Insolvency Exclusions

The Financial Conduct Authority (FCA) has been conducting a review of the operation of the Financial Services Compensation Scheme (FSCS), seeking views as to how to reduce the number and value of claims falling to the FSCS and assessing how the scheme is funded, including the impact of professional indemnity insurance (PII).

On 1 May 2018, the FCA (in CP18/11) published its responses to its previous consultation (CP17/36), which had included the question:

Do you have any views on our proposal to prevent personal investment firms (PIFs) from buying PII policies which exclude claims when the policyholder or a related party is insolvent?

The proposed change is "to ensure that more consumer claims are paid by insurers which could help to reduce the cost of the FSCS to other firms." There is a prohibition on the use of insolvency exclusions in PII for other professions: for example solicitors and accountants and the FCA's concern is that an otherwise covered claim, which has been notified correctly, could be denied if there is an insolvency exclusion in a PIF policy and the insured or a third party is insolvent.

This was the case in the 2017 case of Crowden v QBE [2017] EWHC 2597 (Comm). The insured financial adviser had provided investment advice to the claimants, after which the claimants invested £350,000 in bonds issued by Keydata and securities issued by Lehmans. Following their collapse, the claimants suffered significant losses. With the insured having entered liquidation in 2013, the claimants sought to pursue the insured's professional indemnity insurer under the Third Parties (Rights Against Insurers) Act 1930.

The insurer applied for summary judgment or strike out, on the basis that the claim had no reasonable prospects of success, as the insurer was not liable to the insured under its professional indemnity insurance as a result of the application of an insolvency exclusion in the policy which excluded cover for any Claims, liability, loss, costs or expenses "arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or of any insurance company, building society, bank, investment manager, stockbroker, investment intermediary, or any other business, firm or company with whom the insured has arranged directly or indirectly any insurances, investments of deposits" (the 'Insolvency Exclusion').

The Court held that the Insolvency Exclusion was "clear and unambiguous". For the Insolvency Exclusion to...