Following the conclusions of the recent SRA consultation on the PII minimum terms and conditions, one can’t help but feel that they just don’t get it! After a 6 week consultation, in which the SRA have garnered opinion for all quarters, they have had a variety of suggestions including: –
- Reducing the minimum level of cover required
- Introducing an aggregate limit on claims
- Restricting the type of clients a firm can act for
- Reducing run off cover requirements from 6 years to 3 years
- Requiring firms to assess the level of cover appropriate to their firm beyond the minimum
- Requiring a minimum financial stability rating from insurers
It is fair to say that a case could be made for one or all of the above measures to be taken in order to reduce the burden of higher insurance premiums on law firms and also on the insurance industry who are forced to comply with the most extensive minimum terms and conditions of any profession anywhere in the world.
The insurance market is one, like many others, of supply and demand. Following the end of the Solicitors Indemnity Fund in 2001 there was an influx of capacity into the solicitors PII market and by and large the industry benefited from falling premiums as a result. Inevitably after a settling in period Insurers started to be impacted by claims issues, which began with TAG and other claims farmers as well as the issues around the Miners claims. Of course this was blown out of all proportion following the property crash in 2008, which has had a huge impact not only on the industry but also on Insurers.
As a result of these issues a number of quality insurers have found that they simply cannot make money from underwriting solicitors business and have pulled out of the market. Unfortunately this has had the effect of driving up prices, but also encouraging lower quality insurers into a market in which they can see high premiums and a chance to make a quick profit.
A large number of firms are now insured with these lower quality, largely unrated, insurers as the nearest quality alternative could well be double the price.
I suppose the question is, would any of these problems have been prevented by some or all of the changes to the minimum terms and conditions proposed above.
As previously stated the current minimum terms and conditions are a barrier to new insurers entering the market as they effectively have an unlimited liability, with little or no ability to deny liability on a claim. There are provisions for an insurer to pursue an individual partner in a firm for wrong doing following claims, however this is simply not practical in real life. In addition to this, should a firm fail, an insurer is bound to provide 6 years cover for no premium.
The suggestions above are all pretty much tinkering around the edges and the actual result of the consultation, a reduction in the minimum cover to £500,000, will have a negligible impact on premiums, if any. It also does nothing to encourage new insurers to enter the market.
Any review of the minimum terms and conditions would have to be more fundamental than those proposed and would need to include the ability to select an aggregate limit and an insurers ability to deny liability on claims where policy terms and conditions have not been met, or where fraudulent activities have occurred. Clearly this would be unpalatable by much of the industry for obvious reasons and would potentially also impact on consumer protection.
Clearly this would be unpalatable by much of the industry for obvious reasons and would potentially also impact on consumer protection.
The only other answer to managing premiums is to manage risk. The rise in insurance premiums in the legal profession is not dissimilar to that which occurred in industry around 2001, where companies in high risk trades were either unable to obtain insurance, or saw large increases overnight. This resulted in businesses having to pay closer attention to the management of risk and the reduction in claims. As a result these companies now have much larger spends on Health & Safety and other risk management initiatives, but this was more than compensated for by reductions in insurance premiums.
A similar process is occurring within the legal profession, with quality standards and good management procedures becoming the norm rather than the exception.
With the majority of recession related property claims washing through the system and quality standards increasing within the profession, the market will settled down and new quality insurers are already beginning to dip their toe in. The SRA tinkering around the edges doesn’t help and just adds more confusion into a process that is already difficult enough.
I can’t stress enough that the best way to achieve the right outcome from the Professional Indemnity renewal season is to focus on managing risk, get good advice from a specialist insurance broker and tackle renewal as early as you possibly can.