Insurers vulnerable to legal challenge from policyholders

Standard Life, Europe's largest mutually-owned insurer, and Resolution Life, the closed insurance fund specialist, could be vulnerable to an Equitable Life-style legal challenge according to one of Britain's most experienced financial services QCs.

The barrister has given a written opinion, seen by The Independent, to a rival of the two firms, which warns their treatment of with-profits policyholders is "in breach of their contractual rights".

The legal warning concerns the way in which the two insurers have divided with-profits policyholders into different groups, according to whether their plans guarantee them minimum final pay-outs and what these minimums are.

Both Standard and Resolution have set up their with-profits investment funds so that policyholders whose guarantees have already been met are exposed to the fund's bond holdings rather than to more risky equities, even though this means the returns that accrue on their plans in future are likely to be lower.

Policyholders without guarantees, or whose policies remain well short of what they have been promised, have meanwhile been allocated the lion's share of the with-profits funds' stock market exposure. The practice enables insurers to ensure that projections of pay-outs for future policyholders look more generous, but could mean some with-profits investors receive less than would have done if all members were exposed to the same mix of assets.

The QC's opinion, sent to a third insurer hoping to introduce a similar policy, warned: "Unless it was contractually stipulated otherwise, a court would find that part of the very nature of a with-profits contract was that returns were calculated by reference to the performance of an entire fund and not by reference to hypothecated pools of assets."

The barrister added: "If a party's contractual rights are breached and a loss does in fact occur, that party has a right to damages for loss of contract."

For Standard or Resolution to be caught out, a customer would have to challenge the practice of treating with-profits policyholders differently. The legal issue is reminiscent of the case that was so damaging to Equitable Life. In 1999, the House of Lords ruled that it could not pay lower bonuses to with-profits pension savers who had been promised guaranteed pension incomes than to those with no such entitlements.

Yesterday, Standard and Resolution said they were not concerned about the opinion. A spokesman for Standard said the terms on which its with-profits business was written expressly allowed it to offer customers different asset allocations. A spokesman for Resolution added: "We feel very comfortable with the legal advice and the position we've taken."

However, the issue comes at a key moment for both companies. Standard is in the process of demutualising and plans a £5.5bn stock market float this summer. Resolution, meanwhile, is hoping to win a £3.5bn contract to manage the with-profits funds of Abbey.