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Running for cover

Elaine Parkes

Over the past five years the professional indemnity insurance market has seen a general trend of rising claims against financial advisers. Increased regulatory scrutiny, with no back-stop to retrospective action, continues to unearth difficulties relating to advice, sometimes provided many years ago.

Arch Cru funds, unregulated collective investment schemes and defined benefit pension transfers – the list of allegedly mis-sold products is seemingly endless, as are the resultant PI claims against financial advisers.

While the FCA’s commitment in its 2014/15 business plan to revisit rules on how long clients have to take a complaint to Fos is welcomed, financial advice continues to produce a significant volume of PI claims. This has unsurprisingly resulted in an equally significant reduction in the number of PI insurers who are prepared to insure the profession.

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Unfortunately, the implementation of the retail distribution review, while well received by insurers, has not led to a discernible change in underwriting attitude, as insurers are still dealing with a huge number of claims that arose prior to the RDR. In short, the RDR will need to demonstrate its merits, as evidenced by a reduction in claims, before it results in improved insurer confidence.

As the range of insurers willing to underwrite PI for financial advisers has reduced, so too has competition, allowing those insurers who continue to provide cover to use the opportunity created by reduced competition to increase their insurance rates to try to offset the losses caused by claims. In essence, the laws of supply and demand prevail, and many firms will find the cost of their PI insurance has increased significantly in recent years.

The situation is made worse when insurers also seek to increase excesses and/or restrict the level of cover by, for example:

• Product-specific exclusions relating to those products which are known to cause a high level of claims, for example defined benefit pension transfers.

• Including defence costs within the limit of indemnity – which will actually reduce the sum available to settle any claims.

• Including an insolvency or failed fund exclusion – this exclusion is present in numerous policies and can exclude claims that arise from the failure of a financial institution or suspended fund such as Keydata, Brandeaux and Arch Cru. The extent of these exclusions can vary greatly.

Given the trend for reductions in breadth of cover it is vitally important that firms seeking renewal terms take time to complete the proposal form accurately. Unintentional inaccuracies in response to questions relating to past and present business activities are common. This may result in a firm either receiving inappropriate cover or insurers rightfully rejecting a claim, leaving a firm to cover any losses arising from their balance sheet.

In advance of accepting a quotation, firms must take time to read their policy wording in order to understand precisely what they are being covered for and, more importantly, what they are not being covered for. Firms should not simply assume that the cover being offered will remain unchanged from the previous year, particularly if they have changed their broker and/or insurer. It is also very important that time is invested in understanding the precise steps that should be followed when notifying a claim or change in circumstance. As highlighted above, these can vary from policy to policy, and failure to adhere to the process may result in insurers rejecting a claim.