Professional Indemnity Insurance : Coverage Investigations & Other Issues

Coverage Investigations

When a professional indemnity insurer receives notification of a circumstance or claim from you, it will consider the extent to which it is obliged to provide the firm and individuals with cover.

The principal ground upon which cover may be excluded is dishonesty. If suspected, your insurer will commence a coverage investigation. The insurer will instruct a separate firm to handle the coverage investigation, as distinct from the firm acting for you on the notified claim.

You are required to cooperate with your insurer within reasonable limits. We can assist in identifying the extent to which cooperation is reasonably required.

Early engagement with us can assist you in preparing information for insurers, reducing the chances of a negative outcome, for example declinature, a claim for reimbursement, or an action for claims handling prejudice, and increasing the speed at which matters are addressed.

If you are invited to attend an indemnity conference, you can be sure that your insurer intends to decline cover. Representation is very important. In our experience, the conference is used by insurers as a means to cross-examine you in advance of declinature with a view to litigation. Usually the insurer appoints Kings Counsel to question you.

Cover may be declined for one or more partners (and technically other individuals), which may cause the firm and its partners to become wholly exposed to the underlying claim, or leave the excluded partners to face reimbursement claims by the insurer.

The insurer may seek to limit its exposure by relying on an aggregation clause, and may claim damages for claims handling prejudice e.g. upon late notification. There have been a number of important recent cases on the subject of aggregation.

Insurance declinature?

Your contract of insurance must as a minimum adopt the requirements set out in the Minimum Terms & Conditions (MTCs) prescribed by the SRA. While those MTCs prohibit insurers from declining insurance cover for an entire firm, small firms are at particular risk : If all of a firm's partners/directors are adjudicated by the insurer to have either acted dishonestly or condoned such acts, effectively the firm will not be covered. In our experience, when commercially expedient some insurers will attempt such a strategy, and argue an interpretation of the MTCs that is not good law.

The key battleground in an insurance investigation is often dishonesty.  The test for dishonesty, set out in Ivey v Genting [2017] UKSC 67, is not universally applied properly, and as specialists in the field we can guide you and seek to ensure that the case is properly applied.

Will the insurer seek reimbursement?

The MTCs permit an insurer to seek reimbursement in the event that an insured commits or condones (whether knowingly or recklessly):

  • any breach of the duty to make a fair presentation of the risk, or misrepresentation;
  • any breach of the terms or conditions of the insurance; or
  • dishonesty or any fraudulent act or omission.

to the extent that is just and equitable having regard to the prejudice caused to the insurer’s interests by such failure.

Will the insurer cover my defence costs in the underlying claim while it conducts a coverage investigation?

The MTCs require insurers to meet defence costs as and when they are incurred, including defence costs incurred on behalf of an insured who is alleged to have committed or condoned dishonesty or a fraudulent act or omission, provided that the insurer is not liable for defence costs incurred on behalf of that insured after the earlier of:

  • that insured admitting to the insurer the commission or condoning of such dishonesty, act or omission; or
  • a court or other judicial body finding that that insured was in fact guilty of such dishonesty, act or omission.

Insurers may seek to argue that they are not obliged to provide such cover as soon as they have declined cover, i.e. relying upon their own finding whether dishonesty is made out. We’ve seen this before, so how do you challenge this?

How to challenge an insurer?

The starting point is to make detailed written representations to the insurer’s appointed solicitors. If that doesn’t succeed and an issue persists, the dispute may either be the subject of arbitration, court proceedings or an application to the SRA for an order directing the insurer to indemnify you. Insurers are dutybound to report declinatures for dishonesty to the SRA. A failure to mount a legal challenge to a disputed finding by an insurer may be relied upon by the SRA as material.

Why choose us?

Robert Forman in our team is the author of The Law Society's Professional Indemnity Insurance chapter (among many other chapters) in The Solicitor's Handbook 2022 (and earlier 2019 edition). We have the specialist knowledge and experience to guide you through the process, to give you and your firm the best chance of success. It is also important to recognise that submissions made during an insurance investigation may later be scrutinised by the SRA making specialist representation essential. As SRA investigation specialists, we have the knowledge and experience to ensure that the wider consequences of an investigation are taken into account.

Case Study 1

We acted for two firms in separate investigations arising from large scale employee theft from client account. Early engagement allowed us to present claims to the relevant insurers for an indemnity and rectification of the client account avoiding intervention in circumstances where, given the extent of the shortfalls, the partners had insufficient resources to meet the liability. Frequent and good communication with the SRA helped avoid intervention.

Case Study 2

A month before scheduled insurance renewal we were instructed by three partners in a four-partner practice. The firm had been served with four civil claims brought by mortgage lenders. Upon our advice the firm investigated and quickly ascertained that the senior partner had engaged in serious misconduct; there were c.1,000 affected files. They were all notified to the firm’s existing insurer in the weeks left before renewal, with the effect that the current insurer was at risk. The insurer declined cover for the two equity partners, the other two being salaried, availing it of a Defence in the underlying claims, the reserve for which was understood to be anywhere between £10 million and £30 million.

Upon instruction we challenged the declinature and which led to arbitral proceedings. The complexity of those proceedings was such that many months would be required before a substantive hearing could be heard. In the interim, the insurer declined cover for Defence Costs. We applied to the SRA for an order directing the insurer to conduct the claims and advance Defence Costs.

Appearing for the equity partner at the hearing we successfully argued the case before the SRA Adjudication Panel. The SRA concluded that it was not open to the insurer to decline to indemnify the firm for Defence Costs cover pending resolution of a coverage dispute. Here resolution meant an arbitral award, not the insurer’s decision. The SRA went further directing the insurer to compromise claims. That decision ultimately led to the settlement of the arbitral proceedings including an indemnity and payment of legal costs. Having acted swiftly to place this insurer at risk, the firm had crystallised the issue. With a report that we prepared, the firm was able to obtain renewal insurance and continue in business.

We understand that at the time we were the only firm to have made a successful application to the SRA for such an award.

Other issues

We can also assist with all other indemnity insurance issues that arise for example :-

  • Successor Practice Advice;
  • Advice on aggregation;
  • Advice on defence costs cover;
  • Issues arising on the failure of an insurer;
  • Claims upon the Financial Services Compensation Scheme;
  • Sham partnership investigations; and
  • Claims by an insurer to recover a run-off premium from fixed share and salaried members of an LLP.

If you want us on your team, e-mail or speak to Robert Forman on 07976 562236.