The Law Society is warning solicitors to check the financial strength of an insurer before purchasing their next professional indemnity insurance (PII) policy, to find out whether the company will be able to meet insurance claims.
The warning follows the recent financial collapse of two insurers, Quinn and Lemma and is being made to quell the misconception, held by many solicitors, that because the Solicitors Regulation Authority (SRA) publishes a list of 'qualifying insurers' that these insurers are vetted by the SRA in some way. This is not the case.
A 'qualifying insurer' is authorised by the FSA to conduct business in the UK and has agreed to write solicitors' PII policies.
The Law Society's warning about insurer solvency is being aimed at smaller firms to give them time to assess the financial strength of potential insurers ahead of the next PII renewal phase in early summer.
While commercial pressures on firms may tempt them to choose the 'cheapest' quote for their professional indemnity insurance, the true cost of this cover can be frightening. If an insurer becomes insolvent, there may be a very high price to pay, in a personal, as well as business capacity.
It is essential to know that an insurer is financially secure and will be able to meet any claims made on a policy, due to the long-term nature of solicitors' PII, particularly run-off cover, which must be provided for six years.
The Society is advising solicitors to seek out an insurer's rating before selecting their provider because unrated insurers are an unknown quantity. An official rating from an independent ratings agency is the most objective measure of a firm's financial security.
Law Society president Lucy Scott-Moncrieff said
'Firms should not make one of the most important purchasing decisions for their practice without knowing the facts. While cost is a key consideration for firms, they need to be absolutely confident that their insurer will be able to meet its obligation to pay claims. Depending on a firm's business structure, uninsured loss can have devastating personal consequences.
'Firms should also consider whether the indemnity limit of their policy is sufficient to cover the potential liability of their firm. The Law Society has prepared additional guidance about top-up and excess layer cover.'
'It is for the SRA to address the systemic risk of insurer failure, however, the Law Society is currently undertaking various activities aimed at mitigating this risk and providing a stable market for solicitors.'
Notes to editors
The Law Society has prepared a host of guidance on PII for its members:
The Solicitors Regulation Authority (SRA) does not undertake any solvency checks on insurers and does not require a minimum level of financial security for participation in the solicitors' PII market. The SRA has, however, introduced a transparency requirement for all qualifying insurers. Insurers must now disclose whether or not they have a financial security rating and the provider of this rating.
The SRA and the Law Society do not vet, approve or regulate insurers. A 'qualifying insurer' is authorised by the FSA to conduct business in the UK and has agreed to write solicitors' PII policies that accord with the SRA's requirements.
The SRA enters into the qualifying insurers' agreement with insurers each year to ensure that they provide policies in accordance with the minimum terms and conditions in the SRA Indemnity Insurance Rules.
While the SRA requires transparency of financial security ratings as part of this agreement it does not mandate that insurers have a certain rating or indeed any rating at all.
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.