Professional indemnity insurers cannot completely avoid conflicts of interest. Nobody expects this. What is expected, however, is that conflicts of interest are recognised and managed fairly. Fairness is at the heart of what the FCA expects from its insurers. Some years back the then chief executive of the FCA said "the dominant theme of 21st century financial services is fast turning out to be a complicated question of fairness." So what does the complicated question of fairness mean in practical terms for conflicts of interest in professional indemnity claims management? We examine how conflicts of interest can occur in the insurer context and look at practical ways to recognise and manage them.
What is a conflict of interest?
In broad terms, a conflict of interest is a situation in which the concerns or aims of two or more parties conflict with each other. Experienced claims adjusters can often spot a potential conflict of interest well before it may happen. Other conflicts of interest only emerge as the claim progresses.
In professional indemnity claims, conflicts of interest from an insurer's perspective typically arise at four levels:
- Between insureds
- Between insurers and the insured
- Between insurers and other insurers on excess layers of the same risk
- Between insurers and other insurers on different years of the same risk.
In addition, there is the potential for conflicts as between panel solicitors (Panel) and the insured which insurers need to be mindful of. This might happen, for example, where Panel is instructed pursuant to a joint retainer and receives instructions from insurers to settle a claim and instructions from the insured to defend it.
Insurers may find themselves on risk for more than one party to a dispute. This raises a conflict of interest as, from the insurer's perspective, it will not want to incur costs on a dispute between two or more insureds if there is an acceptable compromise position. Each insured, however, will want its own claim to be assessed on its merits.
Conflicts may also arise as between individual insureds in the same firm. For example, if in a three partner law firm, one partner is alleged to have misappropriated client monies, it is unlikely that there will be any unity of interest between that partner and the other partners and they will need separate representation.
Between insurer and insured
One of the most common conflicts between an insurer and insured arises out of different approaches to settlement. A professional may want to defend a claim against them as a matter of principle, particularly if they feel that their professional livelihood and/or reputation may be tarnished. Insurers will typically take a more commercial view, particularly if the settlement value of a claim is below or around the policy excess. Although most policies have a QC clause, this is rarely invoked. If Panel is instructed, they will also need to tread carefully to avoid a conflict of interest arising in these circumstances as they will typically be retained pursuant to a joint retainer and must not prefer the interests of one client to the other's.
A similar situation may arise where the claimant is claiming more than the limit of indemnity. Insurers may want to settle the claim at the policy limit and draw a line under their liability for defence costs at that point. However, this may be inconsistent with the actual position and again there is a possibility of a conflict of interest.
Coverage disputes are another area where there is an inherent conflict: the insured wants cover but if there are potential grounds for rejecting cover, the insurer will want to pursue these. Sometimes the information which gives insurers the right to deny coverage is not discovered until after Panel's instruction. Again if Panel is instructed pursuant to a joint retainer, this can present problems. Panel will need to take great care to ensure that they are not conflicted out of continuing to act in these circumstances.
A conflict of interest may also arise between a primary insurer and excess layer insurers of the same risk. For example, if a claim settles for a figure at which the excess layers are triggered, the primary insurer may pay a smaller proportion of defence costs if the policy provides a pro-rata clause in respect of defence costs. This means that the primary layer insurer, who typically controls the case and gives instructions, may have a commercial interest in settling the claim beyond the primary layer contrary to the interests of the excess layer insurers.
Similarly a conflict of interest can arise between insurers and other insurers on different policy years for the same risk because each insurer will have a commercial interest in passing the claim to the other policy year insurer.
In both of the above situations, there is a significant risk that the insured gets caught in the middle of an insurer dispute, leaving them in conflict with either or both insurers.
How conflicts of interests can go wrong for insurers
Insurers and individual claims handlers who fail to identify and manage conflicts of interest fairly may find themselves on the wrong side of regulatory action.
As we have already said, fairness is at the heart of what the FCA expects from its insurers. This can be seen in the FCA's Treating Customers Fairly (TCF) guidance which makes it clear that the insurer must "pay due regard to the interests of its customers and treat them fairly". TCF remains core to what the FCA expects of insurers and the guidance will be used as an important factor in regulatory decisions and actions. The SMCR conduct rules also emphasise that senior managers "must pay due regard to the interests of customers and treat them fairly".
While fairness often makes the headlines in the context of pricing practices, it must also be borne in mind when dealing with claims against your insured, coverage investigations and dealings with excess layer and other policy year insurers.
Solicitor claims handlers are additionally bound by the SRA's Code of Conduct. Even though the insured is not a client, in a solicitor/client context, all solicitors are subject to the Code of Conduct and bound by the rules of conduct requiring fairness and integrity.
There are also commercial consequences if conflicts of interest are not managed effectively. For example:
- The insurer may be held to have waived rights to decline cover
- The insurer may be unable to rely on information in a coverage investigation which has been disclosed to Panel
- Both the insurer and the insured may incur costs in establishing the policy coverage position
- The insured may lose cover and with that comes complaints and relationship damage
- Relationships with excess layer and other insurers may also be damaged.
Managing conflicts of interest fairly and practically
So what does the complicated question of fairness mean for conflicts of interest in a professional indemnity context? In essence, it means act fairly – ensure that you pay due regard to the interests of your insured(s) and treat them fairly and with integrity in accordance with the TCF regime and the SRA Code of Conduct if applicable. This may mean disclosure of the conflict of interest (if appropriate).
In our experience, insurers' claims handlers should think about the following practical steps:
- Be live to the possibility of conflicts and be familiar with your company's conflicts policy if it has one
- Consider whether your conflict searching procedures are robust and whether they will stand up to scrutiny. The FCA expects that appropriate steps will be taken to identify conflicts - are the steps you are taking appropriate?
- Keep records of conflicts and document everything you do and the reason that you have reached the decisions you have
- Manage Panel appropriately and ensure that there are clear lines of communication and that express consent is sought from the insured to pass information to insurers (which can be done in an appropriately worded retainer letter). This is to avoid the situation where the solicitor appointed to act for the insurer and the insured has to stand down when a conflict arises which increases costs
- Where there is a real risk of a conflict arising then separate representation should be considered at an early stage otherwise a solicitor appointed on a joint retainer may need to stand down when a conflict arises
- Create ethical walls with information barriers. In this regard if you have more than one panel firm (due to conflicts within the insured or coverage issues), think about how that information is going to be shared and whether you should assign separate claims handlers to each panel firm with different reporting lines. You will want to avoid the situation where the reporting chain has one individual at the top who is receiving reports from two claims handlers on conflicting sides of a claim. The insured's insurance brokers should do the same. In addition, there should be an effective information barrier on your computer systems to prevent leakage of information.
There will sometimes be challenging circumstances but the guiding principle should be to ask – what is fair?