Professional indemnity insurance
Professional indemnity insurance - 23 April 2009
1. Introduction
1.1 Who should read this practice note?
Solicitors who are required to obtain professional indemnity insurance (PII).
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 2008 some solicitors were unable to obtain PII from a qualifying insurer or had to accept significantly increased premiums. Obtaining PII for 2009–10 is likely to be just as, if not more, difficult.
This practice note describes the PII requirements and market. It then outlines how you should apply for PII and how you should deal with PII-related issues.
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.
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). See the SRA website for details of the rules on PII .
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.
2.3 When do I need it?
Existing firms must renew PII by the start of the indemnity period on 1 October. This date is intended to precede the annual renewal of solicitors’ practising certificates on 1 November.
New firms may obtain PII at any time throughout the year, before commencing practice.
Firms should not assume that PII will be easy to obtain, however, and should plan ahead of the deadline.
2.4 Who provides it?
You can obtain PII from either:
- a qualifying insurer, or
- as a last resort - the assigned risks pool (ARP).
2.4.1 A qualifying insurer
A qualifying insurer is an insurer that:
- is authorised to conduct insurance business in the UK, and
- has signed the Qualifying Insurer's Agreement.
The Qualifying Insurer’s Agreement requires qualifying insurers to offer a minimum level of cover which is set out in the Minimum Terms and Conditions. This minimum level of cover applies regardless of the actual wording of the policies issued.
You should note that neither the Law Society nor SRA vets, approves or regulates qualifying insurers. This means that they do not give a warranty about the financial integrity of qualifying insurers. The Financial Services Authority (FSA) regulates insurers that are authorised to conduct business in the UK and, accordingly, all qualifying insurers.
2.4.2 The assigned risks pool
If you cannot get PII from a qualifying insurer before 1 October, you may apply for PII from the ARP. The ARP is intended as an option of last resort. You will be required to pay a higher premium than the market rate, and to be inspected and monitored by the SRA at your own expense. You may also be required to attend approved courses and to implement specified practice management measures.
The 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 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 practice.
2.5 How much cover do I need?
The 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:
- Body corporates must have at least £3m in cover.
- Other firms, for example, sole practitioners and partnerships, must have at least £2m in 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 the cover from one insurer.
3. The current PII market
You should be aware that the renewal process is likely to be just as difficult as, if not more difficult than, last year.
3.1 Effects of hardening
The solicitors’ PII market hardened during the 2008–09 renewal process. This was due to a combination of factors including:
- some qualifying insurers exiting the market prior to the 2008 renewal date
- 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 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 insurers scrutinised proposals more carefully and were more selective in the firms to which they offered cover. Some parts of the profession were forced to accept significantly increased premiums or were unable to obtain PII from a qualifying insurer at all. Amongst the worst affected were:
- sole practitioners
- firms with fewer than five partners, and
- firms that performed conveyancing work.
- Even some firms with a clean claims history experienced difficulties.
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.
4. Applying for professional indemnity insurance
4.1 When should I start?
You should start preparing for this year’s renewal process by May 2009, as the information required can be difficult and time consuming to find. Do not wait until the insurers have finalised their proposal forms.
4.1.1 Preparation
Start collecting information by May and preferably continue to do so on an ongoing basis.
Check last year’s proposal forms to predict most of the information that insurers will be requesting this year. If anything, insurers are likely to request more information this year than in previous years, 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 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
- 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 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 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 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 therefore less likely to constitute significant risk.
4.1.4 Firms in the ARP
If you are currently in the ARP, you should start speaking to brokers and/or insurers about obtaining PII for 2009–10 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.
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 SRA lists a number of brokers that offer PII through qualifying insurers. This list is not exhaustive and does not indicate the Law Society’s or SRA’s approval of these brokers.
In the lead up to the renewal date, you are likely to receive advertising material from a number of broking firms. You should not necessarily engage the first one you read about. There are a number of factors to ensure you engage the broker that is right for you.
4.2.1 Regulation
Before engaging a broker, you should ensure that the FSA regulates it. You can do this by checking the FSA's website. A broker or any other intermediary can only give advice on insurance matters if it is regulated by the FSA either:
- directly, or
- as an Appointed Representative of another regulated firm.
Brokers regulated by the FSA must comply with a number of obligations designed to protect their clients. The FSA also provides a useful avenue for making a complaint if you receive poor service from your broker.
4.2.2 Services
You should consider the services a broker provides and their level of relevant experience. Brokers offer very different services to their clients:
- Sub-broking: some brokers only refer proposals to large broking firms, which then communicate with the insurers.
- Intermediaries: some brokers simply act as an intermediary between you and the insurers.
- Advice: some brokers will inform you about market conditions and advise you about how best to apply for PII.
Brokers also have different levels of experience in dealing with the solicitors’ PII market. PII is a specialist area of insurance, particularly solicitors’ PII and you should therefore ensure that you engage a sufficiently experienced broker.
4.2.3 Access to qualifying insurers
You should consider a broker’s access to the qualifying insurers. Some brokers have a commercial agreement with a single qualifying insurer for certain segments of the profession. This may mean that the broker can place business only with one qualifying insurer or that the broker is the only broker that places business or certain types of business for that insurer.
You should ask the broker:
- which qualifying insurers they place business with, and
- which qualifying insurers are prepared to offer cover to firms of your size.
By asking this, you may realise that you need to use more than one broker to gain access to the full range of qualifying insurers who are willing to offer your firm cover. You should not normally need to approach more than three brokers to ensure adequate access.
If you use multiple brokers you should ensure that your proposal does not go to the same insurer more than once. Otherwise, you risk irritating insurers that receive your proposal multiple times through different brokers, and slowing down the entire system.
Finally, you should reach an agreement with the broker(s) and/or insurer on the renewal process. You should ask them
- how they will review your proposal formm, and
- how they will keep you informed about the progress of your proposal.
You should also agree with them on a reasonable deadline for the offer of terms.
5. Your proposal
5.1 How should I write my proposal?
You should use the proposal as an opportunity to convince the insurers that they should 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 and treat it like a business tender. Your proposal form 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.
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 quite a wide variance in the questions asked by different insurers and it is not inconceivable that you may have to complete several different proposal forms. One way around 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 constituting a higher risk. Your broker should also be able to advise you on what a particular insurer regards as high risk areas.
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 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 firms that practise in:
- residential and/or commercial conveyancing
- personal injury
- litigation, or
- niche areas of law about 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 provide an indication of the likelihood of future claims. You should provide an explanation and details about 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 and provide copies of reports or correspondence from the Solicitors Disciplinary Tribunal, SRA or where relevant the Law Society about you and/or your firm. This information may affect your firm’s premium, either positively or negatively, and/or your likelihood of being offered PII. This information provides a second and independent assessment of your firm’s management and risk frameworks.
5.2.4 Expertise
Insurers are more likely to favourably consider your proposal 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, for example: 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 previous years’ fees. 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 a relevant factor here, 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 demonstrate good risk management practices. A number of insurers have seen this as a positive step towards better managing risk and may offer you competitive terms if your firm is Lexcel accredited.
High risk: firms that lack an effective written risk management policy.
5.3 What should I do if I fall into a high risk area?
Your proposal should address the high risk areas that insurers look for in assessing proposals. The fact that your firm falls within one of these areas does not necessarily mean that an insurer will not be willing to offer 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.
These are some examples of how you might address high risk areas:
- 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 work.
- 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 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.
5.4 Submission timeframe
The time that insurers take to process your proposal depends on a number of factors. These may include:
- your time of submission, for example: peak time is during the last weeks of September
- whether you provided full information, and
- enquiries that the insurers need to make to verify information you have provided.
It is your responsibility to obtain PII. You should actively manage your relationship with the broker or insurer and contact them regularly to seek updates about 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.
6. Considering offers
You should seek your broker’s advice about whether to accept an offer you receive from an insurer. Your broker will be able to advise you in 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 about which is the best offer for your firm. This will not necessarily be the cheapest offer. There are a number of factors to take into account 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 period
- the financial security of the insurer
- the insurer’s experience and likely longevity in the marketplace, and
- whether the insurer provides risk management support.
You should also check how long the offer is open for and ensure that you communicate your decision before the offer expires.
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 a premium. The ARP premium is calculated in accordance with a formula and is linked to your firm's gross fees. 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.
The insurer may be willing to backdate your cover to up to 30 days from the date of contract finalisation or, if finalisation occurs before 30 November, to 1 October. However, this is not an automatic entitlement and you should apply for PII in accordance with the timeframes set out in at section 4.
See the SRA website for further information about the ARP rules.
7.1 Late submissions to the ARP
Your firm and its principals will commit a disciplinary offence and may be subject to a default premium if you submit your ARP application late or make a material misrepresentation in your application. The default premium involves paying the ARP premium plus twenty percent of the premium for the whole indemnity period.
7.2 New firms entering the ARP
If you are opening a new firm and are unable to obtain insurance from a qualifying insurer, you may apply to enter the ARP during the insurance year. The ARP premium for your firm will be reduced pro rata according to the number of days that have elapsed in the insurance year before you commence practice.
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 for 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 its customers and treat them fairly. If you wish to make a complaint against a broker or insurer, you should contact them in the first instance.
If you subsequently decide to take the complaint further, you should consider the information on the website of the FSA and Financial Ombudsman Service .
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 incentives as an additional premium may be payable. Significant changes may increase your PII premiums either during the insurance 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, the insurer of the acquiring form will be required to cover claims made against both the disposing firm and the acquiring firm.
The Rules provide guidance about when an acquiring firm (B) becomes a successor practice to a disposing firm (A). It describes the following five cases where B may become a successor practice to A:
- B is held out as the successor either expressly or by implication.
B might expressly hold itself out by incorporating A’s name in its letterhead or by making a public statement about taking over A’s business. B might do so by implication by using a feature that is commonly associated with A, such as distinctive colours. - A sole practitioner with A becomes a principal or employee of B.
If there is a transition from A to B, for example through the transfer of files or goodwill, then B is likely to become a successor practice to A. - A was a LLP or company and the owner of A becomes a Principal of B.
- A was a partnership and the majority of the principals of A become principals of B.
- A was a partnership and the majority of principals of A do not move to B but one or more of them do.
In this situation, B is only a successor to A in certain circumstances. For instance, where B keeps A’s name, premises, goodwill, assets and/or a majority of its staff.
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.
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 implications to your PII.
It may be useful to seek the insurer's view about whether the acquiring firm would become a successor practice. In the past some insurers have tried to avoid liability for claims in the disposing firm by arguing that the acquiring firm is not a true successor practice. If this is successfully argued, the disposing firm may be liable for any claim that arises.
8.3 Ceasing practice
You should consider the PII ramifications before ceasing practice. In particular, you should consider who will cover claims that arise after your practice has ceased. 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. If you have a policy with a qualifying insurer, you will usually need to pay a run-off premium of approximately 2.5–3 times the amount of your last annual PII premium for the compulsory level of cover. 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. The Solicitors Indemnity Fund provides cover for claims that arise after this time.
Where there is a successor practice, run-off will not be triggered. In this case, the insurer of the successor practice is required to cover the claims against your ceased firm.
The ARP will pay any claims made against your ceased firm if you do not have run-off cover or a successor practice. This is to protect the public interest. In this situation, the ARP Manager is entitled to recover the amount of any claims, associated costs and interest from the principals of your ceased firm.
8.4 Overseas practices
If your firm has an overseas practice, you must ensure your firm is covered by PII or other indemnity against professional liability at all times. Rule 15 states that the amount of insurance or other indemnity need not exceed the requirements in the Rules, but must be reasonable having regards 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.
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 seek advice from your broker about which insurers accept instalments or try to negotiate this with your insurer. Alternatively, you may be able to obtain finance from a premium funding company and pay the loan off by instalments. If you are in the ARP, the ARP Manager will be able to assist you to obtain finance.
8.6 Insurers becoming insolvent
You must arrange replacement qualifying insurance as soon as reasonably practicable, and in any event within 4 weeks of the relevant insolvency event. By becoming insolvent, your insurer has ceased to be a qualifying insurer and is unable to write any new policies. You are also uninsured.
Once you obtain replacement cover, you should cancel your policy with the insolvent insurer and try to obtain a return of the premium for the balance of the relevant indemnity period.
9. More information
9.1 Professional Conduct
The following sections of the Solicitors’ Code of Conduct 2007 are relevant to this issue:
9.2 Legal and other requirements
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.
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.
9.5 Further products and support
9.5.1 Law 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 insurers or brokers in relation to the fairness of their 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