Professional indemnity insurance

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). In-house solicitors should read section 10.5 about how this practice note applies to their circumstances.

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1.2 What is the issue?

If you are a solicitor in private practice, you are required to take out and maintain PII in accordance with the SRA Indemnity Insurance Rules (the Rules) by 1 October each year. The SRA Handbook 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 outlines how you should apply for PII dealing with market-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
• SRA Indemnity Insurance Rules
• SRA Compensation Fund Rules
• Minimum terms and conditions
• 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

ARP - assigned risks pool

MTC - minimum terms and conditions

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 SRA Indemnity Insurance Rules 2012 as amended (the Rules) 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 on the SRA website.

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.

3. Professional indemnity insurance overview

3.1 What isPII?

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.

For more information about the scope of the minimum terms cover see section 4.

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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.

From 1 October 2013, the single renewal date will be abolished. This will mean that insurers and the insured can agree to a different policy length, which may mean that some policies move away from the 1 October start date.

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3.4 Who provides it?

You can obtain PII from either:

• a qualifying insurer, or
• as a last resort - the assigned risks pool (ARP).
• 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.

From 1 October 2013, the ARP will be closed to all firms and the only means of obtaining PII will be via a qualifying insurer. Firms that are unable to obtain insurance on the open market in 2013 must be given an Extended Indemnity Period (EIP) by their previous insurer. Read more about ARP changes.

3.4.1 Qualifying insurer

A qualifying insurer is an insurer that:

• is authorised to conduct insurance business in the UK by the Financial Services Authority (FSA), and
• has signed the Qualifying Insurer's Agreement.

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.

Regulation of qualifying insurers is undertaken by the Financial Services Authority, 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 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 four-year period unless you hold an ARP policy 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 a firm has been in the ARP for the maximum eligible period, it must secure cover from a qualifying insurer or cease practice.

The Qualifying Insurer's Agreement requires qualifying insurers to underwrite the 2012/13 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.

In the SRA Indemnity Insurance Rules 2012, the SRA has changed the way the ARP funded for the final ARP year. The SRA proposes that the 2012 ARP should be 'jointly funded' by the profession and qualifying insurers. It sets out the method and proportions by which this funding will occur:

• 0-£10m Solicitors' Indemnity Fund (SIF)
• £10-20m Insurers
• £20-30m SIF /profession
• £30-40m Insurers
• £40-50m SIF /profession
• £50m+ Insurers

The SRA intends, in part, to use the Solicitors Indemnity Fund to provide the profession's share of ARP funding.

However, it has made provision to permit the collection of contributions from firms to cover the cost of funding all or part of this funding if the need arises (see rule 13 of the SRA Indemnity Insurance Rules 2012).

3.4.3 The extended indemnity period

From 1 October 2013, there is no longer an assigned risks pool (ARP). Instead, firms that are unable to obtain qualifying insurance must be given an extended indemnity period (EIP) by their insurer from the previous indemnity year. The terms on which this EIP will be provided are set out in the SRA Indemnity Insurance Rules 2012 and in your MTC policy.

The EIP is comprised of a 30 day extended indemnity period 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.

3.5.4 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 What are the minimum terms and conditions?

The minimum terms and conditions (MTC) are set out in Appendix 1 of the SRA Indemnity Insurance Rules 2012. The MTC must be included as part of your compulsory policy of qualifying insurance, which you should read carefully.

This practice note does not attempt to detail all of the MTC, but rather highlights some of the more recent changes and important obligations of which you should be aware.

4.1 No defence costs for disciplinary proceedings

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.

Although the Law Society opposed the removal of this cover the SRA decided that it is not in the public interest for insurance to cover these claims. 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.

4.2 Reimbursement provisions

There are provisions in the MTC that permit insurers to seek reimbursement from the insured in certain circumstances, that is, non-disclosure, misrepresentation, breach, dishonesty or fraud.

Failure to disclose material information to your insurer will not permit the insurer to avoid cover for claims within the compulsory level of cover set out in the MTC. Insurers are, however, entitled to seek reimbursement under clause 7.2.

Clause 7.2 does allow for reimbursement against individuals. The reimbursement provision will apply to you if you either commit or condone any breach of policy conditions or are fraudulent or dishonest.

From 1 October 2012, there is a new provision that allows reimbursement for a breach of the requirement to only perform work in connection with existing instructions during the cessation period (see section 4.2.1 below for more details).

Insurers must also report these matters to the SRA under rule 17 of the SRA Indemnity Insurance Rules 2012 and this may give rise to disciplinary action.

It is important to remember that if you have taken out insurance above the compulsory layer of MTC (ie excess or 'top up' cover) it is likely that the policy will provide that the insurer can avoid coverage (rather than seek reimbursement) in the event of non-disclosure or misrepresentation.

4.2.1 When can insurers seek reimbursement?

Clause 7.2 of the MTC provides that the insurer may seek reimbursement from each insured who committed or condoned (whether knowingly or recklessly) any:

• non-disclosure or misrepresentation;
• breach of the terms or conditions of the insurance; or
• dishonesty or any fraudulent act or omission.

For example, a situation where an insurer may seek reimbursement is when the insured has failed to notify circumstances that give rise to a claim. This may be classed as non-disclosure or breach of the terms of insurance.

When the extended indemnity period provisions, come into effect from 1 October 2013, if a firm or any person on its behalf conducts work during the cessation period other than in connection with existing instructions, an insurer can seek reimbursement from that insured. This is a new provision that has been added to the MTC as a consequence of the SRA Indemnity Insurance Rules 2012.

Although insurers will not be able to avoid insurance coverage if work is conducted during the cessation that is not in connection with existing instructions, insurers will be able to seek reimbursement from individuals if a claim arises from work conducted in breach of these rules. While the mere fact of carrying out new work during the cessation period will give rise to a right of reimbursement, the insurer can only rely on this provision if it has (a) paid out sums for which it is seeking reimbursement and (b) been prejudiced. It is difficult to see how the insurer could have suffered prejudice in absence of a claim arising from that breach. See section 4.2.3 How much reimbursement?  

Other acts or omissions must be of a dishonest or fraudulent nature to trigger the reimbursement provisions.

It is for the insurer to demonstrate non-disclosure, misrepresentation, breach, dishonesty or fraud and entitlement to seek reimbursement. Although the insured has an obligation to cooperate and provide information to insurers with respect to claims, you are not required to provide information solely to enable the insurer to investigate whether or not you have breached your obligations to the insurer (Gan v Tai Ping [2002] EWCA Civ 248).

4.2.2 Who can insurers seek reimbursement from?

Insurers can only seek reimbursement from the insured who committed or condoned the non-disclosure, misrepresentation, breach, dishonesty or fraud.

The right of reimbursement is against each insured. An 'insured' is widely defined in the MTC and includes current and former principals and employees of the insured firm (clause 1.3), prior practices (clause 1.5) and successor practices (clause 1.7). This means that insurers can seek reimbursement from both the firm and the individuals within the firm (ie partners, directors, employees) but only if they committed or knowingly or recklessly condoned the act that gave rise to the right of reimbursement.

A principal includes each member of an LLP and any person who is the ultimate owner of the whole or any part of the body corporate or any other legal person that is a member of the LLP.

Non-disclosure, misrepresentation, breach, dishonesty or act or omission can not be imputed to a body corporate unless it was committed or condoned by all the directors of that company, or in the case of an LLP, all members of that LLP. Therefore, before an insurer can seek reimbursement from a body corporate (as opposed to an individual) on an imputed basis, the insurer must show that all of the directors/members were culpable.

The SRA has confirmed that insurers can seek reimbursement from members of an LLP in their personal capacity and member's liability is not limited to the extent of any business assets.

The insurance may require the insured firm to account to the insurer for any asset or entitlement of any person who committed or condoned any dishonesty or fraudulent act or omission provided that insured firm is legally entitled to withhold that asset or entitlement from that person (clause 7.5).

4.2.3 How much reimbursement?

Insurers can only seek reimbursement that is 'just and equitable' having regard to the prejudice to the insurer's interests caused by the non-disclosure, misrepresentation, breach, dishonesty, act or omission.

Insurers cannot be reimbursed for breach of the terms or conditions of insurance if the breach was necessary to comply with the SRA Handbook.

4.2.4 Other types of reimbursement

There are also provisions to allow for reimbursement of:

• defence costs that were advanced but not used (clause 7.3);
• any excess paid by the insurer on the insured's behalf (clause 7.4); and
• moneys paid pending resolution of a coverage dispute that after the resolution of the dispute it was determined that the insurer was not ultimately liable to pay (clause 7.5).

4.3 Obligation to notify claims or circumstances

You have an obligation under your insurance policy to notify your insurer of any claims or circumstances that may give rise to a claim.

Under clause 1.1 of the MTC, the scope of your insurance coverage is determined by claims made during the period of insurance and claims made during or after the period that arise from circumstances first notified to the insurer during the period.

If you fail to notify the insurer of a claim or circumstance, then the insurer can avoid cover. Coverage disputes can arise, for example, if the insurer contends that a circumstance should have been notified in an earlier period of insurance when a different insurer was on cover.

It is important to distinguish between a 'claim' and a 'circumstance'. As a general rule of thumb, a claim is usually relatively easy to identify, namely, an indication from a third party of a dispute which will, or may, result in an expected remedy from you.

A circumstance is more difficult to define, but basically arises where you become aware of an occurrence or problem, which may give rise to a third party claim, but no formal claim or actual allegation of negligence has been made to you. For example, a lender's request to view a conveyancing file.

Circumstances should be distinguished from other disputes (such as complaints or fee disputes) that will not give rise to a claim.

You should notify your insurer of any relevant situation, even if you are unsure whether it amounts to a 'circumstance'. Insurers view notification of circumstances (particularly those that do not result in claims) as a sign of a firm that adheres to good risk management practices and takes its obligation to notify seriously.

Your broker may also be able to advise you about whether a situation is a circumstance that should be notified.

4.3.1 Duty to your client

In order to satisfy the client care outcome in the SRA Handbook, you must inform current clients if you discover any act or omission which could give rise to a claim by them against you; O(1.16).

For further discussion about the scope of this duty, see Insurance Matters 9 (PDF).

4.3.2 Disclosure to your insurer

When notifying insurers of claims and circumstances you should also consider your duty of client confidentiality; O(4.1). Client confidentiality and legal professional privilege can only be waived with the express consent of the client.

Once a client makes a formal claim against the firm, this constitutes an implied waiver and you can share this information with your insurer. However, in the case of Quinn v the Law Society of England and Wales [2010] EWCA Civ 805 the Court of Appeal made it clear that even as regards a law firm's own insurer, solicitors cannot ignore client confidentiality and privilege and can only disclose this type of information with the consent of the client.

This potentially places you in a difficult position in terms of insurance as you are, of course, required to notify insurers of any circumstances that might lead to a claim being made against you. If a firm is notifying a circumstance rather than a claim, there will be no implied waiver of privilege and so the information it is able to provide the insurer could be very limited.

Lord Justice Morritt said: 'It may be that, if the client will not waive his [sic] privilege to enable proper disclosure to be made, the consequence of the resulting conflict of interest will be that the insurance is vitiated or the notification inadequate, but that is the problem of the solicitor not the client.'

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4.4 Obligation to disclose insurer's details

Firms must disclose certain insurance details to clients and/or claimants. Both these regulations apply only to the compulsory element of the insurance, that is the minimum terms and conditions (MTC) cover. This means that only details of the primary layer insurer have to be provided.

You do not have to provide any details of 'top up' or excess layer insurance, this includes the fact that you may have such insurance, the identity of your excess layer insurers or the total level of your insurance cover.

Indeed, it is may be unwise to disclose this information as you will lose tactical litigation advantage in the unfortunate event of a large claim (or several similar claims in one policy year which may be aggregated under the MTC cover).

Firms are of course from time to time subject to commercial pressures to disclose indemnity cover to larger clients or on specific very large transactions. Lenders, for example, have in recent times made blanket requests about the adequacy of insurance arrangements of panel firms.

However, that again needs careful thought. You not need to disclose this information to all clients as a matter of course and indeed to do so may also lead to coverage difficulties with insurers and in particular excess layer insurers, whose policy may contain an express condition prohibiting any such disclosure.

The obligation to disclose comes from two different sources, the SRA Indemnity Insurance Rules 2012 and the Provision of Services Regulation 2009.

4.4.1 SRA Indemnity Insurance Rules 2012

Pursuant to rule 18 of the SRA Indemnity Insurance Rules 2012, if requested, there is an obligation upon firms to provide to a claimant, or by any other person with a legitimate interest, the name of their qualifying insurer, the policy number and the address and contact details for the insurer. The obligation does not extend to any further information and relates only to the compulsory primary layer of insurance. It does, however, extend to claims that may fall within the scope of any supplementary run-off cover provided by SIF.

The requirement in the Rules extends to a claim for contribution or indemnity and this will therefore also require the information to be given to an additional claimant bringing a claim under CPR Part 20 or by a co-defendant, who will be interested tactically to find out which qualifying insurer is involved, as they may for example have a known approach to dealing with certain types of claim.

Importantly, there does have to be an actual claim being asserted before the duty arises. Any communication that falls short of that, such as a general complaint or circumstance, would not trigger the disclosure requirement. In addition, the claim also has to be within the scope of cover of the minimum terms. This is not to say that the claim has to have any merit but simply that it could fall under the cover. For example, a claim made against a solicitor who was not acting in the course of private legal practice would not be within the scope of Rule 18.

4.4.2 Provision of Services Regulations 2009

The Provision of Services Regulations 2009 (implementing European Directive 2006/123/EC on services in the internal market) has imposed further requirements. Under regulation 8(1)(n) where the service provider is subject to a requirement to hold any professional indemnity insurance, they are required to provide information about the insurance to customers.

The only specified information that must be provided under the Regulations is the contact details for the insurer and the territorial coverage of the insurance. In the case of the minimum terms, the territorial coverage is worldwide.

The information must be made available to a customer and the service provider has a choice of four methods by which to make information available. These are:

• You provide the customers with such information on your own initiative.
• It is easily available to the customer at the place where you provide the service, or where the contract for the service is concluded.
• It is easily available to the customer electronically (for example, on your website).
• It appears in any information document you supply to the customer in which you give a detailed description of the service.

Therefore, the requirements can very simply be met by a notice in a firm's reception area, although many firms are choosing to go further and place the details on either their website or in client care documents.

For further information see the Provision of Services Regulation 2009 practice note.

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5. 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. However, the 2011/12 renewal saw signs that the market may be easing for some solicitors.

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5.1 Outlook for 2012-13

We have a more positive outlook for the market this year. We consider the trend from last year will continue and hopefully there will be new insurer entry.

• The results of our 2011-12 survey of renewal experiences suggest that the renewal process is becoming easier for the profession. For example, just over half of all firms (54%) experienced a decrease in the cost of their premiums compared to the previous year. Firms that remained with their existing insurer were less likely to experience a decrease in the cost of their premium and more likely to find that their premium stayed at the same level.
• While the results from the survey seem to suggest that a firm may be able to get 'a better deal' by approaching all insurers in their available market for a quotation, the level of premium should not be a firm's sole consideration. There are other factors to consider, such as insurers' financial stability and maintaining a relationship with your existing insurer as this may provide benefits with respect to claims handling and avoiding coverage disputes.
• With the imminent demise of the assigned risks pool (ARP), new insurers may look to enter the market for the 2012-13 indemnity year.

There does, however, remain concerns within the market that a number of conveyancing claims flowing from the property market crash are still working their way through the PII system.

There is also the perception that the profession itself should do more to proactively manage risk.

Regardless of the state of the market, in order to place your firm in the best PII position, you may 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.

5.2 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 EIP by 2013 will hopefully assist in reversing this trend by encouraging a more competitive market.

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6. Applying forPII

6.1 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.

6.1.1 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.

You may wish to 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. This is what will be used by insurers to assess your firm's renewal prospects.

6.1.2 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.

6.1.3 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.

6.2 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 PII buyers' guide provides checklist of points to consider in selecting the right broker for your requirements.

Download the guide (PDF 200kb)

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7. Your proposal

7.1 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. How you present your proposal is indicative of the way that you conduct the rest of your business, you should:

• 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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7.2 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 at the time 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 or whether they will accept the Law Society's composite proposal form.

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, and
• risk management practices.

7.2.1 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.

7.2.2 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 summary which is readily available from insurers.

High risk: firms or principals that have been subject to previous claims.

7.2.3 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.

7.2.4 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.

7.2.5 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.

7.2.6 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.

7.2.7 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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7.3 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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7.4 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.

For further details about managing these relationships, see the Law Society's PII buyers' guide (PDF 200kb)

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8. 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.

For further details about ensuring your broker will be able to assist you in considering offers, see the Law Society's PII buyers' guide (PDF 200kb)

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9. Difficulties gettingPII

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 2012. 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 'ARP will be closed from 1 October 2013 and replaced by the EIP.

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9.1 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 2012 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 2012.

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9.2 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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9.3 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.

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.

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10. Other issues

10.1 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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10.2 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
• giving undertakings
• 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 year until your insurance is ready to be renewed.

10.2.1 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 prior practice. 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 prior practice will have to enter into run-off.

The SRA Handbook Glossary contains the definition of a successor practice that outlines 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 merger 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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10.3 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 six year period, until 2020, 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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10.4 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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10.5 In-house practice

The SRA Practice Framework Rules prevent in-house lawyers acting for clients other than employer except in certain circumstances. Depending on the circumstances you may need to have professional indemnity insurance (PII) in place.

If you are performing work in-house for an employer, 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.

This cover should be reasonably equivalent to that required under the SRA Indemnity Insurance Rules. 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.

The only areas of work where in-house solicitors can act for non-employer clients are set out in the following practice framework rules:

• pro bono work (rule 4.10),
• commercial legal advice services (rule 4.14)
• law centres, charities and other non-commercial advice services (rule 4.16), and
• foreign law firms (rule 4.19).

You must have PII cover to act for a client other than your employer in any of the above circumstances.

Rules regarding when you can act for clients other than your employer have changed in light of the Legal Services Act 2007.

Please see our FAQs (PDF) for more information about providing pro bono work when working in-house.

10.6 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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10.7 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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11. More information

11.1 Law Society products and services

The Law Society provides support for solicitors on a wide range of areas of practice. The Practice Advice Service can be contacted on 0870 606 2522 from 09.00 to 17.00 on weekdays.

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11.2 Other resources

11.2.1 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.

11.2.2 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 or insurer is regulated by the FSA, check the online register.

11.2.3 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.

11.2.4 Solicitors Regulation Authority

If you have questions about the indemnity insurance arrangements, contact the SRA 's financial protection team on 01527 504487 or email professionalindemnity@sra.org.uk.

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12 Amendments

This note has been amended throughout from the version previously published in August 2011, to reflect the PII renewal process for 2012-13. This practice note refers to the SRA Indemnity Insurance Rules 2012 that will take effect from 1 October 2012.

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