PII – Ignorance is not bliss
Practice Compliance analysis: What are the concerns about the current approach to professional indemnity insurance (PII)? Robert Forman, senior associate at Murdochs Solicitors, explains why it’s vital small and medium sized firms in particular begin to use the insurance market to their advantage.
Report: Quarter of law firms do not know which insurers their broker can access
One quarter of all law firms applying for PII do not know whether their broker has access to all insurers prepared to insure the firm, a report from the Law Society has revealed. Of 600 law firms surveyed, 27% did not know the level of access their broker had to insurers and did not request the information. Larger firms are more likely to ask their brokers about access, or believe they already know, whereas the problem is particularly prevalent among small firms.
What are the concerns surrounding professional indemnity insurance brokers’ access to all qualifying insurers?
Your broker may be tied to particular insurers such that they can only obtain offers from a limited number of qualifying insurers. With access to more insurers, you or your broker could find better terms elsewhere, and/or a more stable insurer.
With the recent collapses of insurers Quinn and Lemma, attention has been drawn to professional indemnity insurers’ financial security and the risk that your policy could be worthless.
The Solicitors Regulation Authority (SRA) maintains a list of qualifying insurers, available on their website. The list provides contact details for each insurer and where available a credit rating from one of four credit rating agencies. An insurer’s credit rating may be a guide to their financial security. It is sometimes perceived that the lower the rating, or the absence of a rating, is indicative of a greater risk that your insurer will collapse leaving you uninsured.
The SRA Indemnity Insurance Rules (SIIR), newly published each year, requires firms to obtain qualifying insurance. If a firm’s insurer collapses, and within four weeks it fails to obtain alternative insurance, then the firm and all of its managers will be in breach of the rules and subject to disciplinary action. If the firm continues in practice without qualifying insurance the SRA is likely to intervene. The costs of doing so are usually large and are recoverable from the managers as a debt. The financial and personal ramifications of disciplinary action and/or intervention can be and usually are life-changing.
If your insurer is no longer able to provide indemnity cover under the contract of insurance then you will, for example, be responsible for meeting the unpaid invoices of firms instructed on your behalf to defend claims, providing your own defence to all claims first intimated against the firm (or notified to your insurer) in the insurance period and for satisfying any judgments obtained by claimants. Your firm may be eligible for compensation from the Financial Services Compensation Scheme (FSCS), which generally for smaller firms provides cover up to 90% of the value of the claim.
The best case scenario is that the collapse of your insurer will cost you time and money. The worst case scenario is the forced closure of your firm, disciplinary action and bankruptcy.
Why should firms be concerned about their broker’s access to all insurers?
If you can find the same or better terms from an insurer with a better credit rating, in theory at least, you are less likely to suffer the consequences of your insurer failing. The greater the pool of insurers, the greater the prospect is of finding that better deal for your firm.
The contract of insurance must as a minimum offer terms of insurance equivalent to the SRA’s Minimum Terms & Conditions (MTC). As they are minimum terms, insurers can, and sometimes do, offer better terms than the MTCs.
Unless there is a successor practice, the insurance contract will extend firms’ insurance cover for six years after they close (‘run-off’). The contract of insurance in force at the time of closure dictates the premium chargeable for such run-off cover. Traditionally this has varied between two and four times the last premium paid. This variation in run-off premium is often significant.
How do complacent attitudes to PII insurance affect firms?
In 2009 Quinn had 9.86% of the market share of solicitors’ PII premiums. At its height Lemma had 2.9%. Presently 12.5% of the PII premiums are with unrated carriers, which premiums cover 16% of firms (and nearly 25% of all sole practitioners). This gives an indication of those affected in recent years, and those who might be perceived to be at greater risk.
Failure to shop around properly increases the likelihood of you selecting an insurer that is unstable and a policy on terms that don’t adequately suit your needs.
What should firms ask their broker to ensure they achieve a market advantage?
Firms could ask their broker to report to them with a list of all insurers approached, and in respect of any offers made, request details of:
- the premium for the year’s insurance
- the credit rating, the excess payable
- the premium for run-off cover
- all other benefits being offered over and above the MTCs
Brokers might additionally be able to advise on insurers’ risk-profiling scoring methods with a view to examining whether you can take any additional action in preparation with the aim of increasing the number of offers you receive and improving the terms of those offers.
How can firms ensure they are using an appropriate broker with suitable access?
You can ask your broker which of the qualifying insurers they don’t have access to. You can compare the response with the list available on the SRA website.
What should law firms do next?
- prepare for the 2013/2014 indemnity year by contacting your broker now to find out which of the insurers they approach and what more they can do for you
- ensure your current insurer is notified of all circumstances that might result in civil liability
- apply as early as possible, completing your proposal form fully and frankly
If you’re one of the affected firms:
- make sure you have qualifying insurance in place
- apply to the FSCS
- consider whether you ought to apply for waiver of the SIIR
- take early legal advice
In the event that you are unable to secure insurance in the next indemnity year, and you are unable to effect a disposal of your practice, commence an orderly closure.
Robert Forman is a senior associate Solicitor at Murdochs Solicitors and the Lawyers Defence Group specialising in solicitors’ professional discipline and regulation, professional indemnity insurance coverage investigations and voluntary practice closures.
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.