Insurance and risk management firm Gallagher is warning firms that professional, financial and reputational risks remain for DIFC firms despite the DFSA removing mandatory professional indemnity insurance for certain types of firms.
The change in regulation means that it's no longer compulsory for many category 3C firms operating in DIFC to have professional indemnity insurance, however the underlying exposure hasn't changed, and claims remain a significant risk for firms with the cost ranging from a few thousand dollars for minor errors to multi-million-dollar settlements for complex oversights.
Firms affected by the change include those operating in asset management, fund management, managing investment portfolios and those operating digital investment or trust platforms. These types of businesses are exposed to claims including negligent investment decisions, breach of mandate, inadequate due diligence and operational errors and omissions.
Max Lawson, Director of Financial Lines at Gallagher, commented: "The DFSA's decision to remove the mandatory professional indemnity insurance requirement for many Category 3C firms may be viewed by some as a reduction in regulatory burden. However, it's important to distinguish between a change in regulation and a change in risk. While the obligation to purchase this type of insurance may no longer be prescribed, the underlying exposures associated with providing investment management and advisory services have not disappeared. Firms continue to make decisions, provide advice and manage assets in an increasingly complex and heavily scrutinised environment, where even a well-managed business can face allegations of an error, omission or professional negligence.
"The removal of the mandatory insurance requirement does not reduce the likelihood of these events occurring, nor does it diminish the costs associated with defending or settling a claim. The legal, financial and reputational consequences remain the same as before the rule change. For many firms, the question is no longer whether professional indemnity insurance is required by regulation, but whether they are comfortable retaining these risks on their own balance sheet."
Gallagher warned that a common misconception is that professional indemnity insurance exists solely to pay damages awarded against a firm, whereas in reality, one of its most valuable functions is funding the defence of allegations, regardless of their merit.
The broker stated that investor complaints, regulatory enquiries and civil proceedings can generate substantial legal costs long before liability is established. Even when a firm ultimately prevails, the cost of defending its position can be high, often exceeding the value of the underlying claim.
Gallagher also highlighted that whilst the DFSA may no longer mandate professional indemnity insurance, institutional investors frequently expect it with many allocators, family offices, fund boards and consultants viewing this insurance as a fundamental component of a manager's risk management framework. During operational due diligence exercises, investors often ask if the manager has professional indemnity cover, what limit of indemnity is purchased and also if the firm has directors' & officers' (D&O), crime and cyber insurance. On this basis, for firms seeking to attract or retain institutional capital, the absence of professional indemnity insurance may create challenges.
Max Lawson concluded: "Professional liability disputes remain an inherent feature of the investment management industry. Claims can arise from market volatility, investment underperformance, operational errors, regulatory investigations or simple misunderstandings between managers and investors. The DFSA's rule change has altered the regulatory landscape, but not the underlying liability faced by firms.
"Investment managers today face the same operational, regulatory and litigation exposures they faced before and investors continue to expect strong governance and risk management practices and regulatory enquiries and professional liability claims remain both costly and disruptive."