PI policy exclusions leave advisers out in the cold

Advisers could be forced to fight client complaints linked to AIG, Lehman Brothers and Kaupthing Singer & Friedlander Isle of Man (KSF IoM) alone because of loopholes in six major professional indemnity insurers’ policies.

Insurers QBE, Hiscox, Markel, Chubb and Beazley all exclude claims which relate to the insolvency of financial institutions and Quinn will not cover claims relating to the failure of an insurance company.

The policy exclusions mean advisers may have to fund their own defence against complaints to the Financial Ombudsman Service relating to Lehman-backed structured products, the AIG Life Enhanced fund and money deposited in KSF IoM through offshore insurance bonds.

Hiscox director of business assurance Gary Head said: ‘We cannot quantify third-party insolvency as it is impossible to know which banks, funds and other vehicles our financial adviser clients are recommending.

‘It’s important to us that customers are crystal clear about what we do and do not cover – our policies are in plain English and any exclusions are clearly listed.’

Collegiate does cover third-party insolvency and head of underwriting Richard Turnbull said he informed the Financial Services Authority (FSA) of other insurers’ clauses four-years ago.

‘I see a lot of papers come across my desk with people who have exposure… it is quite a big issue,’ said Turnbull, who added that insolvency exclusions could break the FSA rules on professional indemnity insurance by unreasonably restricting cover.

The FSA said it could not clarify if the exclusions broke
its rules.

Newcastle-based adviser Ian Lowes did not think a claim could arise from the collapse of a bank unless the advice had been negligent. 

‘All advisers should be making sure clients are clear on the risks,’ he said.

‘What is the point of professional indemnity insurance? It only covers negligent advice,’ he added.