Report to
IFAIFA Insurance Services Limited
On the position relating to those Professional Liability Claims Notified to Syndicate YYY in respect of the June 1998 to June 1999 Insurance Policy
Compiled by Stephen Sumption Consulting.
This Report is intended for the exclusive use of IFAIFA Insurance Services Limited. This Report has not been compiled by a Solicitor and should not be considered as offering Legal Advice.
1) Introduction
a) This is a report into the position of IFAIFA Insurance Services Limited (IFAIFA) in respect of those claims notified to their Professional Indemnity Insurers (Syndicate YYY) under the 1998 renewal.
b) The report will consider the actions taken by IFAIFA and the reactions of Underwriters as inferred from their Solicitor's correspondence.
c) The report is set out as follows;
i) Notification of Claims to Syndicate YYY,
ii) Subsequent Correspondence,
iii) Correspondence With and in Relation to MR. A of SOLICITORS B Representing Underwriters' Interests,
iv) Conclusions,
v) Recommendations.
d) The report will suggest courses of action where appropriate for IFAIFA's consideration.
e) As requested two draft letters are attached at Annex A and Annex B for IFAIFA's consideration.
2) Notification of Claims to Syndicate YYY
a) In the course of the 1998-1999 Policy year IFAIFA conducted correspondence with BROKER Z's claims department. In particular they wrote to BROKER Z to let them know about the PASS health check which had taken place in January 1999 and discussed with BROKER Z the position regarding the need to re-mail all the Phase 1 cases (the Re-mail). Further, IFAIFA asked BROKER Z to notify underwriters of these developments and were still awaiting a reply confirming that they could proceed with the Re-mail on 16 February.1999. On that date Mrs. C telephoned Mr. D of BROKER Z to see if the Re-mail could go and was informed that BROKER Z would respond to her. On 25 February 1999 in a further telephone conversation with BROKER Z (Mr. E) Mrs. C was given the advice that as IFAIFA were complying with a regulatory requirement there was no real need to obtain permission from Underwriters. IFAIFA re-mailed accordingly.
b) The Re-mail resulted in a number of requests for review and these were referred to Underwriters via BROKER Z (IFAIFA letter dated 28 April 1999). In reply to this BROKER Z wrote, on 14 April 1999, to IFAIFA advising what should and should not be advised to Underwriters. Broadly this said that IFAIFA should advise cases where a client had expressed or implied a criticism or a complaint about the service or advice they had received. In the third paragraph BROKER Z specifically states that;
(a) "If you merely receive the returned review documents without the above, then you can proceed with the review process but must inform us if the compliance test fails or loss assessment shows a loss."
c) In a letter dated 18 May 1999 Mrs. C stated that none of the cases listed under Phase 1 & Phase 2 were in line with Financial Services Authority (FSA) standards of compliance, and that these had been outsourced for the purposes of loss assessment calculations.
d) In two further letters dated 26 May 1999and 1 June 1999 Mrs C wrote to notify Underwriters, via BROKER Z, of a number of cases that now constituted claims.
e) On Friday 4th June and Monday 6th June IFAIFA faxed further information comprising additional details in respect of some further Phase 2 cases that would require redress and a spreadsheet from Their Actuary. By two further Faxes of 7 June, IFAIFA further updated the claims information and submitted the relevant loss calculations.
f) On 8 June 1999, the last day of the Policy Period Mrs. C faxed a list of all the clients who had been mailed under Phase 2. This list was accompanied by a covering letter to the effect that those cases from whom nothing had been heard could result in a claim and instructing BROKER Z to notify Underwriters accordingly.
g) IFAIFA continued to correspond with BROKER Z concerning the various claims notified to Facility YYY and a case notified to the London and Edinburgh in 1997 (Claimant 1). Underwriters through BROKER Z persuaded IFAIFA to withdraw the claim under threat of voiding the policy "ab initio". On 29 July 1999 Mrs. C wrote to BROKER Z to express her concern over the possibility that Facility YYY would also repudiate their claims. Mrs C wrote again on 11 August 1999 to chase BROKER Z on a claim in the name of Claimant 2. The letter made reference to two other letters and the fact that the matter had been outstanding for two months.
3) Subsequent Correspondence
a) In a letter to IFAIFA dated 20 August 1999 BROKER Z notified IFAIFA that Underwriters had appointed solicitors to assist them. The letter raised the question of possible non-disclosure and questioned five cases specifically. These were Claimant 3, Claimant 4, Claimant 5, Claimant 6 and, Claimant 2.
b) The letter further referred to "The Four Cases" (referred to in a letter from IFAIFA dated 26 may 1999) and "The Nine Cases" (referred to in a letter from IFAIFA dated 1 June 1999) and asked whether any causation or compliance aspects had been addressed. This letter continued by pointing out that redress would have to continue to be paid regardless of any insurance position. There appears to be a request for information but no advice as to how to tackle the situation.
c) Mrs. C replied to this letter on 25 August 1999 expressing confusion over what did and did not constitute a "notifiable case". In this letter Mrs. C also asked if she should have withheld information from Underwriters and been less open in her disclosures in the course of this Policy year.
d) BROKER Z's reply contained in their letter dated 8 September 1999merely informed IFAIFA that Mrs. C's letter of 25 August had been referred to Underwriters' solicitors and relayed a number of their questions and requests for information. The letter ended with what appears to be an admonishment to stick to the Regulator's guidelines
e) A subsequent exchange of letters and a meeting with BROKER Z resulted in the relevant files being referred to MR. A of SOLICITORS B, on behalf of Underwriters.
4) Correspondence With and in Relation to MR. A of SOLICITORS B Representing Underwriters Interests.
a) On 30 September 1999 Mrs. C wrote to MR. A of SOLICITORS B (Solicitors B) to explain that the files requested were being forwarded and the arrangements made. The letter also gave a reasonably detailed summary of the conduct of the Pensions Review which started in mid 1996.
b) On 11 October 1999 Solicitors B returned a number of the files to IFAIFA. On the same date they wrote to IFAIFA and made the following points:
i) That Underwriters reserved their rights under the policy,
ii) That IFAIFA could continue to comply with the Regulator's requirements,
iii) That when proposing to Insurers in May 1998 IFAIFA stated that They had not effected any opt-out or non-joiner transactions,
iv) That it subsequently emerged that there had been such transactions,
v) That the review had not been carried out to the standards required by the Regulator's Guidance,
vi) That "Client Financial Planning Analysis", or "Know Your Client Questionnaires" had not always been completed as stated in the proposal form,
vii) That there were no mailing papers in respect of the Phase 1 Review.
c) In their letter dated 11 October 1999, Solicitors B also stated that two cases were not notifiable circumstances as they were only requests for review.
d) Finally in their letter dated 11 October 1999, Solicitors B stated that these issues were likely to constitute a serious non-disclosure.
e) On 12 October 1999 Mrs. C wrote to Solicitors B to rebut the various allegations in the letter of 11 October 1999. In particular she pointed out that MR. A appeared not to have received the information passed to BROKER Z by fax on 7 June 1999.
f) On 18 October 1999 Solicitors B replied to Mrs. C and raised a number of points including the following:
i) That Underwriters received the information faxed BROKER Z after the expiry of the policy,
ii) That as a result of i) above no liability could attach to the Facility YYY policy,
iii) Queries concerning IFAIFA's state of knowledge in respect of the number of opt-out and non-joiner transactions and acknowledgement of his error regarding notification of opt-outs in the proposal form (the paragraph numbered 2),
iv) Queries concerning the conduct of the Phase 1 Review and mailing,
g) On 22 October 1999 Mrs. C replied setting out the details of how the notifications were sent to BROKER Z and explaining the significance of the PASS visit which occurred in January 1999. On the Phase 1 Review question Mrs. C said she would get back following further research.
h) Also on 22 October 1999 Mrs. C wrote to Mr.D of BROKER Z to let him know of the comments made by Solicitors B in respect of the notifications made to BROKER Z on 7 June 1999. Mrs. C further put BROKER Z on notice that they may be involved in any legal battle that could start.
i) On 26 October 1999 Mr. D wrote a fairly robust letter to Solicitors B to clarify the situation regarding Claimant 1 and the 7 June facsimiles, copying in Mrs. C.
j) On 1 November 1999 Solicitors B wrote IFAIFA informing them that they were in correspondence with BROKER Z but stating that the policy requires notification to Underwriters and that telling the brokers was not sufficient, the brokers were not Underwriters' agents for notification purposes.
5) Conclusions
a) I think it is important to state at the beginning that Syndicate YYY only insured this case for 1 year and has no ongoing relationship with IFAIFA. While this should have no bearing in the situation, human nature being what it is, this may result in Underwriters taking points that they would not otherwise take if they had an existing relationship to consider. Notwithstanding this, it may be that BROKER Z have a sufficiently strong relationship with the Syndicate across their whole account to overcome any such problems.
b) Mr. A in his letter of 11 October raises a number of issues of misrepresentation, non-disclosure and "breach of warranty of truth". In his letter he specifies the following:
i) That IFAIFA stated they had not effected any opt-out or non-joiner transactions, however, a number of such transactions had come to light.
ii) That IFAIFA stated that they had fully reviewed the small number of cases where this was necessary, however, an inspection of the files did not show that they had been carried out to the standard required by the Regulator.
iii) That IFAIFA stated that they were not aware of any claims or circumstances which may give rise to a claim. This appears to be a reference to the Claimant 1 case, and if so the suggestion has been rebutted by BROKER Z in Mr. D's letter of 26 October 1999.
iv) That IFAIFA stated they always completed and maintained on file a Client Financial Planning Analysis or a Know Your Client Questionnaire, and that clients were always supplied with written comparisons between existing and recommended pensions arrangements.
v) There was no indication that investors had been mailed as part of the Phase 1 process.
c) In a letter to Mrs. C dated 18 October 1999 Mr. A raised some further points, in particular the point that the faxes dated 7 June 1999 were not communicated in time. This suggestion has also been rebutted by Mr. D of BROKER Z in his letter dated 26 October 1999. As yet there has been no reply from Underwriters to this or to any other points raised by Mr. D.
d) The questions raised require some consideration particularly those relating to non-disclosure. The first question to ask is "Was there any non disclosure?" Arguably in this case there was some non-disclosure, particularly in the case of Q13 and Q14 of the Proposal form in that there appears to some degree of reconstruction of the "Client Financial Planning Analysis" / "Know your Client Questionnaires, but the Proposal form states that these are always completed prior to advice being given. The Question also refers to this being the practice over the last 10 years. Similar concerns exist over the comparisons referred to in Q14.
e) The questions relating to non-joiners and transfers could also constitute non disclosure, as could the Phase 1 mailing
f) The second question to be asked is "Was that which was not disclosed material?" Arguably it was not. Although the significance which Underwriters might attach to the information given in Q.13 and Q.14 is difficult to gauge. In this case it does not seem likely that they would have refused to take the business had the answer been different. This would be a point to discuss with BROKER Z. The statements regarding the review and the number of reviewable cases were correct to the best of IFAIFA's knowledge and belief at the time the declaration was signed.
g) The third question that has to be asked is "Was the statement made in good faith?" Clearly it was.
h) Turning to the position of the Re-mail of Phase I cases, this occurred because IFAIFA had received independent advice from PASS to the effect that their initial mailing in 1996 was unacceptable under the more stringent regulatory requirement that prevail today. This is hardly surprising given the number of times the "goal posts" have been moved since 1996. It was this re-mail which gave rise to the additional claims and I believe that the review by PASS and the consequent re-mail constitutes a new circumstance. If so then the matter could not have been taken into account when the IFAIFA review took place. Certainly this argument could be put to Underwriters.
i) The view expressed by Mr. A that there was no evidence that the review had been carried out to a standard close to that required by the guidelines may be correct. However, the question in the proposal form does not require any qualitative judgement, merely whether the review had been carried out. It is reasonable for IFAIFA to answer this in the affirmative as in their view they had done so in 1996 and mailed the Phase 1 cases. It is therefore arguable that the question was answered correctly and that Mr. A's point is misconceived.
j) Overall I feel that the non-disclosure point will not stand up as IFAIFA answered the questions in the Proposal Form in good faith and to the best of their knowledge and belief. Although as mentioned above I have some reservations in respect of the documents referred to in Q.13 and Q.14.
k) Looking at the Late Notification question, i.e. whether the claims faxed to BROKER Z on 7 June 1999 were submitted to the box in time to come within the policy period, I feel Underwriters are on weak ground. Mr. D in his letter of 26 October 1999 seems to have covered the question of the timings of the delivery to Syndicate YYY, but even if the claims were submitted late, the insuring clause of the policy refers to claims made against the insured during the policy period. There is no reference to the claims having to be advised to Underwriters within any particular time scale, although it could be argued that there is an implied term that they should be notified within a reasonable time
6) Recommendations
It is recommended that:
a) That BROKER Z and IFAIFA Work together to rebut the allegations of Late Notification on the grounds that the papers were delivered to the box on time. Mr. D of BROKER Z has started this process.
b) That IFAIFA, through BROKER Z should persuade underwriters that the Proposal Form signed in 1998 was correct to the best of IFAIFA's knowledge and belief in all material points, given the state of knowledge of IFAIFA.
c) That the argument should be put to Underwriters or their solicitor through BROKER Z that the wording does not provide for any time limitation on the notification of claims to them so the late notification is not an issue as it does not breach any policy condition.
d) That BROKER Z should be instructed to keep IFAIFA fully informed of any developments in relation to these claims. In particular that any attempt to require the withdrawal of the claims under the threat of the policy being voided be explained to IFAIFA in considerably greater detail than occurred in the Claimant 1 case. In the event that matters appear to be developing along these lines, then BROKER Z should explain to IFAIFA what arguments have been used to resist such a move by Underwriters, and the counter arguments raised by Underwriters.
e) That if underwriters do attempt to void the policy then IFAIFA should obtain Legal Advice from a specialist firm of Solicitors with experience in this class.
Annex A : Letter to Mr. D of BROKER Z.
Annex B : Letter to MR. A of SOLICITORS B.
Annex A To Report to IFAIFA Insurance Services Limited
Dear Mr. D,
I feel it would be worth while writing to set out where we now stand with regard to the various P.I. claims notified to Syndicate YYY, how we have arrived at this point, and my concerns at recent developments.
In 1996 I mailed all our clients in accordance with my understanding of the Regulator's requirements. No request for review arose out of this mailing and so I answered the various questions in the proposal forms in good faith. I was of the opinion at that time, that the actions I had taken in dealing with the review were acceptable and that Phase 1 had been dealt with. I understand that Underwriters expect their Insureds to take such actions as they think will mitigate any potential or actual loss. This was what I was doing when I wrote to my clients.
In January 1999 PASS visited IFAIFA and carried out an independent review of all our files. Among other points, they concluded that the Phase 1 cases had to be re-mailed and that most of our files were non-compliant. This in large measure was due to the significant changes in the standards of compliance imposed by the Regulator over the course of the three years in question.
I am of the opinion that the PASS review constituted a new occurrence and as such both the PASS review and its consequences constitute a new circumstance which could not have been notified prior to renewal in June 1998.
Mr. A, as you know, has raised the question of non-disclosure in respect of the 1998 proposal form. I am very concerned about this, particularly in the light of the situation that arose in the Claimant 1 case. Although IFAIFA withdrew the claim, we did so because, in the absence of any advice from you, our Brokers, we assumed there was no possibility of arguing the point and persuading the London and Edinburgh to accept the claim. The London and Edinburgh took the view that Claimant 1 was a serious and material non-disclosure, but in retrospect was this a reasonable and sustainable view, or was it merely a reflection of their own deteriorating financial position? Certainly IFAIFA were given a stark choice. Withdraw or have the policy voided. Is this pattern to be repeated with the 1998 year? If so, IFAIFA will be relying on your advice to steer us out of this difficulty in a way that will ensure our claims are met.
Mr. A has also raised the question of notification outside the policy period in respect of the circumstances notified to BROKER Z. I was reassured by the robust nature of your reply to Mr. A on the matter of when the faxes of 7 June were notified to Syndicate YYY. However, I still find it extraordinary that Underwriters can in the same letter claim non-disclosure of some claims notified, but reject others as not being notifiable. Will the courts allow them to "have their cake and eat it"? I find it hard to believe they will. In any event I hope that you will keep me informed of any
developments that may emerge, and in particular, of how you are fighting the attempts by Underwriters to avoid their obligations under the policy.
I enclose the draft of a letter to Mr A answering the one outstanding point from his letter of 18 October 1999. I hope you will approve the draft as I need to reply fairly soon.
In the meantime I look forward to hearing from you in the event that there are any developments and with any advice that you think relevant.
Yours Sincerely
Annex B To Report to IFAIFA Insurance Services Limited
Dear Mr. A,
I am writing, as promised, in reply to the outstanding point raised in the paragraph numbered 4 on page 2 of your letter dated 18 October 1999.
In 1996, having conducted an internal review, IFAIFA wrote to their Phase 1 clients in terms we believed satisfied the Regulator's requirements. We did this because we felt that we had to comply with the Regulator's instructions and to do anything else would be to prejudice our own ability to keep trading, as the Regulator had the power to close us down. We also believed this action would mitigate any loss if such a loss existed.
In this way, we felt we had dealt with the matter pro-actively, i.e. not waited until the accord of which we knew nothing, and it seemed to us that we had succeeded in mitigating any loss as no replies asking for redress were received.
The subsequent re-mailing of our Phase 1 clients arose as a result of a subsequent review carried out in 1999 by PASS, and is a separate matter on which we have already corresponded.
I trust this answers you questions and satisfies Underwriters' concerns.
Yours Sincerely