Should You Take out Insolvency Insurance?
Professional insolvency indemnity insurance
Insolvency practitioners and their firms must have professional indemnity insurance in place covering all of their actions. This cover is in place for matters which do not have relation specifically to case funds such as:
- Loss of documents or personal data.
- Mistakes in work carried out for clients.
- Incorrect advice given.
- Losses from unintentional breach of confidentiality.
- Defamation of character.
Insolvency practitioners are very often acting in the public interest and are often officers of the court, therefore both of these covers provide against deliberate and accidental breaches of this trust. Any claims against the professional indemnity policy will be made by the party who has suffered loss.
Open cover insolvency insurance
An open cover is a type of insolvency insurance that insolvency practitioners will generally take out at the start of a case with a significant level of assets which are not covered under their agent’s policy. Unlike the previous policies, the open cover provides insurance where the officeholder is the beneficiary against any damages to the assets in a case by third parties or otherwise.
The open cover is often used as it is a blanket insurance policy so provides immediate cover before the insurer is aware of exactly what is covered. This will then be established within 30 days of cover being provided by way of a more detailed questionnaire. Once this has been completed and returned an annual policy invoice will be raised.
The disadvantage of the open cover is it is generally necessary to take out the policy before being aware of the quote, however other insurance products will not provide the level of blanket cover without first knowing what the assets are.
Insolvency insurance (bonds)
A legal requirement of being qualified to act as an insolvency practitioner is to hold an insolvency insurance policy for each insolvency known as a bond. This is a surety policy which will pay out if there has been any misappropriation of client funds by the insolvency practitioner.
The bond will be split into two parts:
- A general bond providing cover for all matters. This covers claims up to £250,000.
- A particular case bond providing cover up to the bonded level for funds in the case. This must be a minimum of £5,000 and can provide cover up to a maximum level of £5,000,000.
Is insolvency insurance necessary?
The overall risk of a claim having to be made against an insolvency bond is weak. According to Insolvency Service figures, for 2015, there were 92 out of 56,443 cases which required a claim, which equates to only 0.16%. In short, the vast majority of insolvency cases proceed without any incident, and the majority of insolvency practices will never have cause for their insolvency insurance to ever be called upon.
However, in the unlikely event claims are made it is usually at a comparatively high level.
A recent example of is the case of Phillip Nuttall a licensed insolvency practitioner who had specialised in high volumes of consumer individual voluntary arrangements (IVAs). His company, Varden Nuttall was unable to account for nearly £5 million of clients funds relating to approximately 1,600 IVA clients. Varden Nuttall was placed into administration, and Mr Nuttall has had his insolvency licence removed. Bond claims are now likely to be made in the cases by the company administrators totalling several thousand pounds for each of the 1,600 cases. To give perspective, the actual cost of the original bonds would have been between £10 and £50! I would say that in these circumstances, insolvency insurance has been shown to be an absolute must in protecting the public. It is not yet known how many cases are below the minimum level of insurance payout, but for those that are, it could mean that no money is available from the insurers.
If you’d like any more information on insolvency insurance, you can speak to one of our experts on 0333 939 80 40. Or if you prefer you can email firstname.lastname@example.org