Jamie Newell, managing director of o3 Insurance, said the policy wording in PI contracts varied from insurer to insurer meaning advisers could inadvertently fall foul of the conditions and be faced with insurers unwilling to settle their claim.
For instance, some policies' claims notification clauses state that a claim needs to be notified to the insurer 'as soon as possible', while others impose a stricter policy whereby claimants must notify their insurer within either 14 or 30 days of discovery.
Mr Newell said: "In the first instance [the FCA] should mandate the claims notification clauses in policy wording so that they are uniform across the board as at present they vary from insurer to insurer. Firms often fall foul of the conditions of same and thus leave it possible for insurers not to accept the notification."
Philippa Hann, partner at law firm Clarke Wilmott, echoed these claims at the Chartered Institute for Securities & Investments financial planning conference this week (2 October) when she warned advisers may not be in a position to solve problems such as those happening in the aftermath of the British Steel pension scheme restructure without their PI insurance changing.
She said: "If we want some good news stories we need mandatory wordings within PI policies or some form of pooled insurance in place."
There is also no standard definition for claims, said Lee Chapman, director of professional risks at PIB Insurance Brokers.
He said: "Clients also need to be aware of the claim definition under their policies as these differ as well and all have their own trigger points as to what is accepted as a claim under the policy."
The Financial Conduct Authority (FCA) has so far refused to introduce a standard form of policy wording or review the claims notification clause.
The FCA was considering the possibility of introducing such wording and mandatory terms for professional indemnity (PI) insurance cover for financial advisers early last year but by October it had decided that it would not take action saying the move could have adverse effects on the level of the Financial Services Compensation Scheme (FSCS) levy.
A spokesperson for the FCA said: "Overall, our conclusions are that while there are some issues in the market, such as use of exclusions and issues with the notification of claims, professional indemnity insurance does provide beneficial cover and the cost of intervening may outweigh the benefits."
The FSCS, paid for by the industry, compensates consumers on behalf of failed regulated firms so any policy which could force firms to go out of business could negatively impact the levy.
Scott Gallacher, financial planner at Rowley Turton, said he has seen advisers fall foul of the claims notification clause.
He said: "There is a need for advisers to notify their PI insurers as and when potential claims arise.
"I did read of a case where a mortgage adviser didn't report a complaint, as he felt it related to an investment bought with the mortgage proceeds and he had only recommended the mortgage not the investment.
"Unfortunately I understand that FOS ruled against him and, as he hadn't informed his PI insurer about the initial complaint within the required period he had no PI cover for this particular case."
Mr Chapman said further problems were created because the FCA does not make it mandatory for IFAs to buy PI insurance, as had been on the table in the FSCS funding review.
He said: "The FCA recommends that firms should buy [...] run off cover to safeguard themselves against professional indemnity claims but it isn’t mandatory. Some firms only buy one year and it’s never chased up or renewed. Because of this, IFAs could be left further exposed to claims and be left to pay out of their own pocket."
But Mr Chapman said although IFAs would benefit from having mandatory policy wordings in place for PI insurance, there was a lack of capacity to write business in this area.
He said: "The benefit would be that clients at least know, despite which insurer they were with, what to notify and when to notify a claim.
"[But] the FCA has a difficult task, with the lack of capacity available to write this class of business coupled with the pressures of the FSCS. It's knowing what is best for the IFAs and their clients, along with what is available in the market."
rosie.quigley@ft.com
