The professional indemnity insurance (PII) regime has recently undergone substantial changes, culminating in a number of regulatory reforms which will be bedded in this year.
The major change is that from 30 September, the Assigned Risks Pool (ARP) will close and will be replaced by an Extended Indemnity Period (EIP) and Cessation Period (CP). The EIP is a 30 day extension of your PII policy provided by your last insurer in the event that you are unable to obtain renewal terms elsewhere. The CP is a further extension of 60 days.
The main difference between these two periods is the ability of firms to accept new work from clients. During the EIP, firms can continue to practise as usual. During the CP, the focus of the firm (and the SRA) must switch to planning for orderly closure; firms are unable to accept new instructions from clients, although they can continue to conduct work in connection with existing instructions. Firms should continue to seek cover from insurers during the EIP/CP as failure to obtain open market insurance by the end of this period will necessitate the closure of your firm.
Firms are obliged to notify the SRA that they have entered both these periods as soon as reasonably practicable, and in any event within five days. Firms must also notify the SRA if they obtain a backdated insurance policy, stating the name of their new insurer and the policy number. It is vital that your firm has the processes in place to report this information to the SRA in order to comply with your regulatory obligations.
You should also carefully consider how you communicate with your clients if you enter the CP and are unable to conduct new work or accept new instructions. We expect that the SRA will be tough on firms and ensure they shut down by the end of the period, otherwise the entire profession will pay via the Compensation Fund, which now has a role of protecting the clients of uninsured firms.
The best course of action for firms is to avoid the EIP/CP entirely and plan for 2013 PII renewal to optimise your firm’s chance of obtaining cover. If you have not already done so, attaining Lexcel accreditation will go a long way in demonstrating to insurers that your firm has a quality approach to risk management.
If your firm does fall into a high risk work area or has a claims history, it is vital that you and your broker present your firm in a way that demonstrates sound business practices and that you have taken steps to redress any issues that have previously resulted in claims. The Law Society has also published a range of advice to assist you to choose the right broker and use the market to your advantage.
The Law Society’s Small Firm Division is hosting a free webinar for its members on 18 June to provide further insight into the changes for the 2013 PII renewal, to detail the advice provided by the Law Society and to give firms an opportunity to better understand the SRA’s regulatory approach.
Another change that may take some time to take effect is that solicitors and insurers are no longer tied to 1 October as a renewal date. This year, for the first time, solicitors will be able to agree variable-length policies with their insurer. Firms may wish to align the expiry of their policy with other business processes or take advantage of the security provided by longer-term policies that will move their renewal date away from the manic summer season.
In past years, PII renewal has been a daunting process for some small firms. It may be tempting to avoid shopping around and simply seek renewal terms from your existing insurer. There may be advantages to accepting an early renewal, particularly if you have an established relationship with a rated provider; however, changes to the PII regime may encourage new rated entrants into the market, so it may be worthwhile to explore all of your options.
Some firms may need to look elsewhere for cover. There remains uncertainty over whether the 1,300 firms insured with Balva will be provided with renewal terms as the insurer’s license to conduct new business within the UK has been suspended by its Latvian regulator. We urge you to keep abreast of all the latest PII news via Professional Update and the Law Society’s Insurers’ Guide which is updated regularly throughout renewal.
The demise of PII providers Quinn and Lemma was a sobering wake-up call for all firms, and further highlights the dangers of failing to conduct financial due diligence on insurers. The Law Society strongly recommends that this renewal, firms do not simply select an insurer based on price alone, but also consider the financial stability of the insurer that you are placing your cover with. You want them to be there for the long term, particularly in the unfortunate event that you need them to settle a claim made against your firm. Remember that the SRA does not conduct any additional solvency checks on insurers that participate within the market.
A senior partner within a one to four partner firm reflecting on the experience of dealing with an insolvent insurer, said: “[At the time] I didn’t pay too much attention to whether the insurer was rated or not, but now I understand the difference and fully appreciate what is at risk. You pay too much in premiums to find out that you have got no cover at the end of the day.”
We want our members to be aware of the potential risks of selecting an financially insecure insurer. If your insurer were to become insolvent, you would be obliged to arrange alternative cover within a month and to pay a second premium, which might of course be more onerous than the first.
Under the new PII regime, if your provider were to fall insolvent after 1 October 2013, and you struggle to acquire secondary cover within the four-week window, you will have to cease practice. You could even find yourself wholly uninsured, which would have grave consequences, particularly for sole practitioners and partnership principals who are jointly and severally liable for losses. The Law Society has developed advice to assist small firms with this purchasing decision.
In summary, there are some major changes occurring and we encourage firms to be proactive and engaged this PII renewal. Securing PII should not be a daunting task if you plan ahead and use the advice and support offered by the Law Society to keep informed.