How to persuade Insurers that you are not ‘high risk’
Published: Tuesday, 13 April 2021
‘High risk’ clients may find that they are faced with large hikes in premium from a restricted list of insurers.
Karen Eckstein, risk mitigation specialist and lawyer, argues that some historical risks may be reducing in value. An in-depth review of outstanding cases can be used to provide evidence to insurers that you are less exposed than they might initially assume.
What's happening at the moment?
We are in a ‘hard’ PII market, premiums are rising, and there is not much ‘appetite’ to cover certain risks. Underwriters are cautious - many have more restrictions on the profile of business they are permitted to insure than previously. Despite future uncertainties, some expect the hard market to remain for some years.
Anyone with a ‘taint' on their record (a prior claims history or unattractive past work area e.g. tax schemes) may find getting cover at affordable prices very difficult in in this current market.
What can you do?
Often, the reluctance of Insurers to write the risk is based on a less than fully informed understanding of: -
- Your practice, its processes, procedures, risk management overall and
- The underlying risks.
Insurers do not have long to decide if they like a risk, whether to insure it, on what terms, and at what price.
‘Red flags’ in your proposal form, whether claims history or involvement in a practice area that Insurers are wary of, may be sufficient to produce either a refusal to quote, a substantial increase in premium and sometimes restrictions in the scope of the policy protection.
It is important, therefore, that you ensure that your proposal clearly explains your risk management process in general and specifically in any areas of concern.
In this article we're using the example of tax schemes (because they are a well-known area of concern) but the principle would apply equally to other areas where underwriters are sensitive to known issues, for example property and conveyancing claims, or where there has been a practice area with a history of claims in in the past, but where the firm no longer operates in that area.
So, what should you do?
Step One- processes and prevention
Review the processes and systems in your firm- so that a concise but credible report can be put together to confirm, in relation to the ‘problem area’, that your firm has appropriate processes and safeguards in place to ensure that issues can be identified and prevented going forward.
Step Two- historic review of relevant files
Identify all matters that fall within the area of concern, and review them from a risk and legal perspective to:
- Identify the likelihood of claims arising,
- Estimate the likely quantum of claims, if any are made,
- Any available defences and to provide an analysis from a risk perspective of the value of the historic matters.
This detailed analysis, which takes into account both risk metrics and legal issues, can be summarised in table form to provide a ‘snapshot’ review for insurers.
Let’s look at a typical (but hypothetical) firm of accountants that had historically undertaken tax scheme work, ABC Accountants.
ABC had introduced a number of clients to Mystic, a promoter of tax products which promised substantial tax savings, between 2000 and 2014. ABC did not advise on the products but did receive a fee for any successful introductions.
The clients would see a representative of Mystic at ABC’s offices, with their usual adviser from ABC present. If they were persuaded that the tax product was for them, and decided to sign up for the product, they would pay Mystic substantial fees. (These fees, whilst high, were a lot less than the tax savings the clients understood they would achieve). The clients would be aware that ABC would get some form of payment as a result, but nothing was confirmed in writing and the clients would typically be unclear what role ABC played, perhaps assuming they were recommending or advising investment.
The scheme sheltered substantial sums from HMRC including CT, PAYE and NI. ABC completed the tax paperwork based on the information provided by Mystic.
HMRC start enquiries
HMRC opened an enquiry into the some of these clients’ tax returns, and Mystic advised that there was nothing to worry about. They advised both the clients and ABC what to say in response to the correspondence.
After a similar (but not identical) scheme was tried in the tax tribunals and found in HMRC’s favour in 2010, the correspondence from HMRC became increasingly hostile, with HMRC demanding documentation and payments by way of APNs (advance payment notices).
A few clients became concerned in 2013/14, with others raising queries as late as 2017. Some asked ABC Ltd to get the matter resolved, but Mystic would be very aggressive when challenged.
ABC did resolve some clients’ matters with HMRC, some clients moved accountants to do so, and a few clients are still ‘holding firm’ on the advice of Mystic. ABC have not made any new introductions to promoters since 2014. In total they have made 50 introductions.
ABC stop all introductions
ABC Ltd took the decision in 2014 to stop all introductions to promoters. They now have a system in place to ensure that no future introductions are made and a review system to check that no unauthorised introductions are made.
What potential claims do ABC face?
- ABC’s clients could argue that they relied upon the advice of ABC when entering into the tax schemes, saying that, without the introduction and encouragement of ABC, they would not have entered into the scheme. They might say that they would have been able to take advantage of other tax planning opportunities at the time, to minimise the tax liabilities that they faced, but that they did not do so, because they were using the scheme and were led to believe that the scheme would succeed. The worst case therefore could be a claim for the tax paid to HMRC, the interest paid to HMRC, the penalties paid to HMRC, the fees paid to Mystic including any payments to ABC and the costs paid to advisers to effect the settlement. On that basis, the 50 claims have a worst-case value of between £350,000 and £6,000,000 each!
- There is a second claim that could be brought, that ABC advised on the handling of the enquiry, once it began, and that, had ABC advised differently, the clients would have been able to settle on better terms and at a lower overall cost. Those claims have a worst-case value of between £50,000 and £200,000 each, still a substantial sum.
No wonder Insurers are worried!
What evidence is available to defend the claim?
The following issues need to be considered for each claim to establish what ABC’s duty was to their clients and what mitigating evidence exists in ABC’s client files:
- Was it clear in ABC’s engagement letter that they were acting in an introductory capacity only, and were not advising on the merits of the scheme?
- Were clients advised that the scheme may not work?
- Was there evidence that the clients were prepared to take the risk?
- Was there evidence of the availability of alternative tax planning and at what cost?
- What was the role undertaken by ABC during the HMRC investigation?
- What disclosure was made by ABC of any payments made to them for the introductions to Mystic?
- What evidence there is of when the clients knew that the advice that they had been given may not have been correct, and that they may have grounds to bring a claim?
A legal expert will analyse each client file to ascertain the likelihood of a claim being brought against ABC, the true value of that claim and what defences exist.
Time limits for a claim relating to initial investment advice
If the advice on investing in the scheme was given, and acted on, in March 2006, the primary limitation period will have expired in March 2012. A client may have realised after that that something wasn’t working as expected and could have started investigations to gather facts for a claim. They could then potentially claim under S14A of the Limitation Act, which extends the period to 3 years from the date of becoming aware of a problem. The latest date that a claim can be brought is 15 years after the investment advice (March 2021), so this claim will be NIL.
Claim relating to HMRC investigation advice
The client might bring a claim that they were poorly advised about the handling of the HMRC investigation, and that they incurred costs over and above those that they would have done, had they not been required to change advisers. There may be, from the review of the papers, some merit in that claim, which is not time barred. This claim would be limited to the duplicated cost element only, which is estimated for this case at £15,000, within ABC’s excess.
In conclusion, the potential claim for ABC for this case, is much reduced.
A similar exercise is carried out in relation to each of the problem files to come to an overall value of the risk faced by ABC.
For more information, please contact Karen@kareneckstein.co.uk or on 07973 627039
The DeRisk© service undertakes a review of the processes and systems relating to problem areas in a firm and analyses problem files as outlined above, in order to assess and report on the likely risk and value of claims within a problem area- in order to give an assessment of the overall risk from a risk and legal perspective.