Professional indemnity wordings exclude fines, penalties, punitive damages, exemplary damages and multiple damages. The exclusion reflects a longstanding position in English law that a person should not be indemnified against the consequences of their own criminal or quasi-criminal conduct, because indemnity would defeat the deterrent purpose of the penalty.
The principle was applied in Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, where the Court of Appeal held that a company could not recover a competition law penalty from its own directors and employees, the penalty being a personal statutory liability of the company that public policy would not allow it to pass on.
The exclusion attaches to the penalty, not to everything connected with the process that produced it. Several adjacent exposures are commonly insurable, either within the PI policy or by extension:
The distinction between penalty and redress is the operative one, and it is not always obvious from the regulator's decision notice. Firms should read the notice carefully and separate the heads before notifying.
Advisory firms inside the FCA perimeter face both outcomes from the same file: a redress calculation that is compensatory and a penalty that is not. Past business reviews and skilled person reviews under section 166 sit awkwardly between the two, since the cost of the review is neither a fine nor obviously a defence cost. The position for financial advisers should be checked against the specific wording, because market practice varies.
Legal practices meet it through the Solicitors Disciplinary Tribunal, where a fine on an individual is excluded but the costs of representation may be addressed elsewhere in the programme. The Minimum Terms and Conditions govern what an insurer must cover for solicitors in respect of civil liability, and disciplinary penalties sit outside that.
Property agents encounter penalties under a range of statutory regimes, including client money protection requirements and redress scheme membership obligations. Penalties imposed by a local authority are not insurable, while compensation directed by a redress scheme generally is, and estate and letting agents should keep the two apart in any notification.
Notify early where an investigation could produce a civil claim, since defence costs cover often depends on notification timing. Ask whether regulatory investigation costs are included, sub-limited or absent. And do not assume a settlement described as a penalty is uninsurable in its entirety, since mixed outcomes are common and the compensatory element may be recoverable.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.