5th February 2007

Third party funding’ could affect Professional Indemnity (PI) rates

A high profile negligence case involving an accountancy firm could lead to a rise in Professional Indemnity (PI) insurance rates, according to reports.

Mid-tier City accountancy firm Moore Stephens is to face a £90 million negligence claim based on the alleged "dishonesty" of a couple of its auditors.

The claim has been brought to the high court in London through "litigation funding" and will be backed by a number of creditors including several banks and HM Revenue & Customs.

Litigation funding allows for third parties unconnected with the claimant or defendant such as Hedge Funds to put forward capital and help seek a claim in return "for a share in the proceeds if it succeeds," reports the Financial Times.

While the firm now has limited liability partnership (LLP) status, it was not so covered in the 90s - which is the time of the alleged negligence - making it open to "off the scale" claims.

This means negligence claims could be brought against both the firm in general and individuals in particular, states The Herald.

However, PI insurers have said that this sort of funding could lead to an increase in the number of "spurious" claims made.

David Jones, managing director of Markel's professional liability division, told Insurance Times: "Nobody would suggest that a legitimate claim should not be pursued due to a lack of funds."

"However, if a third party is going to fund litigation that would otherwise have failed, this will lead to an increase in claims activity and a consequent increase in premium."

Gary Head, director of professions and speciality commercial division at Hiscox, added: "Issues will start if litigation funding becomes a vehicle to put pressure on a lost case, or perhaps where there is a feeling that a mediated settlement might occur because of complexities in a particular case."

He continued that firms taking on a litigation funded case "should be met with a robust defence from the insurance community".