What is the ARP? What is the EIP?
The assigned risks pool (ARP) provides a 'safety net' for
firms that cannot get cover from qualifying insurers in the open
market. The SRA have now finalised its review of client financial
protection arrangements and decided to abolish the ARP from 1
October 2013.
Instead of entering the ARP, firms that are unable to obtain
qualifying insurance by 30 September 2013 will be given a 90 day
policy extension from their previous insurer. This extension will
be in the form of the extended indemnity period (EIP) and the
cessation period.
The EIP is a period of 30 days in which a firm can continue to
practise and try to obtain qualifying insurance. After this time,
firms will enter a cessation period of 60 days in which firms will
be unable to accept new instructions and can only perform work in
connection with existing instructions. If firms are unable to
obtain professional indemnity insurance (PII) outside of the EIP or
cessation period, then they will have to cease practice and their
insurer will be required to provide them with the mandatory six
years run-off cover.
The EIP/cessation period model is broadly similar to the ARP
alternative that the Law Society proposed in its consultation response to the SRA's first stage review of client financial
protection arrangements.
Back to top
How is the cover underwritten?
Assigned risks pool
ARP cover is underwritten by all qualifying insurers in the
same proportion as their share of the total declared premium income
from compulsory cover for each indemnity period.
Extended indemnity period/cessation period
EIP/cessation period cover is underwritten by the individual
qualifying insurer that insured the firm for the previous indemnity
period.
Why the change?
Insurers often refer to the high level and amount of claims
arising from the firms in ARP as a major contributing factor to the
increase in PII premium levels across the entire profession. As the
public reports of Capita Commercial Services Limited, the ARP
Manager, show, the claims arising from firms in the ARP have
increased significantly in recent years and a number of cash calls
have been made on the insurers. The pooled nature of the ARP mean
that qualifying insurers are required to underwrite the ARP in the
same proportion as their share of the premium income from the
compulsory PII cover. As such, the ARP arrangements acted as a
disincentive to insurers to write solicitors' PII. The ARP is a
barrier to new insurer entry and the reason why many existing
insurers have reduce market share in recent years.
The EIP/cessation period represents a change from pooled to
individual arrangements. It has received support from insurers and
is a significant contributing factor to new insurers entering the
solicitors' PII market and existing insurers increasing their
capacity to write small firms for the 2012 renewal. For these
reasons, the PII reforms are supported by the Law Society (see Law Society response).
Back to top
Scope of cover
Assigned risks pool
PII is provided to ARP firms in accordance with the SRA
Indemnity Insurance Rules 2012 and the Qualifying Insurer's Agreement (QIA). The terms of the cover are set out in the ARP
Policy or ARP Run-Off Policy set out in Schedule 2, Appendix 1 of
the QIA. The terms are similar to those provided under the minimum terms and conditions (MTC), except:
(a) no ARP Policy provides cover in respect of an
extended indemnity period or a cessation period; and
(b) to the extent that the terms of the MTC and ARP Policy are
expressly different.
Currently, firms may apply to be insured through the ARP for a
maximum of six months in any four year period unless you hold an
ARP policy from before 1 October 2011. If you have been in
the ARP in any previous indemnity periods, you will need to
consider whether you fall within the definition of an 'eligible firm' in the SRA glossary.
After you have entered the ARP, you should still continue to
try to obtain cover from a qualifying insurer. An 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. If you are able to secure cover from a qualifying
insurer that is not backdated (ie 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 will adjust the premium in
accordance with the short period scale in Appendix 2 to the SRA
Indemnity Insurance Rules 2012.
If a firm is unable to obtain cover with a qualifying insurer
in the open market by the end of the maximum period for which they
are eligible to remain in the ARP, the firm will have to cease
practice.
After this time, firms will be provided with six years of
run-off by the ARP. For more information about solicitors'
regulatory obligations on entering the ARP, see the Law Society's PII practice note.
Extended indemnity period/cessation period
The first 30 days known as the 'extended indemnity period' can
be used by the firm to find alternative qualifying insurance. Firms
can continue to practice as usual but must notify the SRA as soon
as reasonably practicable and in any event no later than 5 days of
entering the EIP (rule 17.3 of the SRA Indemnity Insurance Rules
2012).
The next 60 days known as the 'cessation period' will be
used for orderly closure or merger of the practice. Firms must
notify the SRA as soon as reasonably practicable and in any event
no later than 5 days of entering the cessation period (rule 17.3 of
the SRA Indemnity Insurance Rules 2012).
Rule 4.2 of the SRA Indemnity Insurance Rules 2012 require
firms unable to renew their PII with a qualifying insurer at the
end of the EIP to cease practice promptly and by no later than the
end of the cessation period. It is still possible for firms to
obtain open market insurance during the cessation period, provided
the insurer is willing to backdate the policy to the start of the
EIP.
During the cessation 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. Each firm must ensure that
it and each principal or employee, undertakes no activities in
connection with private legal practice and accepts no instructions
during the cessation period save to the extent that the activity is
undertaken to discharge its obligations within the scope of the
firm's existing instructions or is necessary in connection with the
discharge of such obligation (rule 5.3 of the SRA Indemnity
Insurance Rules 2012).
The firm's qualifying insurer (except for the ARP) is required
to provide cover during the EIP and cessation period which, as a
minimum, satisfies the minimum terms and conditions (MTC).
The MTC will still cover activities conducted in breach of the
obligation to undertake no new work during the cessation period in
rule 5.3, however, individuals who breach this obligation will
expose themselves to disciplinary action and liability for
reimbursement if the insurer suffers prejudice as a result of the
breach.
If the firm closes on or before the expiry of the cessation
period, firms must be provided run-off cover by their insurer for
six years incepting with effect on and from the start of the
EIP.
For more information about solicitors' regulatory obligations
on entering the EIP/cessation period, see the Law Society's PII practice note.
Back to top
What is the cost?
ARP premium
The ARP is intended as an option of last resort for practices
that are unable to obtain insurance from a qualifying insurer in
the open market. ARP premiums are usually much higher than the
market rate, and you will be required to 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. The SRA also requires ARP firms to plan and implement
arrangements to either obtain open market cover or close in an
orderly fashion.
Firms that use the ARP for temporary cover receive discounts
on their ARP premium. The discounts do not apply if claims or
circumstances that give rise to claims are notified to the ARP
during the indemnity period concerned. It is a disciplinary offence
to fail to pay premiums. For more information, see the Law Society's PII practice note.
EIP/cessation period premium
The SRA decided not to regulate the cost of EIP or cessation
period premium, therefore, this cost is determined by your insurer.
The Law Society expects insurers will charge a pro rata amount of
the firm's current annual premium, however, you should check your
individual policy wording.
Details of the cost of EIP/cessation period premium should be
found in your insurance policy or quotation pack. Ask your
broker/insurer for further details about your specific
circumstances.
Back to top
What happens to uninsured firms?
In order to protect the public, there needs to be cover for claims against firms which do not, for whatever reason, secure
their own insurance arrangements in accordance with the Rules. This
includes the provision of run-off cover in the case of firms which
have no policy of qualifying insurance in place when they cease
practice.
This 'uninsured' or 'non-applied firms' role is akin to the
Motor Insurer's Bureau for uninsured drivers. Where firms fail to
effect cover, the amount of any claims and any associated costs,
plus interest, can be recovered from the principals of the firm
concerned. It is also a disciplinary offence to practise without
insurance.
Before 1 October 2012, this role was provided by the ARP. From
1 October 2012, this role will be transferred to the Compensation
Fund (see Rule 5 of the SRA Compensation Fund Rules 2011).
Any grant from the Fund will be made in accordance with these
rules and otherwise will be assessed and determined in accordance
with the terms, conditions and exclusions of the MTC as though the
defaulting practitioner had a policy of qualifying insurance
against which a claim in respect of the loss had been made. The
maximum grant that may be made is £2 million (although this may be
waived by the SRA). For further information about the Law Society's
response to this change see our PII campaign page.
Back to top
What happens if my insurer becomes insolvent?
A firm whose qualifying insurer has become insolvent needs to
act immediately to put new qualifying insurance in place. Any
replacement cover will require an additional premium to be paid.
The Law Society has published a practice note for solicitors who
find themselves in this situation.
ARP
The SRA has already made changes removing the obligation on
other qualifying insurers to fund an insolvent insurer's share of
the ARP (see changes to the ARP).This potentially affects the
ability of the ARP to meet the entirety of claims if an insolvent
insurer does not meet its cash calls for a particular ARP
year.
If your insurer becomes insolvent during the current indemnity
period and you are eligible to enter the ARP, you can apply within
the four week period, provided that you do so by 30 September
2013.
No firm will be eligible to remain in the ARP after 30
September 2013 except for the provision of run-off cover (rule 6.2
of the SRA Indemnity Insurance Rules 2012).
There is no recourse to the ARP in the event of insurer
insolvency after 30 September 2013.
If you are in the ARP and are unable to obtain open market
insurance on or before the end of the maximum six month period or
30 September 2013 (whichever is earlier), the Law Society has
published a practice note on the regulatory requirements of closing down your practice.
EIP/cessation period
If your insurer becomes insolvent after 1 October 2013, you
will have four weeks to seek alternative cover. Any replacement
cover will require an additional premium to be paid. If replacement
cover is not available, you will have to cease to practice and your
run-off cover will fall on the insolvent insurer.
Given the long-term nature of solicitors' PII, particularly
run-off cover which must be provided for six years, it is important
to be satisfied that your insurer is financially secure and will be
able to meet any claims made on the policy during the indemnity
period. You do not want to find yourself in a situation of being an
unsecured creditor or reliant on your eligibility for the Financial
Services Compensation Scheme in order to meet claims.
More information is available in the Law Society's
Insolvency of qualifying insurer practice note and insurers' guide (PDF 200kb). If you are in the cessation period and are unable to obtain
open market insurance, the Law Society has published a practice
noteon the regulatory requirements of closing down your practice.
Back to top
Changes to the ARP
As part of the SRA's review of client financial protection
arrangements, the following changes have been made to the ARP
arrangements over a number of indemnity periods.
Changes to the ARP for the 2011/12 indemnity period:
- reduction of the time a firm can spend in the ARP from 12 to
6 months
- requirement for ARP firms to plan and implement arrangements
to either obtain open market cover or close in an orderly
fashion
- removal of the liability of Qualifying Insurers (QIs) to
meet the ARP liabilities of insolvent QIs
- clarification of the reporting obligations of QIs; and
- the SRA now has the ability to make public the insurer of
firms.
Changes to the ARP for the 2012/13 indemnity period:
- the profession will share the liability for the 2012 ARP
with insurers - the SRA intends to use the Solicitors Indemnity
Fund (SIF) to provide at least the initial tranche of the
profession's share of ARP funding. Funding will be shared in the
following tranches:
- 0-£10m SIF
- £10-20m Insurers
- £20-30m SIF/profession
- £30-40m Insurers
- £40-50m SIF/profession
- £50m+ Insurers
- non-applied firms' role will be transferred to the
Compensation Fund - see above.
Changes for the 2013/14 indemnity period:
- the ARP will be closed to new entry and replaced by the EIP/cessation period - see above
- the single renewal date will be abolished.
Back to top
Law Society response
We successfully lobbied the SRA to change its approach to the
ARP and adopt our alternative approach.
The Law Society's current policy position is that the ARP
should be abolished. In our response to the SRA's review, we
proposed an alternative, which involves a firm's current insurer
providing a policy extension in the event that insurance is not
renewed to allow firms to either obtain insurance elsewhere or
consider their alternatives. As part of developing this proposal,
the Society consulted with and obtained the support of various
stakeholders, including insurers and the profession.
In its policy statement, the SRA agreed that the Law Society's
alternative proposal for the ARP represents the best way forward
and has now made the necessary rule changes to implement the
extended indemnity period/cessation period by 2013.
The Society considers that these changes will create a more
stable and competitive PII market to the benefit of the entire
profession and, importantly, remove the need for the ARP to act as
an 'insurer of last resort', which is seen by many insurers as a
barrier to a competitive insurance market. A more stable and
competitive market will hopefully mean that PII is accessible and
affordable to all sectors of the legal profession.
We also decided to support the 2012 ARP funding proposal,
subject to the SRA being transparent about its ARP management
strategy and being open to suggestions about how to better control
and manage firms. Layering of liability (with insurers being
responsible for the unlimited layer) represented the best available
outcome for the profession in the circumstances. Without Law
Society support, the SRA was intending to directly levy the
profession for the entire 2012 ARP. The Society felt it was
important that insurers retain some liability for the final
ARP.
However, a year on, the Society now takes a far less
pessimistic view of the likely development of the market and is
therefore disappointed that it was unable to persuade the SRA to
revisit the issue of the liability split in its second stage
financial protection review. We suggested that a 50:50 split
instead of the £10m tranches above was more in line with the
equitable 'sharing' of liability that was at the heart of our
agreed position. This was particularly the case given the data that
was available to the SRA when making its decision. However, the SRA
has maintained the £10m tranches as part of its 2012 rule
changes.
Back to top
Law Society support
You can obtain further assistance from our Practice Advice
Service by emailing
professionalindemnityinsurance@lawsociety.org.uk.
If you are in the ARP or cessation period and are unable to
obtain open market insurance, the Law Society has published a
practice note on the regulatory requirements of closing down your
practice.
Further information
This guidance has been updated to reflect the SRA Indemnity
Insurance Rules 2012 which can be found at
http://www.sra.org.uk/indemnity/. These rules will come into force
and form part of the SRA Handbook from 1 October 2012. Until that
time, the 2011 Indemnity Insurance Rules (as featured in the SRA
Handbook) remain in force.
There is further information about the ARP on the SRA website:
www.sra.org.uk/arp
Back to top