Interpreting insolvency exclusion clauses

In a summary judgment and strike out application made by the professional indemnity insurers of a firm of financial advisers, the court was asked to consider whether an exclusion in the policy concerning insolvency applied to the insolvency of the investment provider which gave rise to the claimants’ claim.

Crowden v QBE Insurance (Europe) Ltd concerned a claim against the insurers under the Third Party (Rights Against Insurers) Act 1930. The claimants were the trustees of a self-administered pension scheme. They had retained Target Financial Management Limited to provide them with investment advice. Target advised the claimants to invest in two products. Subsequently the providers of both products became insolvent. Target also entered into administration.

The claimants commenced proceedings against Target in respect of negligent investment advice. Target’s liquidators did not defend those proceedings and the claimants obtained judgment in their favour. The claimants then issued proceedings against QBE under the 1930 Act for an indemnity under Target’s professional indemnity policy in respect of Target’s liability to the claimants for negligent investment advice.

QBE issued an application for summary judgment or to strike out of the claimants’ claim against them on the grounds that: 

1. QBE was not liable to indemnify Target under the policy by reason of the insolvency exclusion in the policy. 
2. The claimants did not have any rights of action against Target because they had assigned their rights to the Financial Services Compensation Scheme who had paid the claimants some compensation.

The judge declined to make a finding on the second ground of the application. We consider the judge’s findings in relation to the first ground.

The relevant clause stated: “The Insured section excludes and does not cover any claims, liability, loss, costs or expenses…arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or 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 or deposits…”.

The claimants argued that the clause did not apply to negligent advice given by Target and only applied in respect of investments made by Target for itself and not investments made by Target on behalf of its customers. The judge rejected the claimants’ interpretation and found that the wording of the exclusion was relatively clear. The use of the words “arising out of”, “relating” and “indirectly” meant that the relevant insolvency did not need to be a proximate cause of the claim. Instead it needed to be “specifically accountable as a cause of the claim, liability or loss” and stand out as a contributing factor.

The judge concluded that the insolvencies of the two entities precipitated the claimants’ loss. The exclusion did not only apply to investments arranged by Target for itself. The use of the word “arranged” suggested arrangement on behalf of a third party and the policy was principally a third party liability policy. The claimants’ claim for negligent investment in relation to the two products was therefore excluded under the policy.

Arguments raised by the claimants that the effect of QBE’s interpretation would leave Target without significant cover were rejected. The claimants’ contention that QBE’s interpretation of the exclusion was incompatible with Target’s regulatory requirements did not materially affect the construction of the clause. In any event it was a matter for Target to ensure that it obtained sufficient professional indemnity cover.

Comment

On one level, this case is perhaps no surprise: the Court finds that a clearly-worded exclusion clause excluding liability arising from the insolvency of investment intermediaries does not work.

However, this is a case with an all-too familiar theme. Too often, claims against financial advisers arise out of issues which are not covered. IFAs are struggling to get cover.

The burden on the FSCS is significant. It has become a first port of call to pay claims rather than a last resort. As the levy on firms – which is not yet risk-based – increases year on year, the familiar refrain from consumers is that claims are not covered and the IFAs are nowhere to be seen.

Meanwhile, IFAs are struggling to pay the levy. The good firms end up subsidising the bad.

IFAs are regulated professionals, and yet do not benefit from the minimum terms of cover available to solicitors and accountants. Insurers are understandably still jittery. They remember Arch Cru and Keydata, and are now dealing with pension transfers mis-selling and UCIS. Profit margins for IFA business are low, or non-existent. Insurers need to be watchful.

However, with the changes brought about by RDR in 2012, most IFAs have cleaned up significantly. Those still in business have never been in better shape.

Surely it is now time for the FCA to bring about risk-based levies? Yes, it would drive the bad IFAs out of business, but the good IFAs need a break.