PII renewal: the insurance issues facing law firms
By Frank Maher
Solicitors in England and Wales will be renewing their compulsory insurance on 1 October 2013. This will be the last year that the date is cast in tablets of stone, and some may renew for more than one year in order to move away from the date which the rest of the profession may continue to adopt through inertia. What will the renewal season be like, and what other issues are emerging in relation to cover?
Insurers of US firms have encountered a sustained run of large claims with some very significant loss ratios, though the number of circumstances notified is down. Experience in the UK in the past couple of years has generally been significantly better. The primary limitation period for lender claims arising from the economic woes of 2008 is gradually approaching, and whether or not this flushes out a large number of claims will have a significant impact on the future.
With that said, I expect no significant difficulty for the majority of large firms renewing cover. However, the position may not be so rosy for small firms. The breadth of compulsory cover has made many an unattractive risk for established insurers and thrust many into the arms of the unrated market. While being unrated does not necessarily indicate that an insurer is unable to meet claims, given the long term nature of solicitors’ professional indemnity, more so than other professions, it puts premium-paying buyers on enquiry. However, although the Law Society has published advice on Financial Security of your PII insurer and cautioned solicitors against buying from unrated insurers, the reality is that many have no choice, other than to close down.
The position is exacerbated by the situation involving Balva which arose after our last Risk Update. Balva insure 1300 firms. Their Latvian regulator has barred them from writing further business in the UK. There is no suggestion that they are insolvent, but I have yet to see any evidence that provides reassurance for the long term. The economic situation will force many firms out of business and they will be reliant on six years’ run-off cover; circumstances may be notified during that period giving rise to claims years later. In my experience it may take 15 years or longer to close the close on a book of solicitors’ professional indemnity insurance. I am aware of another insurer which may face problems too.
I believe there may be a partial solution to the issue, if the SRA were willing to grant waivers to firms with specific problems, such as a run of claims from the activity of a rogue partner. If the SRA were prepared to grant a waiver allowing a firm to obtain cover which excluded that risk, after making a block notification of the problem to the current insurer, it may enable a firm to obtain cover from a better rated insurer. It is not a perfect solution, but one is unlikely to exist so long as the current broad cover continues.
Provisional figures for the last renewal, which took place on 1 October 2013, show that 12.504% of the profession’s total premiums of £239,300,522 were paid to unrated insurers. Many small firms face collapse due to economic pressures and reforms in legal aid and personal injury. Insurers are concerned about the credit risk of law firms, because they have to provide six years’ run-off cover even if the premium is not paid, and they have to fund excesses on claims if they are not paid by the insured. Many firms face particular difficulty funding insurance premiums this year because they borrow from secondary lenders whose perception of law firms will have deteriorated following the collapse of many firms in recent times, including high profile examples such as Cobbetts, Atteys and Blakemores.
These problems beg the question of where small firms will buy their cover this time. I am aware of one new entrant and an unrated insurer which may enter the market, but I do not see this as likely to fill the gap; I am concerned that the gap may be filled by insurers whose balance sheet makes them smaller than a top 200 law firm. The closure of the Assigned Risks Pool (“ARP”) which has until now provided cover for firms unable to obtain cover in the open market may provide some comfort to possible entrants, but we doubt it will be sufficient to change the landscape dramatically: the history of insuring lawyers is not encouraging.
A further problem arises from the fact that many firms borrow to fund their premium, often from secondary lenders who have had their fingers burned in the recent spate of law firm failures. Attitudes to the risk of lending to solicitors may therefore change significantly.
If that were not enough, the Solicitors Regulation Authority has floated the proposal of adding the cost of interventions to professional indemnity insurance. The consultation paper asks, “Can compulsory professional indemnity insurance be expanded to cover some or all of the claims paid from the current Compensation Fund?” Having responded to insurers’ demands to close the ARP, I am surprised this suggestion has seen the light of day. The average cost of “traditional” small-scale interventions (excluding the large high profile cases) is stated to be £74,649. Given that small firms which fail are unlikely to pay the run-off premium for the compulsory six years’ run-off cover, which insurers nonetheless have to provide, the burden of insuring large tranches of small firms would surely become an unacceptable risk.
The message is to start the renewal exercise early. There are more coverage disputes than there used to be, and great care will be needed in ensuring full and effective notification to current insurers and full disclosure to prospective insurers.