Solicitors PII and unrated insurers
Yesterday the SRA announced that it was dropping its plans to introduce a minimum rating requirement on participating insurers (insurers who agree to provide solicitors PII satisfying the Minimum Terms & Conditions).
The SRA has resolved to keep the decision 'under review' however, as the root issues underlying the initial proposals (namely the risks to clients - and indeed law firms and their Principals - posed by the failure/risk of failure of un-rated insurer 'failures' such as Quinn, Balva and Berliner) remain unresolved.
While many perfectly reputable firms continue to be insured by unrated carriers, these insurers have tended to be particularly exposed to toxic conveyancing claims - having bought up large market shares quickly, often on minimal due diligence, and at below-market premiums. The result has been a pattern of instability as unrated insurers entry into the market is rapidly followed by an 'unplanned exit with no guarantee that clients will be protected'.
Regulation by Lenders?
Following recent allegations in a Law Society Gazette article by Jonathan Goldsmith that we are in a market where Insurers are effectively acting as the profession's regulator, recent developments with a number of lenders would suggest that that allegation can now be laid at the door of lenders - who are increasingly refusing to instruct firms who insure with unrated carriers.
MTC Consultation
Many commentators, including Legal Risks's Frank Maher, have argued that the real issue is the unduly high bar that the SRA Minimum Terms & Conditions of Insurance (MTC) impose on the profession. Particularly in a pluralistic world of ABSs and deregulation in the provision of legal services, an un-level playing field in terms of insurance requirements places law firms at a potential disadvantage.
For example, Accountants have a minimum level of cover of the greater of £50,000 (ACCA) or £100,000 (ICAEW) and 2.5 x fee income. In contrast, Solicitors require to have a minimum of £2m (Sole Practitioners and Partnerships) or £3m (LLPs, Incorporated Practices). The level of protection solicitor clients are afforded is also significantly greater than that in other professions. As a result, solicitors' premiums are comparatively higher than those of other professions.
The SRA has now issued a consultation on the matter - and is looking for feedback on the following proposals:
- Reducing the minimum level of mandatory PI cover to £500,000
- Introducing an aggregate limit on claims
- Requiring compulsory cover for claims by individuals, small and medium-sized enterprises, trusts and charities
- Reducing run off cover to a minimum of three years (from the current 6)
- Requiring firms to assess the level of cover appropriate to their firm beyond the minimum
The consultation closes on 18 June.
The implications for the profession
A reduction in the minimum limit of cover alone is unlikely to have the desired effect of reducing the cost of PII significantly. The extent of cover needs to be addressed as well.
The reality for many conveyancing firms is likely to be that, in order for lenders to instruct them, they will have to maintain cover in excess of the revised MTC, even if the consultation proposals come into effect.
That said, the proposed changes could be enough to encourage new insurers to enter the market, with an opportunity for more profitable underwriting than insurers currently enjoy.
How Lockton can help
Following the results of the consultation, Lockton will be examiniting the implications for clients of any changes - and we will keep clients informed of the timeframes for changes being introduced.
All firms, whether low risk or not, need to consider carefully with their advisors what level of cover is suitable for their business.
Whenever firms are considering reducing their level of cover, there needs to be consideration given to the potential liabilities from past work. Claims, particularly in property work, often arise 3,4 or 5 years after the work was carried out.
If a law practice has either (a) not limited liability within their client engagement, or (b) capped it at their level of compulsory cover at the time (£2m/£3m), reducing cover to below that level leaves the firm with a potential uninsured exposure. This should be considered carefully before deciding on a revised level of cover, and should ideally be considered alongside other risk mitigation measures - which your broker can advise you on.
If you have any queries arising from the issues in this article, please contact your Lockton broker.