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PI insurance - invaluable when luck turns against you.

Sometimes matters can go very wrong with a financial institution when decisions are made which have unforseen consequences. Often these decisions can seem to be very sound at the time and it can be highly debateable just whom, if anyone, is to blame for the subsequent disaster. The situation becomes even more complicated when success or failure can hinge on a finely balanced court decision. Sometimes it isn't just the careless who need to look to their professional indemnity insurance policies; it can happen to the unlucky, too.

The Rise and Fall of the Equitable Life Assurance Society

The Equitable Life Insurance Society was founded on September 1762 in the United Kingdom and is recognized as the first insurance company to use assured returns for a standard premium, a model that is still used today by many insurance companies. A policy purchased from Equitable Life acted as a life insurance policy as well as an investment, thus providing immediate security and a pension when the holder reached a certain age. Since the policy had an assured rate, the model was very popular. James Dodson is credited for first devising the method and for calculating premiums based on mortality statistics. This method would be passed down to subsequent Directors of Equitable Life and become a trademark for the company. This model, and how it was sold and worded in contracts between 1956 and 1988, contributed to the downfall of the Society.

The Beginning of the Fall

When Equitable Life issued their "with profits" policies, basically a life insurance policy with an investment vehicle attached, the type of investment rate was either a GAR (Guaranteed Annual Rate) or a CAR (Current Annual Rate). The GAR was a rate fixed at the time of purchase and set based on a forecast of the markets over the suspected lifetime of the policy. A CAR policy, however, fluctuated with the markets and rates were variable. The premiums, that is the amount paid by the policy holder to Equitable Life in return for the policy, did not differ whether the GAR or the CAR was used for their policy. As a whole, the GAR was set to lower rate than the anticipated forecasted current rate. An important factor was article 65 of the Equitable Life's Articles of Association which stated that Equitable Life Directors could, if need be, vary the amount of the bonuses paid out on policies. This was a failsafe in case the current rate of interest fell below the guaranteed interest rate of the GAR policy holders and thus allowed Equitable Life to pay out their obligations without losing money on their policies across the whole average. This was called Equitable Life's Differential Terminal Bonus Policy and was introduced in 1993 and inspected by third party regulators that found no fault in it for the next five years. It was also in 1993 that the current annuity dipped below the guaranteed rate and Equitable Life's troubles began.

The Lawsuit and Ruling

In 1998 GAR policyholders received a lower terminal bonus than was expected. Some GAR policyholders complained through the person of Mr Hyman who was a representative policyholder and acted on behalf of the group. These policyholders were a group of longstanding policy holders who purchased their policies between the years of 1956 and 1988. In the defense of Equitable Life, there was no point where the GAR policyholders were paid less per annum. The lawsuit arose from the simple fact that the wording in the contract was a little misleading and, although strictly speaking, very legal, it led some policyholders to be disillusioned with the amount of their terminal bonuses. It is also important to remember that a board of regulators audited this process from 1993 to 1998 when the suit of Equitable Life versus Mr Hyman came to pass and found not fault in the process, the wording or with Equitable Life. Never the less, the House of Lords ruled in the favour of Mr Hyman that Equitable Life had given reasonable expectations to their GAR policy holders and then failed to act on those expectations. As a result, Equitable Life was required to pay out £1.5b in annuities, the amount they had intended to garner from the GAR policy holders terminal bonuses.

The Result

The Equitable Life Assurance Society collapsed after the ruling of the case as it was unable to fulfill the additional court mandated obligations of liabilities to its GAR policy holders. Resentment and bitterness between policy holders, the company and government ran rampant as the ruling was, and still is today, seen as controversial and unexpected. Equitable Life put itself up for sale in 2000, intending to use the proceeds to partially pay off the outstanding debts, but could not find an immediate buyer. As a result, policyholders at the time saw deficiencies as Equitable Life fought to pay the liabilities from the court ruling; some 50,000 policy holders saw their policy revenues decreased by about 20%.

In February 2007 Equitable Life finished transferring £4.6B of annuities to Canada Life and in November of the same year transferred £1.8 billion with-profits annuity policies to Prudential. November 2008 brought the announcement that Equitable Life would be stalling any additional sales of their assets and that the company would exist on the remainder of their business. Equitable Life gross assets as of December 2008 were estimated at £8,754 million, approximately a quarter of the company's value in 2000 before the ruling House of Lords ruling.

Conclusion

The Equitable Life Assurance Society fell far from its origins as a founder of modern life insurance and investment methods to a shade of its former self, all on a controversial court ruling. Although the company was not forced to sell out completely, they were brought low through the lawsuit and their reputation tarnished from the results of the ruling.