Insurers warn of rate rises as numbers of 'spurious' claims could increase
Insurers have warned that professional indemnity (PI) rates could rise due to the growing number of claims backed by third parties.
PI insurers said the number of "spurious" claims could rise as a result of an increasing number of parties, such as hedge funds, unconnected with either the claimant or defendant, providing finance to help pursue cases that may otherwise have failed.
The level of funding from these funding bodies can run into millions of pounds.
David Jones, managing director of Markel's professional liability division, said: "Nobody would suggest that a legitimate claim should not be pursued due to a lack of funds.
"However, if a third party is going to fund litigation that would otherwise have failed, this will inevitably lead to an increase in claims activity and a consequent increase in premium."
Rates in the sector have been in decline due to increased capacity and low levels of claims.
The warning comes after reports that Moore Stephens, the City-based accountancy and advisory firm, is set to face a £90m negligence claim in one of the largest lawsuits to be brought with the help of independent litigation funding.
Litigation funding is in its infancy in the UK, although it has become more established in some overseas jurisdictions, notably Australia. Although controversial, it is seen by some lawyers as a valuable means of advancing bona fide claims.
Gary Head, director of Hiscox' professions and specialty commercial division said: "Issues will start if litigation funding becomes a vehicle to put pressure on a lost case, or perhaps where there is a feeling that a mediated settlement might occur because of complexities in a particular case."
He added: "If they have to take on a litigation funded case then it should be met with a robust defence from the insurance community."
PI insurers could be forced to pay out above their limit of liability following a court's landmark decision.
In Plymouth & South West Co-operative Society v Architecture, Structure & Management, the insurers were ordered to pay the claimant's legal costs of up to £1m, in addition to the limit of indemnity of £2m. This was because the insured was insolvent and could not pay.
Experts said this was the first time a court had awarded costs against a non-party in a PI context and could set a precedent for future cases, Sandra Neilson-Moore, European practice leader for law firms' PI at Marsh, said: "It's worrying for insurers. They can't depend as strongly on their policy wording. This is a warning to insurers to be careful when making the decision to take on a claim which is close to the policy limit."
