Thousands of IFAs exposed to crippling Lifemark and Keydata compensation claims face bankruptcy because a common insolvency exclusion in professional indemnity (PI) insurance will leave them without cover.
Even IFAs with valid PI can expect costs of £5,000 to £10,000 or more in excess per claim, as most PI policies treat complaints individually even if many relate to the same company.
Claims management firm Collegiate Management Services is calling it a "bankruptcy issue" for exposed IFAs.
The FOS this month ruled Norwich & Peterborough (N&P) IFAs caused a couple financial loss by advising them to invest in Lifemark-backed products from insolvent investment firm Keydata. N&P are appealing the landmark case which could open the flood gates to claims from nearly 30,000 investors.
IFA Geoff Hartnell, who has clients' money in Keydata products, says if the FOS decision is upheld "it will be the end of IFAs' world as we know it".
"If PI insurers treat claims as individual claimants, with a £10,000 excess on each one, and a potential 3,000 claimants at N&P, that is £30m. N&P may be able to cover this, but smaller IFAs will go out of business."
Commercial and insurance law firm Reynolds, Porter & Chamberlain says it is advising several PI insurers on their liability in respect of Keydata, but would not comment further.
Chubb and Markel both use insolvency exclusions in their IFA PI agreements. RSA says it has had a 'failure of financial institutions' exclusion on new business for the last two years, a caveat it says is "pretty standard" across the insurance market.
Wording of insolvency exclusions vary, but all remove the PI insurer's liability for losses to an IFA caused by claims based upon, arising from or in consequence of the insolvency of any financial institution.
Keydata was put into liquidation by the FSA in June 2009. Troubled Luxembourg-based investment company Lifemark is not insolvent but its bonds underpinned thousands of Keydata plans.
David Turner, PI lawyer at Foot Anstey, says the phrase "in connection with" which is part of the insolvency exclusion in many PI contracts, could be enough for insurers to argue IFAs' Lifemark claims are invalid due to the Keydata link.
Richard Turnbull, head of underwriting at claims management firm Collegiate, says IFAs exposed to Keydata should review their PI insurance and find out if they are covered: "The fact Keydata is insolvent, even though Lifemark isn't, is probably enough to activate this exclusion.
"For many IFAs it is a bankruptcy issue. Few IFAs have the funds to cover the types of costs we are talking about if their PI doesn't. They will either have to dip into their own assets or go bankrupt."
The FOS has a claims limit of £100,000. Clients with more than that invested in Keydata may decide to fight for the rest in court, and IFAs would have to pay the legal costs win or lose.
Turnbull says IFAs should argue with their PI insurer the insolvency exclusion does not apply if clients claim their loss arose from negligent advice, and not a firm's insolvency.
However, he says such a dispute would inevitably involve lawyers, and therefore other legal costs.
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