1. Introduction
1.1 Who should read this practice note?
Solicitors in private practice in England and Wales who are required to obtain professional indemnity insurance (PII).
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1.2 What is the issue?
The Solicitors Regulation Authority (SRA) implemented outcomes-focused regulation (OFR) in October 2011. OFR is a move away from a rules-based approach to one that focuses on high-level outcomes governing practice and the quality of outcomes for clients.
The SRA has published a Handbook, which sets out all the SRA's regulatory requirements. It outlines the ethical standards that the SRA expects of practices and practitioners and the outcomes that the SRA expects them to achieve for their clients.
The SRA Handbook includes a Code of Conduct (the 'SRA Code'), which replaced the Solicitors' Code of Conduct 2007 (the '2007 Code'). The SRA Code establishes outcomes-focused conduct requirements and each chapter outlines outcomes and indicative behaviours (IBs).
The SRA Handbook and Code has been in force since 6 October 2011. Accordingly, the 2007 Code and all of its rules and guidance, no longer apply to solicitors' conduct , save in respect of any review by the SRA of conduct taken prior to 6 October 2011 to which the 2007 Code will still be applied.
An overview of OFR can be found on the Law Society's website. This provides information on what the SRA Handbook contains, including a summary of the chapters in the Code of Conduct and a summary of the reporting requirements included throughout the Handbook.
If you are a solicitor in private practice, you are required to take out and maintain PII in accordance with the Solicitors' Indemnity Insurance Rules (the Rules) by 1 October each year. The SRA Handbook (in force from 6 October 2011) requires you to ensure that clients have the benefit of compulsory PII (outcome 1.8). Obtaining PII can be difficult. In recent times some solicitors have been unable to obtain PII from a qualifying insurer or had to accept significantly higher premiums.
This practice note describes the solicitors' PII requirements and market. It then outlines how you should apply for PII and deal with PII-related issues.
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1.3 Professional conduct
The following sections of the SRA Handbook are relevant to this issue:
- SRA Code
- SRA Indemnity Rules
- Indemnity Insurance Rules
- SRA Compensation Fund Rules
- Qualifying Insurer's Agreement
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1.4 Status of this note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note contact the Law Society's Practice Advice Service.
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1.5 Terminology
Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view.
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
2007 Code - Solicitors' Code of Conduct 2007
OFR - Outcomes-focused regulation
SRA - Solicitors Regulation Authority
IB - indicative behaviour
Qualifying insurance - Professional indemnity insurance that is taken out with a qualifying insurer, and which meets the Minimum Terms and Conditions set out in Appendix 1 of the Solicitors Indemnity Insurance Rules 2011 as amended (the Rules) (see 9.1 Professional conduct )
Qualifying insurer - An authorised insurer that has entered into a Qualifying Insurer's Agreement with the Solicitors Regulation Authority (SRA) as the independent regulatory body of the Law Society. A list of all qualifying insurers is available from the SRA.
Solicitor / you - Includes all bodies (recognised and authorised) regulated by the SRA. For the purpose of this practice note, the term 'solicitor' includes registered european lawyers, registered foreign lawyers as well as recognised and authorised bodies, their managers and owners.
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2. SRA principles
There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.
When thinking about how to meet the outcomes in the Code/Handbook, you must consider the principles which apply across the Handbook including the Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.
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3. Professional indemnity insurance overview
3.1 What is PII?
PII is insurance that covers civil liability claims arising from your work. These claims most commonly involve professional negligence.
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3.2 Why do I need it?
Like many other types of professionals, solicitors' firms need PII to practise. You must take out and maintain qualifying insurance in accordance with the rules administered by the Solicitors Regulation Authority (SRA).
PII also increases your financial security and serves an important public interest function by covering civil liability claims, including:
- certain related defence costs, and
- regulatory awards made against you.
It ensures that the public does not suffer loss as a result of your civil liability, which might otherwise be uncompensated. This is important in maintaining public confidence in the integrity and standing of solicitors.
From 1 October 2010, the minimum terms and conditions no longer provide cover for defence costs for disciplinary proceedings by the Solicitors Regulation Authority or the Solicitors Disciplinary Tribunal. The Law Society opposed the removal of this cover, however, the SRA decided that it is not in the public interest for insurance to cover these claims. However, some insurers are prepared to include this cover and continue to insure this type of loss. If you are concerned about lacking this type of cover, you should discuss the availability of such a policy with your PII broker or insurer.
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3.3 When do I need it?
Existing firms must renew their PII by the start of the indemnity period on 1 October. This date precedes the annual renewal of solicitors' practising certificates on 1 November.
New firms may obtain PII at any time throughout the year, before commencing practise.
Firms should not assume that PII will be easy to obtain and should plan ahead of the deadline.
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3.4 Who provides it?
You can obtain PII from either:
New firms are not eligible to apply for PII from the ARP. Firms that are eligible to enter the ARP are confined to those that have previously obtained qualifying insurance with a qualifying insurer.
The SRA has released a policy statement on 19 April 2011 advising that as of 1 October 2013, the ARP will no longer be an insurer of last resort. Instead, in the event that you are unable to obtain a policy of qualifying insurance, your existing insurer will provide you with an extended policy period (or EPP). The SRA will consult further about the details of the EPP but in its policy statement, it suggests that the EPP should be for 90 days. The SRA intends the first 30 days of the EPP will be used by the firm to find alternative qualifying insurance and, if unsuccessful, the next 60 days must be used for orderly closure or merger of the practice. In this latter period, the firm is not permitted to take on new work but is permitted to continue to work for existing clients as the practice is winding down.
3.4.1 Qualifying insurer
A qualifying insurer is an insurer that:
The Qualifying Insurer's Agreement is a contract that is entered into each year between each qualifying insurer and the SRA as the independent regulatory body of the Law Society. It requires qualifying insurers to offer a minimum level of cover as set out in the minimum terms and conditions appended to the rules. This minimum level of cover applies regardless of the actual wording of the policies issued.
Neither the Law Society nor the SRA vets, approves or regulates qualifying insurers. This means we do not give a warranty about the financial integrity of the qualifying insurers.
Regulation of qualifying insurers is undertaken by the Financial Services Authority (FSA), or, where an insurer from another jurisdiction is passported into the UK system, the financial regulator of that jurisdiction.
3.4.2 The assigned risks pool
If you cannot get PII from a qualifying insurer before 1 October 2011 or 2012, you may be eligible to apply for PII from the ARP. The ARP is intended as an option of last resort. An ARP premium is usually much higher than the market rate, and you must be inspected and monitored by the SRA at your own expense. You may also be required to attend approved courses and to implement specified practice management measures. New firms are not eligible to apply for PII from the ARP.
You may only be insured through the ARP for a maximum of six months in any five-year period unless you hold an ARP policy before 1 October 2011. After this time, you must secure cover from a qualifying insurer or cease practise.
The Qualifying Insurer's Agreement requires qualifying insurers to underwrite the 2011/12 ARP. They underwrite it in the same proportion as their share of the premium income from the compulsory level of cover for the relevant indemnity period.
The SRA has proposed the following changes to the ARP for the 2011/12 indemnity period:
- a reduction in the time a firm can spend in the ARP from 12 to six months;
- a requirement on firms in the ARP to plan and implement arrangements that address the issues that have led to failure to obtain open-market cover and to either obtain this cover or close in an orderly fashion;
- removal of the liability on qualifying insurers to meet the ARP liabilities of an insolvent qualifying insurer;
- clarifying the reporting obligations of qualifying insurers; and
- making public the insurer of any firms.
In its policy statement, the SRA has also set out a plan for transition to the EPP by 2013. These proposals will be subject to a further consultation period in mid-2011 as further changes to the rules will have to made before the 2012/13 indemnity year.
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3.4.3 How much cover do I need?
The total amount of PII you need will depend on your firm's size and exposure to risks. You should seek advice from your broker and/or insurer to ensure that you have a sufficient level of cover for your firm.
The rules establish a compulsory level of cover for all solicitors' firms:
- Bodies corporate must have at least £3m compulsory cover.
- Other firms, for example, sole practitioners and partnerships, must have at least £2m in compulsory cover.
You must not exclude or attempt to exclude liability below the minimum level of cover ( outcome 1.8 of the SRA Code of Conduct ). If you seek to limit your liability to a level above the minimum level of cover, the limitation should be in writing and you should bring it to your client's attention ( IB 1.8 ).
If you decide to obtain cover above the compulsory level, this cover will not be subject to the rules. This means that you can obtain it from any insurer, not just a qualifying insurer, and on different terms and conditions to the Minimum Terms and Conditions. It is not necessary to buy all of your cover from one insurer.
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4. State of the market
The solicitors' PII market has hardened in recent years. This is due to a combination of factors including:
- some qualifying insurers exiting the market
- some qualifying insurers narrowing the types of firms to which they offered cover
- the ability of some qualifying insurers to minimise their ARP exposure by adopting methodologies to reduce the amount of declared premium
- the collapse of the housing market and an increase in mortgage-related fraud leading to concerns amongst insurers about an imminent increase in conveyancing-related claims, and
- an increase in the amount and value of claims insurers are receiving from solicitors
Many qualifying insurers now scrutinise proposal forms more carefully and are more selective in the firms to which they offer cover. Some parts of the profession have been forced to accept significantly increased premiums or have been unable to obtain PII from a qualifying insurer at all. Among those most affected have been:
- sole practitioners
- firms with fewer than five partners, and
- firms that perform conveyancing work
Even some firms with a clean claims history have experienced difficulties.
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4.1 Outlook for 2011-12
Given that the SRA's proposed reforms will take time to implement, the 2011-12 renewal is likely to still present difficulties for some firms due to:
- the number of conveyancing claims flowing from the property market crash that are still working their way through the PII system, which may maintain the hard market for the next few years
- insurers remaining liable for the 2011-12 ARP – this cost is passed on to the profession through increased premiums (estimated at between 15-20 per cent last indemnity year)
- some insurers being left with greater ARP liability than they predicted due to other insurers employing methodologies designed to reduce their declared premiums, and
- the perception amongst insurers that the SRA needs to do more in terms of management of firms, particularly those in the ARP
There is also the perception that the profession itself should do more to proactively manage risk. Given the current state of the market, in order to place your firm in the best PII position, you will have to demonstrate to insurers that your firm has effective risk management systems in place. If you haven't already done so, you may want to consider applying for one of the Law Society's accreditation schemes, such as the Conveyancing Quality Scheme (CQS), or Lexcel, its practice management standard, which are designed to provide your clients and insurers with increased confidence.
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4.2 Premiums
Under the minimum terms and conditions (clause 7.7), the premium may be calculated on such basis as the insurer determines and you accept including, without limitation, a basis which recognises:
- claims history
- categories of work performed by your firm
- number of principals and employees
- revenue derived from the practice, and
- other risk factors determined by the insurer
You should be aware of costs. If qualifying insurers receive more claims this year and have to contribute more money towards the ARP, they are likely to increase their premiums to recoup their losses. It is estimated that the uplift in premiums attributable to ARP in the 2010/11 indemnity year was between 15 per cent and 20 per cent.
The transition from the ARP to EPP by 2013 will hopefully assist in reversing this trend by encouraging a more competitive market; however, the market may remain hard in the interim.
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5. Applying for PII
5.1 When should I start?
You should start preparing for the renewal process by May each year as the information required to support your proposal form can be difficult and time consuming to collate. Do not wait until the insurers have finalised their proposal forms.
5.1.1 Preparation
You should start collecting information in May and continue to keep it updated throughout the year.
Check last year's proposal forms to predict most of the information that qualifying insurers will be requesting this year. If anything, the insurers are likely to request more information this year than previously, especially if you work in a perceived high risk area such as conveyancing.
Establish a system to capture this information on an ongoing basis, to save you both time and money in the long term.
You should also work with your insurer and broker to review your claims summary. All insurers are required to produce a claims statement on demand. You should check this statement carefully and ensure it is an accurate reflection of the true claims and operational exposure as this is what will be used by insurers to assess your firm's renewal prospects.
5.1.2 Market research
You should start researching the PII market by June. By this time there should be publicity about the market conditions and many qualifying insurers will be communicating to brokers or publicly about what types of firms they will cover. Many of the qualifying insurers have narrow underwriting criteria and will only quote certain types of firms.
You should be able to ascertain:
- which qualifying insurers will be willing to offer cover to a firm of your size, and type,and
- the key things they will be looking for in assessing proposals.
5.1.3 Submitting your proposal
You should submit your proposal to brokers, or in some cases directly to the qualifying insurers, in mid-July, about ten weeks before the renewal date. In a soft market some firms have found it advantageous to submit their proposals just before the renewal deadline. This approach is much riskier in the current market. Furthermore, some qualifying insurers limit the amount of business they will accept. Once this limit is reached, they will stop offering cover to the market.
Ten weeks should give brokers and/or insurers enough time to:
- read and understand your proposal before any last minute rush
- check details
- seek any further information from you, and
- obtain the best terms for your firm.
An early submission may also help to demonstrate that you are a professional and well-managed firm, and are therefore less likely to constitute a high risk.
5.1.4 Firms in the assigned risks pool
If you are currently in the ARP, you should start speaking to brokers and/or insurers about obtaining PII for the next indemnity year as soon as possible. This will give insurers sufficient time to visit your firm, should they want to, before deciding whether to offer your firm PII.
As outlined above, the SRA has proposed changes to the ARP, some of which will take effect from 1 October 2011. If you are in the ARP as at 30 September 2011 and have been in the ARP for greater than six months, then you will have to cease practice if you are unable to obtain insurance on the open market.
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5.2 Insurance brokers
Most qualifying insurers can only be accessed through an insurance broker. Insurance brokers are responsible for advising on and arranging insurance. The Law Society's guide to using an insurance broker provides checklist of points to consider in selecting the right broker for your requirements.
Download the guide (PDF 53kb)
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6. Your proposal
6.1 How should I write my proposal?
You should use the proposal as an opportunity to convince insurers to offer PII to your firm. Often this is the only piece of information insurers have about your firm in deciding whether to offer cover and at what price. You should take it seriously; treat it like a business tender. Your proposal should be clear, well-presented and comprehensive; presentation is indicative of the way that you conduct the rest of your business:
- avoid obvious errors, like spelling mistakes and inaccurate figures
- ensure the proposal is legible and easy to read
- provide all of the requested information. If the proposal is missing information or leaves uncertainty, insurers are likely to err on the side of caution and refuse to quote
- do not just give the answer you think insurers want to hear. Insurers will cross-check the information that you provide and are obliged, under certain circumstances, to report a material inaccuracy, dishonesty or fraud to the SRA. The SRA may use this information to initiate disciplinary proceedings
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6.2 What information do I need to provide to insurers?
In assessing your proposal, insurers will try to ascertain how likely your firm is to receive a claim arising from both past and future events. This is because PII operates on a 'claims made' basis. This means that the insurer that is on cover when a claim is made against the firm, or when circumstances that may give rise to a claim are notified, is responsible for handling the claim. This is not necessarily the same insurer on cover when the alleged negligence occurred.
There is a wide variance in the questions asked by different insurers, you may therefore have to complete several different proposal forms. One way to avoid this is to complete a composite proposal form. Electronic forms that retain core information are particularly useful.
You should ask your broker(s) whether they can provide one of these forms.
Insurers tend to focus on certain categories of information in assessing what type of insurance risk your firm presents. While each insurer assesses risk differently and has its own underwriting criteria, there are some areas that insurers commonly regard as posing a high risk. Your broker(s) should be able to advise you on the areas that a particular insurer regards as high risk.
You should consider the following categories of information:
- areas of practice
- claims history
- disciplinary and regulatory issues
- expertise
- gross fees
- principals and fee earners
- risk management practices.
6.2.1 Areas of practice
Your firm's areas of practice and the amount of income it derives from each of those areas may affect your firm's premium and whether you are offered PII. Certain areas are designated as high risk because they generate more claims than others. If your firm derives a significant amount of income from these areas, your firm's premiums or difficulties in obtaining PII may increase.
High risk areas include:
- residential and/or commercial conveyancing
- wills and probate
- personal injury
- some forms of litigation, and
- niche areas of law with which insurers are unfamiliar.
6.2.2 Claims history
Your firm's premium or difficulties in obtaining PII may increase if you have previously received claims. The claims history of your firm and any predecessor practice for the past five to 10 years provides an indication of the likelihood of future claims. You should provide an explanation and details of your firm's claims history, as well as the qualifying insurers Claims Schedule which is readily available from insurers.
High risk: firms or principals that have been subject to previous claims.
6.2.3 Disciplinary and regulatory issues
You should disclose to the insurer any past disciplinary or regulatory issues involving your firm or principals and provide copies of relevant reports or correspondence from the Solicitors Disciplinary Tribunal or the SRA (or the Law Society prior to 2007). This information provides a second and independent assessment of your firm's management and risk frameworks.
This information may affect your firm's premium, either positively or negatively, and/or your likelihood of being offered PII. It is a disciplinary offence to fail to disclosure material information in your application form.
6.2.4 Expertise
Insurers are more likely to consider your proposal favourably if you demonstrate expertise in your firm's practice areas.
High risk: firms that practise in a number of different areas or that have little or no experience in their practice areas, such as some new firms.
6.2.5 Gross fees
Your firm's premium is likely to increase with any increase in your firm's gross fees for the last completed financial year. Insurers may also take into account the fees of earlier years. Insurers use this information to assess your firm's risk in the last financial year, rather than relying on your firm's projected income.
6.2.6 Principals and fee earners
Your firm's premium may increase with an increase in the number of principals and fee earners in your firm. However, if you have a firm with less than approximately five partners, your premium is also likely to increase. Supervision may be relevant, as the higher your firm's ratio of principals and qualified solicitors to non-qualified staff, the less concerned insurers are likely to be.
6.2.7 Risk management practices
Insurers are more likely to consider your proposal favourably if you demonstrate effective risk management practices. These practices are important in lowering the likelihood of future claims. For example, Lexcel - the Law Society's practice management standard – or being a member of its accreditation schemes such as Conveyancing Quality Scheme (CQS) can help to demonstrate good risk management practices. Some insurers may offer you more competitive terms if your firm is Lexcel or CQS accredited.
High risk: firms that lack effective written risk management practices.
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6.3 What should I do if I fall into a high risk area?
Your proposal should address the areas that insurers perceive as high risk. The fact that your firm falls into one of these areas does not necessarily mean that an insurer will not be willing to offer you PII. It may mean, however, that the insurer will scrutinise your proposal more closely and will require additional information about the potential risk. You should try to address any potential risks and, if possible, try to alleviate insurers' likely concerns about them.
Below are some examples of how you might address potential risks:
- Conveyancing work: describe your activity. An insurer may be less concerned if the volume and complexity of your conveyancing transactions are relatively small, provided the fee earners are experienced in this area.
- New firm: provide a detailed business plan and demonstrate your experience in your proposed practice areas.
- Niche practice area: explain the area fully, address any risks that it might entail, explain how you have dealt with these risks and demonstrate your expertise, experience and track record in this area.
- Past claims: explain what happened and what you have subsequently done to show how you have learned from these claims, and what procedures you have put in place to minimise potential issues in the future.
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6.4 Submission timeframe
The time that insurers take to process your proposal depends on a number of factors. These may include:
- when you submitted your proposal, for example, peak time is during the last weeks of September
- whether you provided all of the requested information, and
- enquiries that the insurers need to make to verify the information that you provided
It is your responsibility to obtain PII . You should actively manage your relationship with your broker(s) and/or insurer(s) and contact them regularly to seek updates on the progress of your proposal if they fail to provide them. You should also respond in a timely manner to any requests for further information or clarification.
You may want to consider negotiating a retainer letter with your broker to set out your expected level of service standards.
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7. Considering offers
You should seek your broker's advice on whether to accept an offer you receive from an insurer. Your broker will be able to advise you in the light of the prevailing market conditions, for example: depending on the movement of the market, it may be worth accepting a premium increase, especially if you have a long standing relationship with your insurer or outstanding claims.
If two insurers have offered you PII, your broker should be able to advise you which is the better offer for your firm. This will not necessarily be the cheapest offer. There are a number of factors to consider including:
- the level of excess payable by you in the event of a claim - you should consider carefully the policy terms of any infill policy that is designed to cover a large excess to ensure that you understand the scope of the cover
- the cost of run-off cover
- the claims service and support the insurer provides
- whether the insurer is offering a commitment to renew for future periods
- the financial security of the insurer
- the insurer's experience and likely longevity in the solicitors' PII market, and
- whether the insurer provides risk management support.
You should also check the duration of the offer and ensure that your broker communicates your decision to the insurer before the offer expires.
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8. Difficulties getting PII
You should consider entering the ARP if:
- you are having difficulties obtaining insurance, and
- the renewal deadline is close.
To enter, you must complete and submit an application form to the ARP manager before 1 October. You must also pay the premium. The ARP premium is calculated in accordance with a formula and is linked to your firm's gross fees.
New firms are not eligible to apply for PII from the ARP.
As outlined above, the SRA's policy statement contains a transition plan that will end the ARP from 1 October 2013.
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8.1 Late ARP submissions and material misrepresentation
Your firm and its principals will commit a disciplinary offence if you submit your ARP application late (ie after 00:01 on 1 October and will then also be subject to a default premium) or make a material misrepresentation in your application. The default premium involves paying the ARP premium plus a further twenty percent of that premium by way of penalty. Therefore, if you think your firm may end up in the ARP, you should make a precautionary application to the ARP before 1 October.
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8.2 New firms
New firms are no longer eligible to apply for PII from the ARP. A new firm is one that has never had qualifying insurance in place and includes :
- A new start up not previously connected to any other firm - for example an assistant solicitor deciding to set up as a sole practitioner.
- A firm resulting from a breakaway or split from an existing practice in circumstances where the firm is not a successor practice.
- A practice that has been regulated by another regulator and is applying to be regulated by the SRA.
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8.3 After entering the ARP
After you have entered the ARP, you should still continue to try to obtain cover from a qualifying insurer. If you are successful, the ARP will pay you a return premium unless you have in the interim made a claim to the ARP. If you had elected to pay by instalments using a credit facility you would receive the instalments made but not the finance charges.
Your insurer may be willing to backdate your cover to up to 30 days from the date of your contract with them. However, this is not an automatic entitlement and you should apply for PII in accordance with the timeframes set out at section 5 as a precautionary measure.
If you are able to secure cover from a qualifying insurer but with an inception date after 1 October, then you will need to effect an ARP policy for the period from 1 October to the inception of the policy with the qualifying insurer. In these circumstances, the ARP would adjust the premium in accordance with the short period scale in Appendix 2 to the rules and the firm could also apply to the SRA for a waiver to further reduce the ARP short period premium.
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9. Other issues
9.1 Poor service from a broker or insurer
The relationship between you and your broker is one of principal and agent. A broker owes you, the client, fiduciary duties. For example, your broker is required to use reasonable endeavours to obtain insurance for you on the best possible terms. You should consider obtaining legal advice about possible avenues of redress if you think that your broker has breached their duty to you.
There is no legal relationship between you and an insurer until you enter into an insurance contract. You are then both bound by the terms of that contract.
If regulated by the FSA, brokers and insurers are subject to various regulatory obligations. For example, FSA Principle 6 requires them to pay due regard to the interests of their customers and to treat them fairly. If you wish to make a complaint about a broker or insurer, you should contact the broker or insurer directly in the first instance.
If you subsequently decide to take the complaint further, you should consider the information on the websites of the FSA and Financial Ombudsman Service.
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9.2 Merging or making another significant change to your firm
You should consider the possible PII ramifications before deciding to:
- merge
- change your firm's partnership or status
- become an ABS
- accept a major contract, or
- make another significant change to your firm.
These ramifications may negate the potential financial benefits. Significant changes may increase your PII premium either during the indemnity year or at the next renewal, and/or make it more difficult to obtain PII in the future.
Some insurers will not provide return premiums if you merge mid term, especially if you have reported circumstances or made a claim. It may therefore be better to leave significant changes to yearuntil your insurance is ready to be renewed.
9.2.1 Successor practices
The PII ramifications of restructuring or changing the partnership of a firm depend on whether the acquiring firm becomes a successor practice to the disposing firm.
If it does, become a successor practice the disposing firm has the option of triggering run-off cover under its own current PII policy. If the disposing firm does not trigger run-off cover, the insurer of the acquiring firm as the successor practice will be required to cover claims made against the disposing firm. Firms that wish to trigger run-off cover must inform their insurer of the election and pay the run-off premium due under the terms of the policy before cessation.
If it does not become a successor practice, the previous firm will have to enter into run-off.
Rule 8.2 of Appendix 1 to the Rules provides guidance about when an acquiring firm becomes a successor practice to a disposing firm. Whether the acquiring firm becomes a successor practice will depend on your particular circumstances. The SRA will provide guidance to you about whether the acquiring firm would become a successor practice but it will not make a declaration or ruling. It may be useful to also seek your insurer's view about whether the acquiring firm would become a successor practice.
Before concluding any agreement, you should discuss your circumstances with your broker and/or insurer. Your broker should be able to help you with the due diligence process and be able to advise you on all of the PII implications.
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9.3 Ceasing practice
You should consider the PII ramifications before ceasing to practise. In particular, you should consider who will cover claims that arise after your practice has closed. Responsibility for covering claims against your former practice will depend largely on whether there is a successor practice to your firm.
Where there is no successor practice, your insurer or the ARP is required to provide you with six years' run-off cover from the expiry date of your policy. For example, if your firm ceased without successor on 1 August 2009 then it would be provided with run-off cover for the balance of the indemnity period (i.e. until 30 September 2009 ) and for a further six years to 30 September 2015. Read the Law Society's advice on run-off cover.
If you have a policy with a qualifying insurer, you will usually need to pay a run-off premium in accordance with your policy (historically, this has been approximately 2.5 to 3 times the amount of your last annual PII premium). If you have an ARP policy, the run-off premium will be calculated in accordance with Appendix 2 to the rules.
Your qualifying insurer or the ARP will handle any claims or circumstances notified in the six years after your firm has closed. For claims that arise after this time, until 2017, the Solicitors' Indemnity Fund provides cover up to your compulsory level at the time of cessation.
Where there is a successor practice you may elect to trigger run-off cover under your current PII policy. If you do not elect to, or do not meet the notification and premium payment requirements, the insurer of the successor practice will be required to cover the claims against your ceased firm.
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9.4 Overseas practices
If your firm practises wholly overseas, you will not be subject to the requirement to have qualifying insurance but you must ensure your firm has PII or other indemnity as required by the jurisdiction in which you practise. You must ensure that clients have the benefit of insurance or other indemnity regarding professional liability, which takes into account:
- the nature and extent of the risks you incur in your overseas practice
- the local conditions in the jurisdiction in which you are practising, and
- the terms upon which PII or other indemnity is available
You must not attempt to exclude liability below the minimum level required for practice in the local jurisdiction ( OP 1.2 ).
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9.5 In-house practice
If you are employed in-house, you must consider whether your employer has appropriate indemnity insurance to meet any award made as a result of a professional negligence claim against you for which your employer might be vicariously liable. If not, you must inform your client in writing that you are not covered by the compulsory insurance scheme. If you act for a client other than your employer, you must have professional indemnity insurance cover.
9.6 Difficulties in paying a premium up front
Most insurers will require you to pay the whole premium before they will confirm cover.
You may be able to pay your premium by instalments or obtain finance to pay your premiums. You should ask your broker about which insurers accept instalments, or approach your insurer directly to negotiate payment options. Alternatively, you may be able to obtain finance from a premium finance company and pay off the loan by instalments. If you are in the ARP, the ARP Manager will be able to assist you to obtain finance.
You should notify the SRA if you are not able to pay your PII premiums (IB 10.3).
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9.7 Insurers becoming insolvent
You should refer to our practice note on the Insolvency of a Qualifying Insurer for information about your position if your qualifying insurer becomes insolvent.
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10. More information
10.1 Law Society products and services
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09.00 to 17.00 on weekdays. The PII helpline is available from 23 August until after the renewal deadline on 020 7320 9545.
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10.2 Other resources
10.2.1 Assigned Risks Pool Manager
For information about the ARP, contact the ARP Manager, Capita Commercial Insurance Services Ltd, on 087 0402 7788 or ARP@capita.co.uk.
10.2.2 Financial Services Authority
The FSA provides information on complaining about an insurer's or broker's financial advertising or contract terms. See the guidance on the FSA's website.
To check that an insurance broker is regulated by the FSA, check the online register.
10.2.3 Financial Ombudsman Service
If you have another type of complaint about an insurer or broker, follow the guidance on the Financial Ombudsman Service's website. You can only make a complaint to the Ombudsman if you have already complained directly to the relevant insurer or broker, and if you are a private individual or your firm employs fewer than 10 persons with a turnover or annual balance sheet total not exceeding €2m at the time of your complaint.
10.2.4 Solicitors Regulation Authority
If you have questions about the indemnity insurance arrangements, contact the SRA's Professional Indemnity team on 01527 504487 or email professionalindemnity@sra.org.uk.
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11 Amendments
This note has been amended throughout from the version previously published in June 2010, to reflect the process of application for 2011-12. This practice note refers to the SRA Handbook which is subject to approval by the Legal Services Board. It is being introduced on a phased basis, beginning in August 2011. The key implementation date is 6 October 2011.
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