UK: The Pension Switching Review: Walking A Tightrope With Professional Indemnity Insurance Cover

Last Updated: 25 June 2009
Article by Jonathan Newbold

Most professional indemnity (PI) insurance policies contain a 'condition precedent' clause prohibiting policyholders from admitting liability or making any offer in respect of any claim or possible claim. That condition does not sit happily with certain regulatory obligations upon IFAs, which arise under the Financial Services Authority's review of pension switching business (the "Review"). This article seeks to provide some helpful tips for avoiding the many insurance pitfalls that could lead to pension switching claims not being covered and explores, too, the possible impact of the Review on the PI market.

Key Features Of The Pension Switching Review

On 5 December 2008 the FSA published its report "Quality of advice on pension switching: a report on the findings of a thematic review", which set out the results of its assessment of advice given to customers since 6 April 2006 to switch their existing pension arrangement(s) into a personal pension plan (PPP) or self-invested personal pension (SIPP).

The FSA immediately followed that up with a "Dear Proprietor/Compliance Officer" letter on 9 December 2008, in which it asked firms to assess the advice given to customers to switch their pension(s). In its letter, the FSA stated what action it expected firms to take and, from a PI insurance perspective, the two most important "expectations" were:

  • to consider the approach taken to the firm's relevant pension switching business and if necessary, look at a sample of individual files of past sales as well as the sales process, and systems and controls that apply; and
  • to take appropriate remedial action if failings are identified, including providing redress to customers where necessary.

The FSA has stated that it intends to undertake follow-up work in the third quarter of this year and has made clear that if firms have not undertaken appropriate action in response to the Review, they may be subject to regulatory action. Those are the important regulatory obligations, but what about the obligations upon firms under the terms of their PI insurance?

Key Features Of Your Professional Indemnity Insurance

The vast majority of insurers offer cover for IFAs on a "claims made" basis. For these types of policies, provided the insurance does not exclude claims that arise from advice given before a particular date (sometimes called a "retroactive date"), it does not matter when the advice was given - underwriters will indemnify the policyholder against claims made and notified during the policy year, subject to the firm having complied with all the other terms and conditions of the policy.

Although all policies are different, "claims made" policies usually contain terms and conditions of the following sort:

  • The policyholder must not admit liability or make any offer deal or payment without the prior written approval of underwriters;
  • Once a claim is made or the policyholder becomes aware (or ought to have become aware) of any circumstances likely to give rise to claims, the policyholder must notify the insurer "as soon as possible" or "promptly" or "within 21 days" or similar. If a circumstance is correctly notified and a claim subsequently arises from it (even after expiry of the policy) the insurance will usually provide cover.

The critical question therefore becomes: how can firms meet the FSA's expectations under the Review, whilst at the same time ensure that their insurance cover won't be jeopardised for any claims payments that have to be made as a result of the Review?

Notification Considerations

One of the first issues to consider is what, when and how the firm should go about notifying its professional indemnity insurer.

What Should A Firm Notify?

Where a firm's insurance policy requires claims to be "likely" to arise from a particular circumstance, before the insurer is obliged to accept the notification, it is highly arguable that claims cannot be said to be "likely" to arise from a firm's entire population of pension switching cases. This argument arises because under the current Review, the FSA considered 500 IFA files (approximately 10% of all pension switches since A-day) and in total found unsuitable advice in only 16% of cases. If that review covered a population representative of the market as a whole (and the FSA says it was representative) then there is arguably a 16% chance of a firm having given unsuitable pension switching advice. In those circumstances, PI insurers arguably would be entitled to say that a 16% chance of a claim does not cross the "likely" threshold.

It follows that where the relevant policy allows circumstances that are "likely" to give rise to claims to be notified, it will probably be necessary for the firm to have undertaken its own investigations into its population of cases that fall within the scope of the Review and have identified specific files where the pension switching advice was deficient. Given what the FSA has said about its expectations on firms taking appropriate remedial action, notifying actual cases where remedial action might be required is prone to form the basis of a notification that has a much better chance of being accepted by an insurer.

When Should A Firm Notify?

This question turns on the precise wording of the PI insurance policy in question. However, the most common obligation is for notifications to be made as "soon as possible" or "promptly". Therefore, it would be prudent for firms to exercise great care to comply with the specific requirements of their policy as soon as the firm believes it has grounds to notify. The notification clock might start ticking once the firm has identified those cases in which it considers deficient advice was provided.

However, in all cases, firms should contact their insurance broker for guidance as to the precise notification obligations under the terms and conditions of their policy and consider taking specialist legal advice in the event of any doubt.

How Should The Notification Be Framed?

This is an important question in the current climate of the PI market (a subject to which I return later). Whilst firms will understandably be very keen to avoid notifying insurers of matters that could very well lead to an increase in premium in the next insurance year, there are real dangers of "playing down" the seriousness and breadth of any problems identified.

Recent case law demonstrates that if a notification is too circumspect about what precisely is the subject matter of the notification, insurers might not be fixed with liability to indemnify the firm for the claims that might ultimately arise. If subsequent insurers exclude cover for matters a firm mistakenly believed had been notified to a previous insurer, a gap in cover could be created that would leave the policyholder with uninsured claims and losses.

Firms may wish to consider the following factors when approaching notifications to PI insurers:

  • What requirements must be satisfied for a notice to be valid and effective for the purposes of the relevant condition in the policy and are those relevant requirements satisfied?
  • Can the relevant communication objectively be said to "give notice" (i.e. can it objectively be regarded as intended to be a notification of circumstances as distinct from – for example – an update describing the insured's response to the Review that is stated to be provided to underwriters "for information")?
  • The following questions should be asked:
    • What does the communication reasonably convey to the reasonable recipient?
    • Is the notification fair, comprehensive and comprehensible?
    • Is there a statement in the heading of any of the letters, or in the body of the communications, to indicate that the firm is in fact, by means of those letters/communications, notifying circumstances which are likely to give rise to claims?

Offer Making

The FSA has informed firms that it expects them to take "appropriate remedial action" if failings are identified. However the FSA has not given any clear guidance of how firms should go about taking any remedial action. To the extent that a firm's PI insurance policy includes a condition precedent to the effect that no admissions, offers or payments must be made without underwriters' approval, it is vital that firms comply in an attempt to ensure that nothing is done to invalidate cover.

It is still too early to say how the PI insurance market will react to requests from firms for approval of letters and so forth to clients offering redress without a claim having been made. However, the prudent course would arguably be for firms to attempt to engage with their PI insurer at an early stage and certainly before any offers are made/redress paid.

The Review's Impact On The Professional Indemnity Market

Due to the severe declines in global asset prices over the last 12 months has led to an increase in the number of claims being made against IFAs. The increase in claims frequency has been compounded with insurers realising less investment profit with the premiums they collect. The net effect of those two factors means that premiums and excesses are very likely to increase for most firms this year. Unfortunately, whilst it is still too early to say with any certainty what the impact of the Review will be, it is almost inevitable that the cost of appropriate PI insurance will increase.

Conclusion

The stakes are undeniably high. On the one hand there is the risk of enforcement action if the FSA's expectations are not met. On the other, there is the risk of insurers rejecting claims/notifications due to breaches of policy terms and conditions.

Obviously the precise obligations on firms will be governed by the specific wording of the relevant insurance policy. Although the points set out in this article might help firms safely traverse the tightrope, ultimately, there is no substitute for having a good understanding of your own firm's PI insurance policy's terms and conditions. If you have any queries or are unsure about any of the firm's obligations, your insurance broker should be able to help. Otherwise, given the perils that could await the unwary, firms may wish to consider taking specialist legal advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.