Insolvency exclusion (PI)

An insolvency exclusion is a clause within a professional indemnity policy that removes or restricts cover for civil liability arising directly or indirectly from the insolvency, bankruptcy, administration, liquidation, or financial failure of the insured firm or specified third parties.

Definition §

An insolvency exclusion is a contractual provision in a professional indemnity (PI) policy that excludes the insurer's liability to indemnify the insured where the claim arises out of, is contributed to by, or is connected with the insolvency of the insured itself or of a third party with whom the insured had dealings. The clause is drafted in widely varying forms. Some exclusions are narrow, excluding only claims that would not have arisen but for the insolvency. Others are broad, removing any claim where insolvency forms part of the causative chain.^[1]

The clause is significant because professional negligence claims frequently surface only after a counterparty becomes insolvent. A solicitor's flawed advice on a security package, an accountant's questionable audit opinion, or a surveyor's overvaluation may all be tolerated commercially until the underlying borrower or business collapses. The insolvency event is often the trigger that crystallises the loss and prompts the search for a solvent defendant. Insurers, conscious that PI policies can otherwise become de facto credit insurance for the insured's clients, use insolvency exclusions to draw a boundary between professional liability and pure financial risk.^[1]

Not every PI policy contains an insolvency exclusion. Many SRA-compliant solicitors' policies do not, because the SRA Minimum Terms and Conditions of Professional Indemnity Insurance (MTC) prescribe a limited list of permitted exclusions and do not include an insolvency carve-out.^[2] By contrast, PI policies written for accountants, financial advisers, surveyors, and insurance intermediaries (subject to MIPRU 3.2.7R) commonly contain some form of insolvency wording, particularly where the insured's work involved structuring transactions, advising on covenant strength, or auditing financial statements.^[3]

Legal / Regulatory basis §

The insolvency exclusion is a creature of contract rather than statute, but it operates against a statutory backdrop. The Insolvency Act 1986 establishes the procedures for administration, liquidation, bankruptcy, and individual voluntary arrangements that the exclusion typically references.^[4] The Third Parties (Rights against Insurers) Act 2010 permits a third-party claimant to proceed directly against the insurer of an insolvent insured, transferring the insured's rights of indemnity to the claimant. Where an insolvency exclusion is engaged, the claimant takes no better right than the insured had, so the exclusion bites equally against the third-party claimant.^[5]

The Insurance Act 2015 affects how an insolvency exclusion is construed in a wider sense. Under section 17, contracting out of certain consumer-protective provisions is restricted; under sections 3 to 8, the insured's duty of fair presentation of the risk is reframed. An insurer who fails to draw attention to an unusual or onerous insolvency exclusion at placement risks difficulty in enforcement, although the principle that policy wording is binding remains intact where the clause has been fairly presented.^[6]

For solicitors, the SRA MTC operates as a regulatory floor. An insurer providing qualifying insurance to a solicitors' firm may not include exclusions outside those specifically permitted in clause 6 of the MTC, which means that broad insolvency exclusions are typically incompatible with SRA-compliant cover.^[2] For insurance intermediaries, MIPRU 3.2.7R prescribes minimum PI cover but does not directly prohibit insolvency exclusions.^[3]

How it works in practice §

Insolvency exclusions are drafted along several axes. The first is whose insolvency triggers the clause. Some exclusions apply only to the insolvency of the insured firm itself; others extend to any third party (typically a client, borrower, or counterparty) whose insolvency forms part of the causative chain. The second axis is causation. Narrow wordings exclude claims arising 'solely from' insolvency; broader wordings exclude claims 'arising out of, based upon, or attributable to' insolvency, capturing any claim where the insolvency event is anywhere in the factual matrix.

A typical scenario where the exclusion is tested is a lender's claim against a solicitor for negligent conveyancing on a buy-to-let mortgage. The borrower defaults, the lender repossesses, the property sells for less than the outstanding loan, and the lender sues the solicitor for the shortfall, arguing that the solicitor should have spotted irregularities in the title or the purchase price. A broadly drafted insolvency exclusion might be invoked on the basis that the loss only crystallised because of the borrower's financial failure. A court would typically construe the clause against the insurer (contra proferentem) and look for a direct causal link rather than mere temporal coincidence.^[1]

Insurers may include carve-backs to the exclusion. Common carve-backs preserve cover where the insured's negligence is the proximate cause of the loss, and only the quantification of damage depends on the insolvency of a third party. Other policies disapply the exclusion where the insured's work was specifically directed at assessing the financial position or solvency of the counterparty — for example, an audit engagement or a solvency opinion.

Notification practices matter. Where an insured becomes aware that a client or counterparty is in financial difficulty, the prudent course is to notify circumstances under the policy promptly, in line with the known circumstances framework. This may preserve cover under the policy in force when the circumstance is notified, even if a claim later emerges after the insolvency exclusion would otherwise have engaged. The Court of Appeal in HLB Kidsons (a firm) v Lloyd's Underwriters considered the requirements for notification of circumstances likely to give rise to a claim, and the decision is regularly cited in this context.^[7]

Common variations §

The clearest variation is between solicitors' policies (where the MTC effectively rules out broad insolvency exclusions) and policies for other professions. A second variation is between exclusions targeting the insured's own insolvency and those targeting third-party insolvency. A third is the treatment of insolvency-adjacent events such as a counterparty entering a company voluntary arrangement (CVA), a scheme of arrangement, or a restructuring plan under Part 26A of the Companies Act 2006.

Some policies replace a hard exclusion with an inner aggregate sub-limit for insolvency-related claims, capping rather than removing cover. Others use a deductible structure, applying a higher excess where insolvency forms part of the claim. A small number of bespoke wordings convert the exclusion into a notification trigger: cover is preserved provided the insured notified the deteriorating counterparty position before the formal insolvency event.

Insolvency exclusions interact with the dishonesty exclusion, the known circumstances exclusion, and the prior acts coverage of the policy. Where multiple exclusions are potentially engaged, insurers usually rely on whichever is most clearly drafted, and disputes often turn on causation rather than the existence of the exclusions themselves.

Example §

An accountancy firm audits a mid-market manufacturer over several years, signing unqualified audit opinions. The manufacturer enters administration and the administrators sue the firm, alleging the audits failed to identify management overrides of internal controls. The firm's PI policy contains an insolvency exclusion in the form 'the insurer shall not be liable for any claim arising out of, based upon, or attributable to the insolvency of any person'. The firm argues the proximate cause is its alleged audit negligence and the insolvency is merely the event that crystallised the loss. The insurer argues the broad 'arising out of' wording engages the clause. Coverage litigation typically turns on construction of the causation phrase and on whether a carve-back for the insured's own negligence applies.

See also §

• /wiki/professional-indemnity-insurance/ — the policy in which the exclusion sits
• /wiki/known-circumstances-exclusion/ — related exclusion for pre-existing matters
• /wiki/dishonesty-exclusion/ — related exclusion for fraud
• /wiki/prior-acts-coverage/ — interaction with cover for legacy work
• /wiki/retroactive-date/ — interaction with the policy's temporal scope
• /wiki/run-off-coverage/ — relevant where the insured itself becomes insolvent
• /wiki/aggregation-clause/ — how multiple insolvency-linked claims may aggregate
• /wiki/civil-liability/ — the core insuring agreement the exclusion modifies

References §

1. ↑ Insurance Act 2015 — https://www.legislation.gov.uk/ukpga/2015/4
2. ↑ SRA Minimum Terms and Conditions of Professional Indemnity Insurance — https://www.sra.org.uk/
3. ↑ FCA Handbook, MIPRU 3.2.7R — https://www.handbook.fca.org.uk/handbook/MIPRU/3/
4. ↑ Insolvency Act 1986 — https://www.legislation.gov.uk/ukpga/1986/45
5. ↑ Third Parties (Rights against Insurers) Act 2010 — https://www.legislation.gov.uk/ukpga/2010/10
6. ↑ Insurance Act 2015, sections 3-8 and 17 — https://www.legislation.gov.uk/ukpga/2015/4
7. ↑ HLB Kidsons (a firm) v Lloyd's Underwriters [2008] EWCA Civ 1206