Professional indemnity (PI) insurers must consider contractual disclaimers in order to determine whether certain customers have reasonable grounds to make a claim.
The PI insurance market is one of the more stagnant commercial product lines in terms of GWP. The market is notoriously claims-driven, with any real change to its worth stemming from a period of high claims, both in frequency and cost to insurers.
However, while the PI space has endured several years of relative stability and as yet hasn’t seen many claims of real significance, certain market developments have put insurers and their clients in a position of uncertainty. This is particularly regarding liability and the reason/eligibility to submit a claim.
Recent years have seen cases in the industry involving independent financial advisors (IFAs) and tax accountants, and the emergence of creative investment schemes and/or progressive accounting designed to entice those with sizable incomes to avoid paying the higher tax rates on their funds. There are two main issues here: firstly, the liability of the introducer to the scheme (the IFA or tax advisor etc.) and their accountability for their client’s decision to invest. Secondly, what reason(s) does the customer have to submit a claim if a disgruntled investment client is looking to take legal action for incurring losses from a failed “investment scheme”?
In recent times, tax relief has become of particular interest to those with large incomes or significant disposable funds. The main draw of these schemes is to take advantage of the opportunity to significantly reduce large tax bills, with financial advisors targeting high-earners. However, the schemes offered by some investment providers have come under scrutiny, causing those who have taken part to face penury over tax demands following a failed investment.
A prime example is media investment firm Ingenious Media and the schemes it ran to offer investors tax relief. According to The Guardian, more than 100 footballers including recently retired Premier League players are facing severe financial difficulties and even bankruptcy, due to demands from HMRC for the repayment of huge disputed tax reliefs. In turn, this has brought the role of the introducers to these schemes into question, and with a threat of legal action from clients, the insurer of the company providing the investment service is at risk if a subsequent claim were to be filed.
Claims in the PI space have a tendency to be substantial, especially when they involve financial services firms, and therefore PI Insurers must strive to protect themselves better. Considering that the market has been flooded with newer and often smaller PI players, it’s questionable whether these insurers have the means to corroborate claims of this magnitude, especially if some are writing high-risk business at low price points.
Insurers must attempt to avert these risks, possibly in the form of a contractual disclaimer to thwart any egregious liability claims and concerns. This would benefit PI insurers when dealing with clients that provide financial and investment services. There is always some degree of risk when investing and losses are always a possibility, which suggests insurers should not have to suffer the consequences of an individual or group making a poor investment or taking part in an ill-advised investment scheme. Insurers must endeavor to clarify the grounds on which PI customers offering these services are eligible to claim.
By Thomas McCourtie, UK General Insurance Analyst