Declaring your firm's gross fees for the financial year can be a confusing task. Below we summarise what would be classed as a rateable fee income by Insurers for the purposes of your Professional Indemnity insurance renewal.
A common mistake when declaring a firm's gross fee income on the proposal form is to include total overall income received during a particular financial year. This could include income received from several sources such as Work In Progress, interest or rents as well as the legal work undertaken and billed to a client.
Although the Solicitors Regulation Authority (SRA) advises firms to include Work in Progress in the total gross fee income when renewing their Practising Certificate, for the purposes of your insurance renewal this should be excluded. Insurers and their actuaries use a number of factors to calculate premiums and one key factor is the firm's gross fees figure. Different Insurers will apply this in different ways; either by looking at each year in isolation and comparing the growth or contraction percentage difference or by using a combination of the last completed financial year together with previous years to apply an average. Work in Progress will still be of interest to Insurers as they are keen to know how much ongoing work the firm is undertaking, however, this will often be a separate question on the proposal form.
(Source - https://www.sra.org.uk/mysra/services/faqs)
It is important to put in the correct gross fee figure because including extra sources of income could disproportionally inflate the overall gross fee income and result in Insurers putting forward quotes that take into account that increased figure. If you are in any doubt about what to include, we would recommend providing a copy of your latest report and accounts when submitting the renewal presentation as this will ensure we are able to portray the appropriate gross fee values to Insurers. Providing a copy of the firm's report and accounts can also add value to your renewal presentation as it helps Insurers understand the firm's financial stability. Insurers are now beginning to apply this as a standard subjectivity when putting forward quotations, so providing this in the first instance saves any back and forth and streamlines the renewal journey.
Another common error we see when a firm is completing their proposal form is with regards to advising the firm's Net Assets. We often see firms entering their Gross Assets less Current Liabilities, without deducting any amount due to Creditors or any other provision for liabilities required. Firms should be aware of this as it can influence the financial position portrayed to Insurers.
Furthermore, every firm has an ongoing duty to make a Fair Presentation of their Risk to Insurers under the Insurance Act 2015, so they should give due care and attention to ensuring the correct figures are presented.
To summarise, the table below shows the full breakdown of what should and should not be included:
Include:
- All Professional Fees of the firm including Remuneration
- Retained commissions
- Any other income (including Notarial Fees)
Do not include:
- Work in progress
- Reimbursement of disbursements
- Value Added Tax (VAT)
- Remuneration from a non-private practice source
- Interest
- Dividends
- Rents
- Investment profit