PI insurance might not cover Keydata advisers

Advisers who recommended the failed company Keydata may find that action pursued against them by the FSA may not be covered by their professional indemnity insurance cover.

The FSA has suggested that traded life policy investments or TLPI’s may be banned in future as they have not proven to be of any benefit to investors.

The decision whether to carry out the ban has come shortly after an attempt by the FSCS to get back over three hundred million pounds it paid out to Keydata by recouping the money through the legal system from Keydata’s former advisers.

It is thought that whatever happens, many financial advisers are likely to lose out, whether as a result of the legal action against them or via the market place in the long run.

The legal action is based on the concept that Keydata was mis-sold in the first place. Normally financial advisers take out PI insurance to cover them in case of exactly this sort of situation but it is possible that their insurance cover might not cover failed companies.

Keydata is in the “failed company” category which means that a PI insurance exclusion might take place.

It is thought that those financial advisers who only sold low levels of Keydata might be able to survive by paying off the claims through their profits. The problem arises for financial advisers who oversold Keydata on a large scale. They are liable to have to pay up much larger amounts of money which might not be recoverable through their PI insurance policies.

The lawyers for FSCS, Herbert Smith are hoping that most financial advisers take the sensible way out and settle out of court rather than take the more chancy route of waiting for a court case to weigh in their favour.

There is a possibility that professional indemnity insurance providers might not be able to play the exclusion card if it can be proven that the FSCS action is merely a civil liability claim. If this si the case then the advisers will be able to use their policies to pay up for alleged overselling.

If the exclusion clause holds up then it is entirely possible a substantial number of advisers who are on the FSCS lawyer’s targets will face bankruptcy as their exposure to Keydata runs into the millions of pounds.

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