12th May 2009

Professional Indemnity Policy Insolvency Exclusions

There is nothing wrong with the old versions of this clause.  The problem is that in recent years it has been extended to link in and take out claims arising from an IFAs negligent selection of an institution that fails.  How is an IFA to know with any accuracy the financial worth of any institution that they choose to put clients’ money in.  The answer, of course, is to make effective enquiries, which must include taking into account the views and opinions of the rating agencies and have full regard to market intelligence.  The key point is matching the clients’ demands and needs with the security offered by the chosen institution.  If the IFA knows, or ought to know or is reckless as to whether or not that institution has the relevant security, they may be legally responsible.

It would be great if all policies covered all things.  I am all for it. This, however, is not reality.  Household policies normally do not cover damage to fences, even if the result of insured perils and motor policies written on a full comprehensive basis will not usually cover impact damage to tyres.  Insurers are loathed to cover claims derived from or connected to the  financial failure of  institutions and similar entities because one or several of them crashing could give rise to massive losses and, of course, it is impossible for them to assess that exposure and rate it.   In normal economic circumstances these exclusions are less of an issue but in these perilous times it must be admitted that their significance is far greater.  For the most part I do not believe that financial intermediaries will be legally liable but I can conceive of instances where they will be.  At this point I am not aware of any recent judgements relating, for example to the collapse of Lehman Brothers, although I have heard of some decisions overseas.  If Underwriters were to embrace this risk and claims were paid or costs incurred in defending them, all IFAs will eventually suffer in terms of the premiums that they will be charged and the excesses they will endure.  Worse still some may not get any cover. This would not be welcome. 

What would be welcome is for the regulator of these Institutions to take responsibility for assessing their financial integrity and establish an effective ‘alert’ system to inform the IFA community, and others who could be affected where solvency issues arise or are predicted to occur.  Rating agencies currently fulfil this obligation, but as we all know, their role has been criticised for all sort of reasons, not least of all, their objectivity.  I do not believe that the costs involved and incurred by the regulatory authority will be wildly different from those already being paid although they will go into a different purse.   

I  welcome any observations.

Feel free to contact me or post in the forum.

Ian Boscoe BA (Hons) Law
Director, PYV Ltd
Tel: 0207 626 6789