Contents
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?
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. Obtaining PII can be difficult. In the past two years some solicitors have been unable to obtain PII from a Qualifying Insurer or had to accept significantly higher premiums. Obtaining PII for 2010-11 is likely to be just as, if not more, difficult.
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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2. Professional indemnity insurance overview
2.1 What is it?
PII is insurance that covers civil liability claims arising from your work. These claims most commonly involve professional negligence.
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2.2 Why do I need it?
Like many other types of professional firms, 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.
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2.3 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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2.4 Who provides it?
You can obtain PII from either:
As of 1 October 2010, new firms will not be eligible to apply for PII from the ARP. Firms that are eligible to enter the ARP will be confined to those that have previously obtained Qualifying Insurance with a Qualifying Insurer.
2.4.1 A 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.
2.4.2 The assigned risks pool
If you cannot get PII from a Qualifying Insurer before 1 October, 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. As of 1 October 2010, new firms will not eligible to apply for PII from the ARP.
The Qualifying Insurer's Agreement requires Qualifying Insurers to underwrite the 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.
You may only be insured through the ARP for a maximum of 12 months in any five-year period unless you hold an ARP policy before 1 October 2010.
As a transitional arrangement, if you hold an ARP policy before 1 October 2010, you may be insured through the ARP for a maximum of 24 months in any five-year period. After this time, you must secure cover from a Qualifying Insurer or cease practise.
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2.5 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.
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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3. The current professional indemnity insurance market
You should be aware that the upcoming renewal process is likely to be just as difficult as, if not more difficult than, the last two years.
3.1 Effects of hardening
The solicitors' PII market has hardened since the 2007-08 renewal process. 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 collapse of the housing market and an increase in mortgage-related fraud leading to concerns among 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 much 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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3.2 Premiums
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.
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4. Applying for professional indemnity insurance
4.1 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 find. Do not wait until the insurers have finalised their proposal forms.
4.1.1 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.
4.1.2 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
- the key things they will be looking for in assessing proposals.
4.1.3 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.
4.1.4 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 2010-11 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.
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4.2 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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5. Your proposal
5.1 How should I write my proposal?
You should use the proposal as an opportunity to convince the 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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5.2 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. That insurer may not necessarily be the 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:
5.2.1 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.
5.2.2 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 5-10 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.
5.2.3 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.
5.2.4 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 practise areas, such as some new firms.
5.2.5 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.
5.2.6 Principals & 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.
5.2.7 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 - can help to demonstrate good risk management practices. Some insurers may offer you more competitive terms if your firm is Lexcel accredited.
High risk: firms that lack effective written risk management practices.
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5.3 What should I do if I fall into a high risk area?
Your proposal should address the areas that insurers perceive as involving a 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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5.4 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.
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6. 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
- 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 you communicate your decision before the offer expires.
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7. 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 will not eligible to apply for PII from the ARP from 1 October 2010 .
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7.1 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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7.2 New firms entering the Assigned Risks Pool
If you are opening a new firm before 1 October 2010 and are unable to obtain insurance from a Qualifying Insurer, you may apply to enter the ARP during this indemnity period (that is, until 30 September 2010). The ARP premium for your firm will be reduced pro rata accordingly.
From 1 October 2010, new firms will not 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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7.3 After entering the Assigned Risks Pool
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 the credit facility provided by Premium Credit, 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 4.
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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8. Other issues
8.1 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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8.2 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
- 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 1 October each year.
8.2.1 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, currently run-off cover for the disposing firm will be provided through the mechanism of the acquiring (successor practice) firm.
From 1 October 2010 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.
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 seek your insurer's view too 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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8.3 Ceasing practice
You should consider the PII ramifications before ceasing 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 (ie. Until 30 September 2009 ) and for a further six year to 30 September 2015 .
If you have a policy with a Qualifying Insurer, you will usually need to pay a run-off premium (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 Part 3 of 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, from 1 October 2010 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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8.4 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. Rule 15.26 (2)(b) of the Solicitors' Code of Conduct 2007 states that the amount of that insurance need not exceed the requirements in the Rules, but must be reasonable having regard to:
- 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.
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8.5 Difficulties in paying a premium up front
Most insurers will require you to pay the whole premium by 1 October 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.
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8.6 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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9. More information
9.1 Professional Conduct
The following sections of the Solicitors' Code of Conduct 2007 are relevant to this issue:
- Rule 5 - Business Management in England and Wales
- Rule 15 - Overseas Practice
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9.2 Legal and other requirements
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9.3 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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9.4 Terminology in this advice
Must - a specific requirement in the code or legislation. You must comply, unless there are specific exemptions or defences provided for in the code or relevant legislation.
Should - good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer.
May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.
Solicitor - includes Registered European lawyers, registered foreign lawyers and recognised bodies and their managers.
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9.5 Further products and support
9.5.1Law Society Practice Advice Line
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.
9.5.2 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
9.5.3 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.
9.5.4 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 your firm?s annual turnover is less than £1m at the time of your complaint.
9.5.5 Solicitors Regulation Authority
If you have questions about the indemnity insurance arrangements, contact the SRA?s Client Protection Policy Unit on 015 2750 4487. For questions about whether a firm is a successor practice, call 015 2750 4422 or email professionalindemnity@sra.org.uk
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10 Amendments
This note has been amended throughout from the version previously published on 10 July 2009, to reflect the process of application for 2010-11.
- Section 4.2: Amended to signpost guidance information.
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