What is an insolvency exclusion clause?
This insurance will most likely have a small but important clause within it called an Insolvency Exclusion Clause. It’s important to understand it and what it means because it is due to be subject to a legal change shortly.
It will probably look similar to this example:
“This clause excludes 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 or deposits…” (clause example taken from Crowden and Crowden v QBE Insurance (Europe) Ltd EWHC 2597 (Comm)).
Basically the clause protects the insurer in case any party goes into administration, insolvency or bankruptcy. If any of these events happen then the insurer doesn’t have to cover those costs or losses.
It is meant to be wide-reaching to cover a lot of eventualities but it also has to be clear enough to be understood by all parties. Courts have insisted upon this in the past.
This means that everyone should ensure that they fully understand the impact behind any change in the wording of key terms, especially those relating to insurance, liability and loss.
As it stands these clauses make it unlikely that any insurer will cover losses caused through insolvency. However, the Financial Conduct Authority has recently announced that from June 1st 2019, Financial Advisors will be banned from taking out professional indemnity insurance policies which limit cover for the policy holders’ in cases of insolvency.
This change will likely mean that less claims are brought to the Financial Services Compensation Scheme (FSCS) rather than falling on the financial advisors in such cases and ultimately being paid by their insurers.
If you’re facing insolvency and aren’t sure if your insurance contract contains an insolvency exclusion clause or if you’re struggling to get your head around the changes and if they affect you, get in touch for some free initial advice about what you can do.