple fact of the matter is that many notifications did not take place until many years later, when the professional indemnity terms were considerably worse.

Another negligence issue must arise when the excesses rise and due to late notification higher amounts become payable. It is my contention that if no reasonable explanation can be given as to why a bulk notification did not occur, then a prima facie case in negligence exists. This point begs a test case.

Where monies have been paid, they could be recoverable if the facts of the case meet the legal argument as outlined above. If the facts of the case meet the legal argument, then in all likelihood a declaration can be sought to prevent further liabilities.

With endowments, split-caps and other potential reviews, now is the time to consider your position.

With such a vast liability, I would suggest that those who were responsible for notification check that they did so to protect their members.

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