Solicitors’ Professional Indemnity Insurance: Run-off and alternative regulators
18th July, 2018
Special Focus: Solicitors’ Professional Indemnity Insurance
Run-off – it dominates the thoughts of sole practitioners and partners in smaller law firms in my experience and restricts the ambitions of firms. The SRA could help law firms by relaxing their rules on run-off cover on their Solicitors’ Professional Indemnity Insurance to help firms merge or close more easily. This would protect client’s interests and help solicitors.
Things have got to the point that that over recent months I have advised a number of law firms thinking about moving away from Solicitors Regulation Authority (SRA) regulation and looking carefully at their options to select their own regulator. Regulator shopping is a growing trend. Those seeking to consider non-SRA regulation are typically split into two groups:
- Conveyancing firms run-off who have heard the Council Licenced Conveyancers (CLC) offers less onerous regulation, is cheaper to be regulated by and whose scheme rules mean it is cheaper to be insured. Why? The CLC qualifying insurance does not require a separate purchase of run-off cover if the firm closes;
- General practices who work is contentious and who are attracted by the Bar Standards Board (BSB) regulatory approach and the mutual insurance offered to those regulated by the BSB.
The spike in enquiries and instructions I have had lead to me thinking about why is it that so many are frustrated by the Solicitor’s Professional Indemnity Insurance (PII) experience and time and again the issue of run-off cover is the cause of my advisory work.
Sole Practitioners account for 45% of the total of 9,488 law firms in England and Wales according to the latest survey by the Law Society. As a former Sole Practitioner I understand the concerns: business is good, the clients loyal to personal service but what happens if you are ill or forced to close? The purchase of 6 years run-off cover at huge cost is a concern and the smaller the firm the more unexpected cost is feared.
Even in slightly larger firms the percentage of 2-4 partners firms across the profession is huge (41.8%). Losing a key partner suddenly is why run-off cover remains the elephant in the room for many practitioners.
In contrast to the SRA the CLC runs a Participating Insurers Agreement which ensures six years of run-off cover is included in the annual premium at no additional cost when a firm closes. This is an attractive factor for those firms whose work is able to be covered by the CLC rather than the SRA.
The Bar Mutual scheme is also of interest to firms and a trickle of smaller start up firms are now regulated by BSB. Those who have instructed me in this area have had a perception that being regulated under the BSB scheme is simpler and their focus on contentious work is more suited to the BSB. Such firms see nothing in common with a “typical law firm” so tend to be specialist or niche firms.
Is Solicitors’ Professional Indemnity Insurance Expensive?
Most of the insurers struggle to make the market pay. Why? High levels of smaller scale claims and the Solicitors’ Professional Indemnity Insurance Rules 2013 which impose onerous terms on insurers.
However, it remains a relatively soft market and a good broker who understands your firm will help.
One thing that scares most partners to some degree is cyber crime. We either do not understand the risks or we do understand the risk and understand it’s a growing problem that is evolving so we can trust nothing.
Recently I spoke at an insurance broker’s seminar series across the Midlands about ethics and the importance of imbedding ethical thinking into supervisors and teams ahead of the proposed new SRA Handbook . The other speakers were on cyber crime prevention and cyber insurance. I left each event feeling that cyber insurance and crime insurance were ever more vital and many firms simply did not appreciate that many crime and cyber events are not covered by their PII terms.
Firms need to check with their broker if they have the right cyber and crime cover for their type of work and resources.
If your firm invests in training its staff through in house training on risk, ethics and good practice make sure you tell your broker in detail what you have done. Working with your supervisors to improve supervision and sharing this with your broker will help in my experience. It shows the firm is managing the risk within the firm and also raises awareness of the common mistakes – they are common as partners lose sight of them – your firm can change this by training and sharing that investment with your broker.