The massive decline in the value of real estate, stocks and other investments will likely trigger investor suits against investment professionals, and will likely result in an uptick in professional liability insurance claims. In anticipation, we are seeing more disciplined risk selection, more restrictive terms and higher pricing from specialty lines underwriters for some professional liability classes such as investment advisors, private equity and hedge funds, trustees, accountants and consultants.
A recent article, entitled Investment Performance and Liability Claims, by Jeff Stimpson (see here), looks at this changing landscape for accountants. As noted, investments with leverage will magnify losses and increase the exposure for claims, and fraud will play a role in some claims.
However, insurance practitioners comment in the article that claims and the resulting loss experience may not turn out to be all that bad. Like many others in the industry, we expect claims to increase significantly and underwriters to respond accordingly. As investment losses increase, at least some investors will bring claims against their advisors and other providers, including accountants and consultants, looking to mitigate their losses. These claims may not always be successful, but the claims will cost significant time and money to defend.
Claims against investment professionals and related entities – accountants, consultants, trustees – seem to develop when investment losses occur. No surprise, and we have had plenty of investment losses. Not just stock investments, but real estate, bond funds, and private funds have all incurred significant losses. Some clients with losses will look for any reason and any entity for compensation. It is not just bad investment advice that triggers the claims, but more specific allegations are used such as inappropriate investments, inadequate oversight, negligent referral, conflict of interest and lack of diversification. One example:
A fund of funds investment manager invests two of his funds in a bond oriented mutual fund. This bond fund makes an investment in a series of securities based on interest rate changes. It does not work as planned, and the bond fund loses significant capital. The investment manager's investors brought an action claiming failure to adequately review the fund manager and misrepresented the risk of the fund, and won an award in excess of $20.0 million.
You can also see some trustee liability claim examples here.
We can expect to see a period of tighter underwriting and higher premiums for professional liability for investment related organizations.
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