Professional Indemnity Insurance : Coverage Investigations & Other Issues
Upon notification of a circumstance or claim, professional indemnity insurers will consider the extent to which they are obliged to provide the firm and individual insureds with cover.
The principal ground upon which cover may be excluded is for dishonesty. If suspected, your insurer will commence a coverage investigation. They are likely to, and should, 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.
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 Queens 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 the excluded partners facing reimbursements 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.
Your contract of insurance will at least replicate the Minimum Terms & Conditions (MTCs) prescribed by the SRA. Your insurer will consider whether a dishonest act or omission was committed or condoned.
Your insurer will seek to argue that the test for dishonesty is an objective only test, as distinct from the test in criminal and professional disciplinary cases. They will argue that recklessness is sufficient to establish dishonesty.
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, 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, usually agreement can be reached to refer the issue for arbitration, but sometimes, the issue will be litigated in court proceedings.
Additionally, the MTCs give the SRA power to order an insurer to conduct any claim, advance defence costs and, if appropriate, compromise and pay the claim. The case study below highlights the extent of these powers.
Even if the legal costs of such action are uncommercial or prohibitive, it is important to reach a settlement which does not prejudice individuals’ disciplinary position. The insurer is principally motivated by its commercial interests, and it is usually possible to reach a form of settlement that minimises the disciplinary risk, usually immaterial to the insurer, even where declinature is not being challenged.
A month before insurance renewal we were instructed by three of the four partners in a practice. Four civil claims had been received brought by mortgage lenders. Upon our advice the firm investigated and quickly ascertained that the senior partner had turned rogue; 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.
On instructions 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.
The insurer instructed a large city outfit and Queens Counsel at 4 New Square to represent them. 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.
We understand that at the time (and possibly still so) we were the only firm to have made a successful application to the SRA for such an award.
Having acted swiftly to place this insurer at risk, the firm crystallised the issue. With a report that we prepared, the firm was able to obtain renewal insurance and continues in business today.
We can also assist with all other indemnity insurance issues that arise for example :-
- Successor Practice Advice;
- 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. We can also provide a written opinion to such persons on the failure of a firm.