Two court cases in two weeks have increased the likelihood of IFAs being pursued into retirement by professional negligence claims. Both cases, one in the Court of Appeal and the other in the High Court, extend the time limits for consumers to sue professionals for breaches of their duty of care.
The two decisions mean that files that IFAs think have been cleared of any pension misselling liability may still come back to haunt them when the pension fund is realised.
A number of professions from architects to solicitors – and IFAs – face the prospect of exposure to negligence claims up to their death or having to pay for professional indemnity insurance after they have stopped practising.
Not all IFAs will be affected but, in particular, sole traders and those offering guarantees to limited companies and limited liability partnerships need to check their insurance cover arrangements in detail.
The case of Cave v Robinson Jarvis & Rolfe, as yet unreported in law reports, but a binding precedent nevertheless, consolidates decisions in two other cases heard in the last two years and confirms the rule set in the Court of Appeal case of Brocklesby v Armitage & Guest two years ago.
That decision said any negligent act, and not just those deliberately proven to show intent to breach a duty of care, would leave an adviser exposed to a claim for negligence.
Six days later in the case of Glaister v Greenwood, the High Court made another change in the time limit rules. The time limit normally runs out three years after the date of knowledge of one's loss, with a 15-year long-stop limit.
In this case, the court decided the time limit for a consumer making a claim was three years from the date he received his loss assessment from the actuary even though he had previously complained in writing. The Glaister case effectively redefines and widens the definition of what constitutes notice of loss.
The Latent Damage Act 1986 generally bars negligence claims after 15 years but the Cave case extends the exceptions to that act by removing the need to prove intention to breach the duty of care professionals owe to their clients, for claims outside the 15-year limit.
The Cave case, which involved negligence on the part of a practising solicitor, was defended by the Solicitors' Indemnity Fund.
The SIF has until March 20 to lodge an appeal to the House of Lords to overturn the decision but, as the law stands at present, many retired IFAs face exposure to potential negligence claims that their professional indemnity insurance may not cover.
If the decision is not overturned in the House of Lords, PI insurers will be rewriting and IFAs will be scrutinising the fine print of indemnity policies to clarify what is and is not covered in the period after an IFA ceases trading. Insurers are bound to recalculate their premiums across the board if liability exposure is increased.
A particular fear is that insurers will make comprehensive run-off insurance prohibitively expensive or with excess clauses so high that IFAs will rem-ain financially exposed.
The Cave case could also mean that IFAs, as well as other professionals, would have to keep their files until death or risk increased exposure to liability.
IFAs who have worked in limited companies or limited liability partnerships will only be at risk if they have given personal guarantees to the firm.
Sole traders who have retired and sold the liabilities of their practice with the goodwill are only protected as long as the firm they left remains solvent.
All of those who have practised as sole traders should look closely at their insurance arrangements. Membership of a network does not guarantee security from legal action.
Armstrong Neal Financial Solicitors principal Gareth Fatchett says: “IFAs should always trade in limited liability partnerships or companies. It is absolute madness to do business as a sole trader. Being in a network does not necessarily protect you.
“If a claim comes through, the network will pass it on to you. If you do not take run-off cover when you retire you may not be covered at all and a lot of liability insurance does not cover you for pension review risk.”
Run-off insurance cover rates have traditionally been close to practising cover rates for the first few years after an IFA retires, tailing off after about four years, but IFAs could face paying higher rates throughout their retirement if the Cave and the Glaister decisions are not overturned.
Professional indemnity insurers will have to rethink how far back they investigate a firm seeking insurance and may increase the amount of reserves needed and IFAs will not be able to throw away paperwork after six years as the PIA currently allows them to do.
The Glaister case brings its own problems for IFAs. This case raises for the first time an issue of the time limit for claims flowing from pension misselling which emerged in 1993. The defending former IFA, Mr Greenwood, retired in 1994 and Glaister started proceedings in 1998.
To be within the time limits to bring a claim, he would need to show he had no knowledge of his loss three years before bringing his claim in 1998.
The judge rejected the argument that press coverage of the pension misselling scandal in 1993 and 1994, which led him to write to the policy provider, Norwich Union, and the factsheets sent by the now defunct Securities and Investment Board in 1995, amounted to sufficient information for Glaister to have knowledge of his losses. Instead, the court held Glaister had knowledge of his loss when he received advice from the appointed actuaries in 1997.
Professional insurance lawyers believe the case could mean on retirement consumers could discover they had suffered loss and claim this was the first time they had notice of it. It could also spell problem for seriously underperforming endowment policies.
As the law stands, IFAs are recommended to keep their files indefinitely, as trying to argue a product was not missold without the paper file invites long, messy and speculative litigation.
Reynolds Porter Chamberlain partner Jonathan Davies represented Cave in the earlier case. Davies says: “The Glaister case opens the nightmare scenario where, having gone through the pension review and had cases where it was agreed at that time there was no loss, an IFA could find a pension client coming back to haunt him on retirement.”
Davies says: “We now have two decisions, by coincidence at the same time, the combined effect of which pushes the horizons for claims further into the distance. IFAs are hit first in the time they will have to pay expensive run-off cover and second in claims for insurance excesses, both in retirement.”
While it may take some time for the impact of these changes to filter through to insurers raising their premiums, IFAs with personal liability do need to review their business structure.
Aifa director general Paul Smee says: “We do not want to panic the house too much. I would question the wholesale applicability of this, given the level of transparency in the IFA business.”
IFAs will hope that the judiciary see fit to overturn this decision.