Firms have a continuing obligation to ensure they have qualifying insurance in place at all times or face closure within 30 days of expiry of the last policy. With the closure of the assigned risks pool (ARP), the extended indemnity period (EIP) was introduced in October 2013 as a mechanism to extend the time within which firms can seek to secure qualifying insurance. At the same time, variable renewal dates were introduced so that firms are no longer tied to the 1 October common renewal date for their PII.
Firms unable to obtain professional indemnity insurance (PII) cover within 30 days will enter the cessation period (CP). They must notify the SRA and their participating insurer within five business days that they have entered the EIP and if they have entered the CP, by emailing email@example.com. During the 60 day CP, firms are not permitted to take on new work but are permitted to continue to work for existing clients while closing their business in an orderly manner. They can continue to try to secure PII cover to avoid closure before the 60 days' CP are up.
Read the Solicitors Regulation Authority advice on the EIP for October 2014
Who should read this?
Any firm that is finding it difficult to renew their PII.
What is the EIP and CP?
Firms that are unable to renew qualifying insurance will be given a 90-day policy extension from their previous insurer. This extension will be in the form of the extended indemnity period (EIP) and the cessation period (CP).
The EIP is a period of 30 days in which a firm can continue to practise and try to obtain qualifying insurance. If qualifying insurance is obtained, the new insurer must backdate the policy to the start of the EIP. If not, 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 while they carry out orderly closure of their practice within those 60 days.
If firms are unable to renew their PII, they will have to cease practice and their insurer will be required to provide them with the mandatory six years run-off cover. The run-off cover will be deemed to have commenced from the start of the EIP.
The EIP/CP replaces the former assigned risks pool (ARP) arrangements. The EIP/CP model is broadly similar to the ARP alternative that the Law Society proposed in its consultation response to the SRA's first stage review of client financial protection arrangements.
What does the EIP/CP mean for me?
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 the firm.
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 and firms are unable to accept new instructions from clients, although they can continue to conduct work in connection with existing instructions.
There is a new obligation on firms to notify the SRA as soon as reasonably practicable (and in any event within five days) of entering both the EIP or CP. You must also notify the SRA if you obtain a backdated policy of insurance, stating the name of your new insurer and the policy number.
The email address to be used for both EIP/CP notifications is InsuredReports@sra.org.uk.
For further information, see this notice from the SRA (PDF, 150kb).
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 consider carefully what messaging to give clients if you enter the CP and cannot conduct new work or accept new instructions.
We expect the SRA to adopt a tough regulatory approach and to ensure that firms 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 by planing well in adavance for the next PII renewal to optimise your firm's chance of obtaining cover. You should demonstrate 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.
Further help and support from the Law Society or call our PII helpline on 02 07320 9545.
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How is the cover underwritten?
EIP/CP cover is underwritten by the individual participating insurer that insured the firm for the previous indemnity period.
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Scope of cover
The first 30 days known as the 'extended indemnity period' can be used by the firm to find alternative qualifying insurance. Firms can continue to practice as usual but must notify the SRA as soon as reasonably practicable and in any event no later than 5 days of entering the EIP (rule 17.3 of the SRA Indemnity Insurance Rules).
The next 60 days known as the 'cessation period' will be used for orderly closure or merger of the practice. Firms must notify the SRA as soon as reasonably practicable and in any event no later than five days of entering the cessation period (rule 17.3 of the SRA Indemnity Insurance Rules).
Rule 4.2 of the SRA Indemnity Insurance Rules requires firms unable to renew their PII with a participating insurer at the end of the EIP to cease practice promptly and by no later than the end of the cessation period. It is still possible for firms to obtain open market insurance during the cessation period, provided the participating insurer is willing to backdate the policy to the start of the EIP.
During the cessation period, the firm is not permitted to take on new work but is permitted to continue to work for existing clients as the practice is winding down. Each firm must ensure that it and each principal or employee, undertakes no activities in connection with private legal practice and accepts no instructions during the cessation period save to the extent that the activity is undertaken to discharge its obligations within the scope of the firm's existing instructions or is necessary in connection with the discharge of such obligation (rule 5.2 of the SRA Indemnity Insurance Rules).
The firm's participating insurer is required to provide cover during the extended and cessation periods, which as a minimum, satisfies the minimum terms and conditions (MTC).
The MTC will still cover activities conducted in breach of the obligation to undertake no new work during the cessation period in rule 5.2, however, individuals who breach this obligation will expose themselves to disciplinary action and liability for reimbursement if the insurer suffers prejudice as a result of the breach.
If the firm closes on or before the expiry of the cessation period, firms must be provided run-off cover by their insurer for six years incepting with effect on and from the start of the EIP.
For more information about solicitors' regulatory obligations on PII, see the Law Society's PII practice note.
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What is the cost of EIP/CP?
You should check your individual policy wording.
The SRA does not regulate the cost of extended indemnity period or cessation period premium, therefore, this cost is determined by your insurer. The Law Society originally expected insurers to charge a pro rata amount of the firm's current annual premium. We understand that many insurers have chosen not to charge for this period as, in the event that the firm enters into run-off, these costs will be recovered via run-off premium.
If your insurer wishes to charge an additional premium, details of the cost of EIP/CP premium should be found in your insurance policy or quotation pack. Ask your broker/insurer for further details about your specific circumstances.
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What happens to uninsured firms?
In order to protect the public, there needs to be cover for claims against firms which do not, for whatever reason, secure their own insurance arrangements in accordance with the Rules. This includes the provision of run-off cover in the case of firms which have no policy of qualifying insurance in place when they cease practice.
This 'uninsured' or 'non-applied firms' role is akin to the Motor Insurer's Bureau for uninsured drivers. Where firms fail to effect cover, the amount of any claims and any associated costs, plus interest, can be recovered from the principals of the firm concerned. It is also a disciplinary offence to practise without insurance.
Before 1 October 2012, this role was provided by the ARP. From 1 October 2012, this role will be transferred to the Compensation Fund (see Rule 5 of the SRA Compensation Fund Rules 2011). Any grant from the Fund will be made in accordance with these rules and otherwise will be assessed and determined in accordance with the terms, conditions and exclusions of the MTC as though the defaulting practitioner had a policy of qualifying insurance against which a claim in respect of the loss had been made. The maximum grant that may be made is £2 million (although this may be waived by the SRA). For further information about the Law Society's response to this change see our PII campaign page.
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What happens if my insurer becomes insolvent?
A firm whose participating insurer has become insolvent needs to act immediately to put new qualifying insurance in place. Any replacement cover will require an additional premium to be paid. The Law Society has published a practice note for solicitors who find themselves in this situation. It is for this reason that the Law Society has asked solicitors to consider carefully the financial security of prospective insurers.
Should your insurer become insolvent, you will have four weeks to seek alternative cover. Any replacement cover will require an additional premium to be paid. If replacement cover is not available, you will have to cease to practice and your run-off cover will fall on the insolvent insurer.
Given the long-term nature of solicitors' PII, particularly run-off cover which must be provided for six years, it is important to be satisfied that your insurer is financially secure and will be able to meet any claims made on the policy during the indemnity period. You do not want to find yourself in a situation of being an unsecured creditor or relying that you might be eligible for the Financial Services Compensation Scheme to meet claims.
More information is available in the Law Society's Insolvency of participating insurer practice note and insurers' guide. If you are in the cessation period and are unable to obtain open market insurance, the Law Society has published a practice noteon the regulatory requirements of closing down your practice.
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What happened to the ARP?
The assigned risks pool (ARP) was the previous arrangement for firms unable to obtain cover from a participating insurer. The SRA decided to abolish the ARP from 1 October 2013 as part of its review of client financial protection arrangements
Why the change?
Insurers often refer to the high level and amount of claims arising from the firms in ARP as a major contributing factor to the increase in PII premium levels across the entire profession. As the public reports of Capita Commercial Services Limited, the ARP Manager, show, the claims arising from firms in the ARP have increased significantly in recent years and a number of cash calls have been made on the insurers.
The pooled nature of the ARP mean that participating (formerly qualifying) insurers are required to underwrite the ARP in the same proportion as their share of the premium income from the compulsory PII cover. As such, the ARP arrangements acted as a disincentive to insurers to write solicitors' PII. The ARP was a barrier to new insurer entry and the reason why many existing insurers have reduce market share in recent years.
The EIP/CP represents a change from pooled to individual arrangements. It has received support from insurers and is a significant contributing factor to new insurers entering the solicitors' PII market.
For these reasons, the PII reforms were supported by the Law Society.
What does the removal of the ARP mean for me?
The ARP closed to all new firms from 1 October 2013. The only means of obtaining qualifying insurance is via a participating insurer. Firms that are unable to renew their insurance on the open market must be given an extended indemnity period (EIP) and cessation period (CP) by their last insurer.
There is no longer recourse to the ARP in the event of insurer insolvency.
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Law Society support
You can obtain further assistance from our Practice Advice Service by emailing firstname.lastname@example.org or phoning our PII helpline on 0207 320 9545.
If you are unable to obtain open market insurance, the Law Society has published a practice note on the regulatory requirements of closing down your practice.
This guidance has been updated to reflect the SRA Indemnity Insurance Rules which came into force and form part of the SRA Handbook from 1 October 2013.
There is further information about the ARP on the SRA website and information for firms closing down.
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