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). In-house solicitors should read section 9.5 about how this practice note applies to their circumstances.
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 SRA Indemnity Insurance Rules (the Rules). The SRA Handbook requires you to ensure that clients have the benefit of compulsory PII (outcome 1.8). Obtaining PII can be difficult. During 'hard' cycles of the PII, market some solicitors have been unable to obtain PII from a participating insurer or had to accept significantly higher premiums.
This practice note outlines solicitors' regulatory obligations relating to PII and provides an introduction to the application process and market-related issues.
See all our PII advice.
2 Professional indemnity insurance overview
2.1 What is PII?
PII is insurance that covers civil liability claims arising from your work in private legal practice. These claims most commonly involve professional negligence.
2.2 Why do I need it?
Like many other types of professionals, 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
- certain regulatory awards made against you by the Legal Ombudsman.
It ensures that the public does not suffer loss, which might otherwise be uncompensated. This is important in maintaining public confidence in the integrity and standing of solicitors.
For more information about the scope of the minimum terms cover, see section 3.
2.3 When do I need it?
The requirement to hold PII is ongoing.
On 1 October 2013, the single renewal date was abolished. This means that insurers and the insured can agree to a different policy length, which may mean that some policies move away from the 1 October start date, on which firms have traditionally had to renew their PII by.
Read more about variable renewal dates
You will have to demonstrate to the SRA that you have a policy of insurance in place as part of the practising certificate renewal process. You must hold cover at all times while practising.
New firms may obtain PII at any time throughout the year, before commencing to practise. Firms should not assume that PII will be easy to obtain and should plan ahead.
For more information about setting up a practice, read the Law Society's practice note.
2.4 Who provides it?
The only way of obtaining mandatory PII cover for new and existing firms is from a participating insurer.
On 1 October 2013, the assigned risks pool (ARP) was closed to all firms and the only means of obtaining PII 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 current insurer. Read more about EIP/CP.
2.4.1 Participating insurer
A participating insurer is an insurer that:
The Participating Insurer's Agreement (PIA) is a contract that is entered into each year between each participating insurer and the SRA as the independent regulatory body of the Law Society. It requires participating insurers to offer a 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.
Regulation of participating insurers is undertaken by the FCA, or, where an insurer from another jurisdiction is passported into the UK system, the financial regulator of that jurisdiction. The SRA does not undertake any additional steps to regulate, vet or approve insurers that sign the PIA.
Importantly, the 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 participating insurers. Insurers must now disclose whether or not they have a financial security rating and the provider of this rating. You should use this information when assessing PII quotations.
For further information, see the Law Society's advice on the importance of insurer solvency.
The SRA maintains a list of the participating insurers on its website. The Law Society's Guide to Insurers outlines insurers' ratings, practice sizes that they will consider providing cover to and which brokers have access.
2.4.2 The extended indemnity period
Firms that are unable to obtain qualifying insurance must be given an extended indemnity period (EIP) by their insurer from the previous indemnity year. The terms on which this EIP will be provided are set out in the SRA Indemnity Insurance Rules 2013 and in your MTC policy.
The EIP is comprised of a 30 day extended indemnity period in which a firm can continue to practise and try to obtain qualifying insurance. After this time 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.
Read more about EIP/CP
2.5 How much cover do I need?
The rules establish a compulsory level of cover for all solicitors' firms:
- Relevant recognised bodies and relevant licensed bodies (ie ABSs and partnerships that are limited companies e.g. LLPs) must have at least £3m for any one claim in compulsory cover. See glossary the definition of a relevant recognised body and relevant licensed body.
- All other structures of firm, for example, sole practitioners and partnerships, must have at least Â£2m for any one claim in compulsory cover.
This is sometimes referred to as 'primary layer' cover.
These limits do not apply to defence costs as there is no monetary limit on defence costs under the minimum terms and conditions (clause 2.2).
In April 2015, the SRA introduced a new outcome into the SRA Code of Conduct 2011 which requires firms to assess and purchase the level of professional indemnity insurance (PII) that is appropriate for the firm.
The new outcome states:
'O(7.13) you assess and purchase the level of professional indemnity insurance cover that is appropriate for your current and past practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make.'
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.
If you decide you need to obtain cover above the compulsory level, known as 'excess layer or top up cover', in order to comply with the new outcome, this cover will not be subject to the minimum terms and conditions (MTC). This means that you can obtain it from any insurer, not just a participating insurer, and on different terms and conditions to the MTC. It is not necessary to buy all of your cover from one insurer.
For further information to assist in your decision about whether or not you firm needs excess layer insurance, see the Law Society's advice on assessing and purchasing the appropriate level of cover.
You must not exclude or attempt to exclude liability below the minimum level of cover (outcome 1.8 of the SRA Code of Conduct). If you seek to limit your liability to a level above the minimum level of cover, the limitation should be in writing and you should bring it to your client's attention (IB 1.8).
3 What are the minimum terms and conditions?
The minimum terms and conditions (MTC) are set out in Appendix 1 of the SRA Indemnity Insurance Rules. The MTC must be included as part of your compulsory policy of qualifying insurance, which you should read carefully.
This practice note does not attempt to detail all of the MTC, but rather highlights some of the important provisions of which you should be aware.
3.1 Defence costs
The MTC covers defence costs in relation to claims and there must be no monetary limit on the cover for defence costs. However, the MTC does not provide cover for defence costs for disciplinary proceedings by the SRA or the Solicitors Disciplinary Tribunal (SDT).
Although the Law Society opposed the removal of this cover in 2010, the SRA decided that it is not in the public interest for insurance to cover these claims.
Some insurers are prepared to include this cover and continue to insure this type of loss. If you are concerned about lacking cover for defence costs of SRA disciplinary proceedings or SDT cases, you should discuss the availability of such a policy with your PII broker or insurer.
3.2 Award by regulatory authorities
The MTC does cover each insured against any amounts paid or payable in accordance with a recommendation of the Legal Ombudsman or any other regulatory authority to the same extent as it indemnifies the insured against civil liability.
- a direction that the insured pay compensation to a complainant for any loss that has been suffered, inconvenience or distress in accordance with section 137(2)(c) of the Legal Services Act 2007 (LSA); and
- any interest charged on the above in accordance with section 137(4)(b) LSA.
The MTC does not, however, cover a direction that the insured refund client fees under section 137(2)(b) LSA.
You should also consider whether any of the general exclusions in clause 6 of the MTC apply. For further information see 3.3 Exclusions.
For example, personal debts are excluded from the MTC under clause 6.6. Subsection 133(7) of the LSA makes certain amounts due under an Ombudsman's award recoverable as a debt due to that person. These types of awards are contained in subsection (3)(g), (h), and (i) of the LSA:
- an award of expenses to persons in connection with attendance at a hearing before an ombudsman
- an award of costs against the respondent in favour of the complainant
- award of costs against the complainant or the respondent in favour of the Legal Ombudsman for the purpose of providing a contribution to resources deployed in dealing with the complaint, if in the ombudsman's opinion that person acted so unreasonably in relation to the complaint that it is appropriate in all the circumstances of the case to make such an award.
There are a number of exclusions that are set out in clause 6 of the MTC.
The MTC does not cover dishonesty or a fraudulent act or omission commissioned or condoned by an individual insured (clause 6.8).
However, it must still cover other insureds who were not complicit in the fraud or dishonesty. In the case of an LLP or body corporate, dishonesty or acts or omissions can only be imputed to the body corporate if they were condoned or committed by all members or directors.
If a client suffers loss due to dishonesty that is excluded from the MTC, there may be recourse to the Compensation Fund.
Your insurance policy can also exclude:
- prior cover - any claim that falls under an earlier period of insurance (clause 6.1)
- liability for death or bodily injury (clause 6.2)
- liability for destruction or damage to property, although it must cover losses which arise from a breach of duty in the performance (or failure to perform) legal work (clause 6.3)
- partnership disputes - for example, any actual or alleged breach of partnership or shareholder agreements (clause 6.4)
- employment breaches, discrimination, wrongful dismissal etc (clause 6.5)
- personal debts and trading liabilities or guarantees, indemnities or undertakes which directly or indirectly benefit an insured (clause 6.6)
- fines, penalties, order or agreement to pay costs in the investigation into the professional conduct of the insured (clause 6.7)
- directors' or officers' liability - however, it must cover liability arising from a breach of duty in the performance (or failure to perform) legal work and cover each other insured against any vicarious or joint liability (clause 6.9), and
- war, terrorism and asbestos - however, it must cover liability arising from a breach of duty in the performance (or failure to perform) legal work or failure to discharge or fulfil any duty incidental to the insured firm's practice or to the conduct of private legal practice (clause 6.10).
You should also consider what the MTCs will cover in the event that your firm falls victim to a scam resulting in the theft of client money or confidential data. The MTCs will cover loss of client money, but will not cover other risks that may be associated with a scam or cyber-attack, such as data breach costs, reputational damage, crisis response and management, hacker damage, the cost of a forensics investigation, cyber extortion, business interruption, or first-party cover such as theft from the office account.
3.4 Reimbursement provisions
There are provisions in the MTC that permit insurers to seek reimbursement from the insured in certain circumstances, that is, non-disclosure, misrepresentation, breach, dishonesty or fraud.
Failure to disclose material information to your insurer will not permit the insurer to avoid cover for claims within the primary layer cover. Insurers are, however, entitled to seek reimbursement from individuals under clause 7.2.
The reimbursement provision will apply if you either commit or condone any breach of policy conditions or are fraudulent or dishonest (see section 3.4.1 and section 3.4.2 for more details).
There is also a provision that allows reimbursement for a breach of the requirement to only perform work in connection with existing instructions during the cessation period (see section 3.4.1 below for more details).
Insurers must also report these matters to the SRA under rule 17 of the SRA Indemnity Insurance Rules and this may give rise to disciplinary action.
It is important to remember that if you have taken out excess layer insurance or 'top up' cover it is likely that the policy will provide that the insurer can avoid coverage (rather than seek reimbursement) in the event of non-disclosure or misrepresentation.
For further information see section 2.5 and the Law Society's guide to excess layer cover.
3.4.1 When can insurers seek reimbursement?
Clause 7.2 of the MTC provides that the insurer may seek reimbursement from each insured who committed or condoned (whether knowingly or recklessly) any:
- non-disclosure or misrepresentation;
- breach of the terms or conditions of the insurance; or
- dishonesty or any fraudulent act or omission.
For example, situation where an insurer may seek reimbursement include:
- when the insured has failed to notify circumstances that give rise to a claim. This may be classed as non-disclosure or breach of the terms of insurance.
- when a firm or any person on its behalf conducts work during the cessation period other than in connection with existing instructions. While the mere fact of carrying out new work during the cessation period will give rise to a right of reimbursement, the insurer can only rely on this provision if it has (a) paid out sums for which it is seeking reimbursement and (b) been prejudiced. It is difficult to see how the insurer could have suffered prejudice in absence of a claim arising from that breach. See section 3.4.3 How much reimbursement?
It is for the insurer to demonstrate non-disclosure, misrepresentation, breach, dishonesty or fraud and entitlement to seek reimbursement. Although the insured has an obligation to cooperate and provide information to insurers with respect to claims, you are not required to provide information solely to enable the insurer to investigate whether or not you have breached your obligations to the insurer (Gan v Tai Ping  EWCA Civ 248).
There are also provisions to allow for reimbursement of:
- defence costs that were advanced but not used (clause 7.3)
- any excess paid by the insurer on the insured's behalf (clause 7.4), and
- moneys paid pending resolution of a coverage dispute that after the resolution of the dispute it was determined that the insurer was not ultimately liable to pay (clause 7.5).
3.4.2 Who can insurers seek reimbursement from?
Insurers can only seek reimbursement from the insured who committed or condoned the non-disclosure, misrepresentation, breach, dishonesty or fraud.
The right of reimbursement is against each insured. An 'insured' is widely defined in the MTC and includes current and former principals and employees of the insured firm (clause 1.3), prior practices (clause 1.5) and successor practices (clause 1.7). This means that insurers can seek reimbursement from both the firm and the individuals within the firm (ie partners, directors, employees) but only if they committed or knowingly or recklessly condoned the act that gave rise to the right of reimbursement.
A principal includes each member of an LLP and any person who is the ultimate owner of the whole or any part of the body corporate or any other legal person that is a member of the LLP. The SRA has confirmed that insurers can seek reimbursement from members of an LLP in their personal capacity and members' liability is not limited to the extent of any business assets.
Non-disclosure, misrepresentation, breach, dishonesty or act or omission cannot be imputed to a body corporate unless it was committed or condoned by all the directors of that company, or in the case of an LLP, all members of that LLP. Therefore, before an insurer can seek reimbursement from a body corporate (as opposed to an individual) on an imputed basis, the insurer must show that all of the directors/members were culpable.
The insurance may require the insured firm to account to the insurer for any asset or entitlement of any person who committed or condoned any dishonesty or fraudulent act or omission provided that insured firm is legally entitled to withhold that asset or entitlement from that person (clause 7.5).
3.4.3 How much reimbursement?
Insurers can only seek reimbursement that is 'just and equitable' having regard to the prejudice to the insurer's interests caused by the non-disclosure, misrepresentation, breach, dishonesty, act or omission.
Insurers cannot be reimbursed for breach of the terms or conditions of insurance if the breach was necessary to comply with the SRA Handbook.
3.5 Obligation to notify claims or circumstances
You have an obligation under your insurance policy to notify your insurer of any claims or circumstances that may give rise to a claim.
Under clause 1.1 of the MTC, the scope of your insurance coverage is determined by claims made during the period of insurance and claims made during or after the period that arise from circumstances first notified to the insurer during the period.
If you fail to notify the insurer of a claim or circumstance, then the insurer can avoid cover. Coverage disputes can arise, for example, if the insurer contends that a circumstance should have been notified in an earlier period of insurance when a different insurer was on cover.
It is important to distinguish between a 'claim' and a 'circumstance'. As a general rule of thumb, a claim is usually relatively easy to identify, namely, an indication from a third party of a dispute which will, or may, result in an expected remedy from you.
A circumstance is more difficult to define, but basically arises where you become aware of an occurrence or problem, which may give rise to a third party claim, but no formal claim or actual allegation of negligence has been made to you.
Circumstances should be distinguished from other disputes (such as complaints or fee disputes) that will not give rise to a claim.
You should notify your insurer of any relevant situation, even if you are unsure whether it amounts to a 'circumstance'. Insurers view notification of circumstances (particularly those that do not result in claims) as a sign of a firm that adheres to good risk management practices and takes its obligation to notify seriously.
The case of McManus Seddon Runhams v European Risk Insurance Company  EWHC 18 (Ch) (McManus) provides guidance about when 'blanket' notifications may be accepted.
Your broker may also be able to advise you about whether a situation is a circumstance that should be notified.
3.5.1 Duty to your client
In order to satisfy the client care outcome in the SRA Handbook, you must inform current clients if you discover any act or omission which could give rise to a claim by them against you; O(1.16).
3.5.2 Disclosure to your insurer
When notifying insurers of claims and circumstances you should also consider your duty of client confidentiality; O(4.1). Client confidentiality and legal professional privilege can only be waived with the express consent of the client.
Once a client makes a formal claim against the firm, this constitutes an implied waiver and you can share this information with your insurer. However, in the case of Quinn v the Law Society of England and Wales  EWCA Civ 805 the Court of Appeal made it clear that even as regards a law firm's own insurer, solicitors cannot ignore client confidentiality and privilege and can only disclose this type of information with the consent of the client.
This potentially places you in a difficult position in terms of insurance as you are, of course, required to notify insurers of any circumstances that might lead to a claim being made against you. If a firm is notifying a circumstance rather than a claim, there will be no implied waiver of privilege and so the information it is able to provide the insurer could be very limited.
3.53 Best practice for notification
To ensure you do not compromise your insurance coverage or fall foul of the reimbursement provisions you should:
- Immediately notify any claim or circumstance to your broker and/or insurer as soon as you become aware.
- Ensure notification is made during the period of the policy during which you become aware of the claim or circumstance.
- Maintain client confidentiality and privilege when notifying circumstances to insurers.
- Do not make any admission of liability or any offer of settlement to any third party without specific consent from your insurers.
- Do not disclose the involvement of your own insurers beyond the extent that you are required: see disclosure of insurer's details.
- Do not allow gaps in coverage. Consider the benefits of continuity of insurers to avoid coverage disputes. For further information see: Law Society's PII Buyers' Guide (PDF 200kb).
- Once notification has been given, ensure you co-operate fully with insurers or their representatives. However, remember that you are only required to provide information to assist in a claim that has already been made.
3.6 Obligation to disclose insurer's details
Firms must disclose certain insurance details to clients and/or claimants. Both these regulations apply only to the compulsory element of the insurance, that is the minimum terms and conditions (MTC) cover. This means that only details of the primary layer insurer have to be provided. The obligation to disclose comes from two different sources, the SRA Indemnity Insurance Rules and the Provision of Services Regulation 2009.
You do not have to provide any details of 'top up' or excess layer insurance. This includes the fact that you may have such insurance, the identity of your excess layer insurers or the total level of your insurance cover.
Indeed, it is may be unwise to disclose this information as you will lose tactical litigation advantage in the unfortunate event of a large claim (or several similar claims in one policy year which may be aggregated under the MTC cover).
Firms are of course from time to time subject to commercial pressures to disclose indemnity cover to larger clients or on specific very large transactions. Lenders, for example, have in recent times made blanket requests about the adequacy of insurance arrangements of panel firms.
These requests require careful thought. You not need to disclose this information to all clients as a matter of course and indeed to do so may also lead to coverage difficulties with insurers and in particular excess layer insurers, whose policy may contain an express condition prohibiting any such disclosure.
3.6.1 SRA Indemnity Insurance Rules
Pursuant to rule 18 of the SRA Indemnity Insurance Rules, if requested, there is an obligation upon firms to provide to a claimant, or any other person with a legitimate interest:
- the name of their participating insurer
- the policy number and
- the address and contact details of the insurer.
The obligation does not extend to any further information and relates only to the compulsory primary layer of cover. It does, however, extend to claims that may fall within the scope of any supplementary run-off cover provided by SIF.
The requirement in the rules extends to a claim for contribution or indemnity and this will therefore also require the information to be given to an additional claimant bringing a claim under CPR Part 20 or by a co-defendant, who will be interested tactically to find out which participating insurer is involved, as they may for example have a known approach to dealing with certain types of claim.
Importantly, there does have to be an actual claim being asserted before the duty arises. Any communication that falls short of that, such as a general complaint or circumstance, would not trigger the disclosure requirement. In addition, the claim also has to be within the scope of cover of the minimum terms. This is not to say that the claim has to have any merit but simply that it could fall under the cover. For example, a claim made against a solicitor who was not acting in the course of private legal practice would not be within the scope of Rule 18.
3.6.2 Provision of Services Regulations 2009
The Provision of Services Regulations 2009 (implementing European Directive 2006/123/EC on services in the internal market) has imposed further requirements. Under regulation 8(1)(n) where the service provider is subject to a requirement to hold any professional indemnity insurance, they are required to provide information about the insurance to customers.
The only specified pieces of information that must be provided under the Regulations are:
- the contact details for the insurer and
- the territorial coverage of the insurance. In the case of the minimum terms, the territorial coverage is worldwide.
The information must be made available to a customer and the service provider has a choice of four methods by which to make information available. These are:
- You provide the customers with such information on your own initiative.
- It is easily available to the customer at the place where you provide the service, or where the contract for the service is concluded.
- It is easily available to the customer electronically (for example, on your website).
- It appears in any information document you supply to the customer in which you give a detailed description of the service.
Therefore, the requirements can very simply be met by a notice in a firm's reception area, although many firms are choosing to go further and place the details on either their website or in client care documents.
For further information see the Provision of Services Regulation 2009 practice note.
Insurers are able to aggregate claims in accordance with clause 2.5 of the minimum terms and conditions, which allows the following to be regarded as 'one claim':
- all claims against any one or more insured arising from:
- one act or omission
- one series of related acts or omissions
- the same act or omission in a series of related matters or transactions
- similar acts or omissions in a series of related matters or transactions, and
- all claims against one or more insured arising from one matter or transaction.
In deciding whether to purchase 'top up' or 'excess layer' cover above the primary layer, you should have regard to how claims may be aggregated. The mandatory limits (see 2.5: How much cover do I need?) apply to each and every claim, meaning that any number of separate claims arising from separate matters can have the full limit of cover applied to each.
Any one claim which exceeds the limit of indemnity, if successful, would mean a shortfall in cover, leaving the insured liable for the uninsured loss. See our advice on assessing and purchasing the appropriate level of cover for case study examples of aggregation of claims.
4 State of the market
The solicitors' PII market undergoes cycles of 'soft' and 'hard' conditions. In the past, the following combination of factors have resulted in a 'hard' market:
- some participating insurers exiting the market
- some participating 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 participating insurers now scrutinise proposal forms more carefully and are more selective in the firms to which they offer cover. During hard cycles, some parts of the profession have had to accept significantly increased premiums or have been unable to obtain PII from a participating 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.
We are aware that the small firms segment has historically attracted a significant proportion of poorly rated or unrated insurers and that broker exclusive arrangements have reduced choice of insurer.
These conditions cause instability in the market. Some rated insurers have in the past regarded the small firms segment of the market to be 'underpriced' and have not wanted to compete with, what they consider to be, unsustainable pricing of unrated capacity.
It is hoped that the introduction of the Solvency II regime (in January 2016) will enable greater stability of the insurance market and of the financial strength of insurers. Under this regime, insurers must hold certain capital reserves in order to operate.
4.1 Outlook for 2016-17
Since October 2013, solicitors have no longer been tied to the 1 October renewal date. Insurers are now able to offer multi-year policies of variable duration. The concept of an annual indemnity period, which will continue to run from 1 October to 30 September, remains for the purposes of making any changes to policy terms that are governed by the SRA Indemnity Insurance Rules.
Preliminary indications from insurers is that capacity will be much the same this year as last year.
Regardless of the state of the market, in order to place your firm in the best PII position, you will have to demonstrate to insurers that your firm has effective risk management systems in place.
If you haven't already done so, you may want to consider applying for one of the Law Society's accreditation schemes, such as the Conveyancing Quality Scheme (CQS), or Lexcel, its practice management standard, which are designed to provide your clients and insurers with increased confidence.
Under the minimum terms and conditions (clause 7.7), the premium may be calculated on such basis as the insurer determines and you accept including, without limitation, a basis which recognises:
- claims history
- categories of work performed by your firm
- number of principals and employees
- revenue derived from the practice, and
- other risk factors determined by the insurer.
5 Applying for PII
5.1 When should I start?
If your renewal date is 1 October, 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 collate. Do not wait until the insurers have finalised their proposal forms to start 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 participating insurers will be requesting this year. The trend in recent years has been for the insurers to request more information, especially if you work in a perceived high risk area such as conveyancing, probate or personal injury work.
You may wish to establish a system to capture this information electronically on an ongoing basis, to save you both time and money in the long term.
You should also work with your insurer and broker to review your claims summary. All insurers are required to produce a claims statement on demand. You should check this statement carefully and ensure it is an accurate reflection of the true claims and operational exposure. This is what will be used by insurers to assess your firm's renewal prospects and premium.
5.1.1 Self-assessment obligation
Outcome 7.13 of the SRA Code of Conduct makes it a regulatory requirement to assess and purchase the level of PII cover that is appropriate for your current and past practice, taking into account potential levels of claims and any alternative arrangements you or your client may make. Firms are expected to be capable of demonstrating how they have formed an assessment of whether the compulsory minimum level of cover is sufficient for their practice.
The SRA has stated that when assessing compliance with the outcome, it may take into account a range of factors including evidence that the firm has made a reasonable and rational assessment of the appropriate level of its PII cover. If a firm is able to demonstrate to the SRA's satisfaction that it done so, the SRA states it is very unlikely that it would challenge that decision.
The Law Society has produced its own excess layer insurance guidance to help firms in meeting this outcome.
5.1.2 Market research
You should start researching the PII market by June. By this time you would expect there to be publicity about the market conditions and for many participating insurers to be communicating to brokers or publicly about what types of firms they will cover.
Many of the participating insurers have narrow underwriting criteria and will only quote certain types of firms.
You should be able to ascertain:
- which participating insurers will be willing to offer cover to a firm of your size, and type (our guide to insurers may be useful here), and
- the key things they will be looking for in assessing proposals.
5.1.3 Submitting your proposal
If you have opted for a varied renewal date, you should submit your proposal to brokers, or in some cases directly to the participating insurers, about 10 weeks before the renewal date.
If your insurance still falls for renewal on 1 October, you should submit your proposal in mid-July.
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 harder cycles. Furthermore, some participating insurers limit the amount of business they will accept and once this capacity limit is reached, they will stop offering cover to the market. Late proposals are also more prone to attracting higher premiums.
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.
5.2 Insurance brokers
Most participating insurers can only be accessed through an insurance broker. Insurance brokers are responsible for advising on and arranging insurance. You should carefully consider the level of access to insurers that any prospective broker has. While some brokers deal directly with a number of different insurers, some have a tied agreement with a single insurer. You should ask enough questions to determine whether a broker is able to access insurers that are prepared to offer appropriate cover to your firm type and size.
For more information about access, see our guide to insurers which is updated regularly throughout renewal to take account of new entries or market changes.
The Law Society's PII Made Simple and PII buyers' guide provide a checklist of points to consider in selecting the right broker for your requirements.
6 Your proposal
6.1 How should I write my proposal?
You should use the proposal form as an opportunity to convince 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. How you present your proposal is indicative of the way that you conduct the rest of your business. You should:
- 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 ambiguous, 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
6.2 What information do I need to provide to insurers?
You should seek advice from your broker and/or insurer to ensure that you have a sufficient level of cover based on your assessment of your firm's work. Your PII proposal form might be a good place to start your assessment. However, you need to bear in mind that its purpose is to assess the appropriate premium for your firm's work for the compulsory MTC cover.
Your broker will not be able, for regulatory reasons, to advise you on the on sufficiency of cover appropriate for your firm. The broker will, however, be able to review the information you provide in your own assessment of the nature of your firm's business and the associated risk profile.
The broker should be able to advise, on the basis of that information, whether you have considered you have sufficient cover, the limits of your indemnity and whether it is appropriate for your firm's exposure.
A good starting point might be to think in terms of how confident you are in being able to defend future claims based on a past and current business review. This should take into account quantifying your firm's risk profile and ensuring that there will be adequate cover for liabilities which your firm may incur to its clients or other parties to whom it may owe duties when performing its legal services.
If you need cover above the compulsory level, known as 'excess layer' or 'top up cover', this cover is not subject to the requirement to purchase it from a SRA participating insurer. It is not necessary to buy all of your cover from one insurer. This means that you can obtain it from any insurer and on different terms and conditions to the minimum terms and conditions. You are also not tied to purchasing it at the same time that you renew your MTC PII - you can purchase it at any time when the need arises, for example, if you are planning to take on additional work.
For some transactions the cost of top-up cover or excess layer might be cheaper than the premium paid for the primary layer, which might be weighted to the main risks.
You should bear in mind that additional layer insurance will not be subject to the comprehensiveness of the MTC cover. It therefore might not benefit from the same level of comfort as MTC cover and might contain exclusions which place risks and excesses on the firm.
More help on assessing amount of cover and how to purchase it can be found in our excess layer insurance guidance.
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 your insurer at the time 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. This is not necessarily the same insurer on cover at the time 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.
Many brokers will accept proposal forms from any insurer and broker. However, some insurers will only accept their own proposal form. You should not rely on using only one proposal form.
Check with your broker first, otherwise you might find yourself at a disadvantage of having to fill in new proposal forms late in the renewal season.
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:
- areas of practice
- claims history
- disciplinary and regulatory issues
- gross fees, and
- risk management practices.
6.2.1 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.
6.2.2 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 five to ten years provides an indication of the likelihood of future claims. Firms or principals that have been subject to previous claims are regarded as higher risk. You should provide an explanation and details of your firm's claims history, as well as the participating insurer's claims summary which is readily available from insurers.
6.2.3 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. It is a disciplinary offence to fail to disclosure material information in your application form.
A firm that employs solicitors that have had disciplinary issues in the past and cannot demonstrate the steps it has taken to remedy systemic problems, is regarded as higher risk.
Insurers are more likely to consider your proposal favourably if you demonstrate expertise in your firm's practice areas.
Firms that practise in a number of different areas or in areas outside of their competence, for example, a new firm that has little or no experience in the work areas in which it intends to practise, are regarded as higher risk.
6.2.5 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 to ascertain the volume of work undertaken in previous years given that this work can still result in claims on the policy. Insurers use this information to assess your firm's risk in the last financial year, rather than relying on your firm's projected income.
6.2.6 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 - or being a member of its accreditation schemes such as Conveyancing Quality Scheme (CQS) can help to demonstrate good risk management practices. Some insurers may offer you more competitive terms if your firm is Lexcel or CQS accredited.
Firms that lack effective written risk management practices are regarded as higher risk.
6.3 What should I do if I fall into a high risk area?
Your proposal should address the areas that insurers perceive as 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 and competence in your proposed practice areas - see also the Society's setting up practice note.
- 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.
6.4 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.
For further details about managing these relationships, see the Law Society's PII made simple and PII buyers' guide.
7 Considering offers
You should seek your broker's advice on whether to accept an offer you receive from an insurer. An independent 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 provided your firm with PII quotations, 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:
You should also check the duration of the offer and ensure that your broker communicates your decision to the insurer before the offer expires.
For further details about ensuring your broker will be able to assist you in considering offers, see our PII made simple and PII buyers' guide.
8 Difficulties getting PII
We publish a wide range of help and guidance for our members. You can also call our Practice Advice Service PII Helpline on 02 0732 09545.
If you are unable to obtain insurance from a participating insurer on the open market, the SRA will monitor the orderly closure of your firm within the 90 day EIP period (see 3.4 above).
Read more about the EIP/CP
9 Other issues
9.1 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 FCA, brokers and insurers are subject to various regulatory obligations. For example, FCA 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 FCA and Financial Ombudsman Service.
9.2 Merging or making another significant change to your firm
You should consider the possible PII ramifications before deciding to:
- change your firm's partnership or status
- become an ABS
- give undertakings
- 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. For further information about assessing the risk of accepting new instructions that have the potential to increase your PII exposure, see our guide to excess layer insurance.
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 until your insurance is ready to be renewed.
9.2.1 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 become a successor practice, 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 prior practice. 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.
If it does not become a successor practice, the prior practice will have to enter into run-off.
The SRA Handbook Glossary contains the definition of a successor practice that outlines 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 will become a successor practice but it will not make a declaration or ruling. It may be useful to also seek your insurer's view about whether the acquiring firm would become a successor practice.
Before concluding any merger 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.
9.3 Ceasing practice
You should consider the PII ramifications before ceasing to 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 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 (i.e. until 30 September 2009) and for a further six years to 30 September 2015. Read the Law Society's advice on run-off cover.
You will usually need to pay a run-off premium in accordance with your policy of qualifying insurance (historically, this has been approximately 2.5 to 3 times the amount of your last annual PII premium). Your insurer will handle any claims or circumstances notified in the six years after your firm has closed. For claims that arise after this six year period, until 2020, the Solicitors' Indemnity Fund provides cover up to your primary layer at the time of cessation.
Where there is a successor practice 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.
The Law Society has designed a calculator to help solicitors to estimate likely run-off costs.
9.4 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. You must ensure that clients have the benefit of insurance or other indemnity regarding professional liability, which takes into account:
- 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.
You must not attempt to exclude liability below the minimum level required for practice in the local jurisdiction (OP (1.2)).
The SRA is reviewing the regulatory regime for registered European lawyers. You should check with the SRA as to whether you might be affected by those changes.
9.5 In-house practice
9.5.1 In-house solicitors performing work for your employer
If you are performing work in-house for your employer, the SRA does not require you to obtain mandatory professional indemnity insurance (PII) in accordance with the minimum terms and conditions.
The SRA Indemnity Insurance Rules only apply to solicitors in 'private practice' and, therefore, do not apply to employees conducting work for their employer. Liability of in-house solicitors is covered by their employment contract and principles of vicarious liability.
As such, it is for your employer to decide whether or not it is necessary to obtain insurance.
9.5.2 In-house solicitors performing work for other clients
The SRA Practice Framework Rules prevent in-house solicitors acting for clients other than their employer except in certain circumstances (rule1.1(e)).
The only circumstances where in-house solicitors can act for clients other than their employer, are set out in rule 4 of the Practice Framework Rules (rules 4.4 to 4.26). Depending on these circumstances, you may need to have PII in place.
9.5.3 Circumstances where you need PII—rule 4.2(a)
If you act for a client other than your employer in any of the following situations, you must have PII cover in place:
- pro bono work (rule 4.10)
- commercial legal advice services (rule 4.14)
- law centres, charities and other non-commercial advice services (rule 4.16), and
- foreign law firms (rule 4.19).
The PII cover must be reasonably equivalent to that required under the SRA Indemnity Insurance Rules.
9.5.4 Circumstances where you do not need PII—rule 4.2(b)
In the following circumstances, there is no requirement to have PII cover in place. You must, however, consider whether your employer has appropriate indemnity insurance to meet any award for professional negligence against you for which your employer might be vicariously liable.
This cover should be reasonably equivalent to that required under the SRA Indemnity Insurance Rules. If not, you must inform your client in writing that you are not covered by the compulsory insurance scheme.
The circumstances where you are permitted to work for a client other than your employer without there being a mandatory requirement for PII cover are:
- work colleagues (rules 4.4-6)
- related bodies (rules 4.7-9)
- associations (rule 4.12)
- insurers (rule 4.13)
- local governments (rule 4.15)
- the Crown, non-departmental public bodies and the Legal Services Commission (rule 4.18)
- in-house practice overseas (rules 4.22-25)
- regulatory bodies (rule 4.26)
For further information about the rules surrounding these individual work areas, please refer to the Law Society's In-house Division webpage and the In-house practice note.
9.6 Difficulties in paying a premium up front
Most insurers will require you to pay the whole premium 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.
You should notify the SRA if you are not able to pay your PII premiums (IB (10.3)).
9.7 Insurers becoming insolvent
There can be serious consequences and increased cost for your firm and individual principals if your insurer is unable to meet its obligations under your PII policy.
For this reason, the Law Society recommends that you consider an insurer's financial security as part of your purchasing decision.
You should refer to our practice note on the Insolvency of a Participating Insurer for information about your position if your participating insurer becomes insolvent.
9.8 The assigned risks pool
Before 1 October 2012, if you could not obtain PII from a participating (formerly 'qualifying') insurer it was possible to apply to the assigned risks pool (ARP) for cover if you met certain eligibility criteria.
In the SRA Indemnity Insurance Rules 2012, the SRA changed the way the ARP funded for the final ARP year. The 2012 ARP is 'jointly funded' by the profession and participating insurers. The method and proportions by which this funding occurs is as follows:
- 0-£10m profession (via the Law Society)
- £10-20m insurers
- £20-30m profession
- £30-40m insurers
- £40-50m profession
- £50m+ insurers
The SRA has made provision to permit the collection of contributions from firms to cover the cost of funding all or part of this funding if the need arises (rule 13 of the SRA Indemnity Insurance Rules).
10 More information
10.1 Law Society products and services
10.1.1 PII helpline
The Law Society provides support for solicitors on a wide range of areas of practice.
Read our PII advice
The Practice Advice Service PII helpine can be contacted on 0207 320 9545 from 09.00 to 17.00 on weekdays.
10.1.2 Law Society Consulting
If you require further support, Law Society Consulting can help. We offer expert and confidential support and guidance, including face-to-face consultancy on risk and compliance and finance and accounting. Please contact us on 020 7316 5655, or email firstname.lastname@example.org.
Find out more about our consultancy services
10.2 Other resources
10.2.1 Assigned Risks Pool Manager
If you have an ARP policy, contact the ARP Manager, Capita Commercial Insurance Services Ltd, on 087 0402 7788 or ARP@capita.co.uk.
The ARP closed to new entry on 30 September 2013.
10.2.2 Financial Conduct Authority
The FCA provides information on complaining about an insurer's or broker's financial advertising or contract terms. See the guidance on the FCA's website.
To check that an insurance broker or insurer is regulated by the FCA, check the online register.
For more information see the Law Society's PII made simple and PII buyers' guide.
10.2.3 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 you are a private individual or your firm employs fewer than 10 persons with a turnover or annual balance sheet total not exceeding €2m at the time of your complaint.
10.2.4 Solicitors Regulation Authority
If you have questions about the indemnity insurance arrangements, contact the SRA's professional ethics helpline on 0370 606 2555 or email email@example.com.