Solicitors’ professional indemnity insurance is one of the big business overheads for law firms...
...along with salaries, and the variation in the premiums available for this essential insurance cover can be huge.
The professional indemnity market for solicitors can also be a minefield for the unwary and in recent years hundreds of law firms have been closed down by the SRA because they were unable to obtain cover.
So it's important to have some understanding of how this market works and be able to make an informed decision on which product is right for your firm.
Please take some time to read this guide and call us if you require more information or a quotation on 0345 251 4000.
The marketplace for solicitors’ professional indemnity insurance
In 2018 the market is in good shape to deliver some very competitive premiums to the profession. This is primarily due to the scrapping of the 'assigned risks pool' and the 'common renewal date', which is making the market far more attractive to new Insurers.
Up until 2014, all law firms renewed their PII on the same day each year, the 1st October. But this was a chaotic system and the common renewal date idea was finally abandoned by the SRA. Now solicitors are free to arrange and renew their cover at anytime during the year although around 80 % still renew their professional indemnity insurance on 1 October and it will probably take years for this date to unravel itself from the renewal process.
In revenue terms, solicitors professional indemnity is worth in the region of £ 250 million in annual premiums to the insurance market. This is for the 'primary' insurance cover and a further £ 50 million comes from excess layer or 'top-up' cover. This is generated by the 11,000 law firms practising in England and Wales.
Market distribution is heavily dominated by brokers who arrange PII on behalf of almost all law firms, with only a small number of firms arranging cover direct with insurers. Like any market you'll find the good, bad and ugly so if you want some good advice about which insurers are best suited for your firm, please contact us anytime.
In England and Wales you can only buy professional indemnity insurance for solicitors from an insurer who has signed up to the SRA’s Qualifying Insurers Agreement. There are approximately 20 'Qualifying Insurers' signed up to underwrite solicitors' professional indemnity insurance but there is some churn each year with some insurers withdrawing and some new entrants.
Buying a PII Policy
Over 90% of law firms buy their cover through insurance brokers, so brokers totally dominate market distribution. A good broker's market knowledge lowers premium spend as well as providing valuable advice and support throughout the insurance period, especially on claims. For a quotation or free advice call us on 0345 251 4000. Also read our guide Why You Need An Insurance Broker.
The cost of Solicitors’ professional indemnity insurance
Rates for this insurance typically range between 2% and 5% of fee income depending on the usual risk factors and market competition. But rates can also be higher or lower than this depending on the work undertaken, the claims history etc. Rates are discounted for new start firms as there is no history or legacy to insure.
You should also bear in mind that minimum premiums will apply which will vary between insurers. The minimum premium is the insurance companies starting point for insuring a risk and they can vary significantly for solicitors. For example a minimum premium could be £ 1,000 or £ 5,000 depending on the Insurer.
If you stop trading you will be required by the SRA to carry run-off insurance. This will be calculated as a multiple of the annual premium, usually three times the annual premium for a six year period of cover.
A word of warning. The history of this market shows that it's foolish to buy solicitors' professional indemnity insurance as a 'commodity' purchased only on its price. Professional indemnity is commercial insurance and coverage disputes still occur. There is also a high churn rate of insurance companies entering and exiting the market, so use a specialist broker to get the right advice.
Setting up a new law firm
When submitting an application to the Solicitors Regulation Authority, new firms will need to include a quotation or 'offer of professional indemnity insurance' from an SRA authorised professional indemnity insurer. This must be in accordance with the Minimum Terms and Conditions (MTC) as set out in the SRA Indemnity Insurance Rules. To obtain a quotation, the following documents are required;
- a fully completed proposal form
- a copy of the business plan,
- cash flow forecasts
- and CV's of the partners or directors
New firms should bear in mind that under the SRA rules, there is a six year mandatory 'run off' requirement for professional indemnity insurance. So if you cease to practice for any reason, you will have a six year 'run off' premium pay.
Creating the right impression
To obtain a quotation you have to complete a fairly lengthy proposal form which will be reviewed by an experienced underwriter. Remember that the proposal form is a representation of the quality of your business to the insurance market, so it's worth spending some time making sure it looks professional. An underwriter will be using it to judge you and they will also look at your website and perhaps your financial information.
If you spend time and money on risk management and improving quality, make sure your insurer knows about it. This could easily be overlooked and not reflected in your premium so add some notes on this subject.
The rating of a law firm or any professional indemnity risk is a complex process. Underwriters need to be highly skilled and require a significant amount of information to enable them to provide a quotation which accurately reflects the risk they are pricing. Premiums are calculated based on many factors which will include:
- The claims history of the firm
- Categories of work performed by the firm
- The number of partners / directors / staff
- Firm’s revenue
To assess the risk the underwriter will require a fully completed proposal form which they will consider in detail. They will also look at the firms website or they may even look deeper online into a firms background.
Presentation is more important that you might think. The underwriter is assessing the professionalism and quality of your firm and if the information is badly presented, it may influence their judgement and the premium they offer or they may even decline to quote.
High risk work
All work carries some risk and for the legal profession this can vary considerably. The following is by no means an exhaustive list but will give you some idea of the type of legal work where professional indemnity claims come from.
- Low Risk - Adjudication, Agency, Children Work, Criminal, Expert Witness, Immigration, Officers and Appointments.
- Medium Risk - Defendant Litigation, Employment, Matrimonial, Personal Injury, Town Planning.
- High Risk - Commercial Litigation, Estate Agency, Financial Advice, Intellectual Property, Probate, Trusts and Wills, Tax Planning.
- Very High Risk - Commercial Work (public and non public companies), Conveyancing.
All qualifying insurers must provide a policy wording which is no less comprehensive than the minimum terms set by the SRA. The policy wording provided under the SRA 'minimum terms' is a 'civil liability' wording and widely regarded as the Rolls Royce of professional indemnity insurance. The cover is broad and the small print generally favours the policyholder rather than the insurance company.
The policy will have the usual exclusions you'd expect to see in a professional indemnity policy. This could include;
- Partnership disputes
- Personal debts and trading liabilities or guarantees
- Defence costs for disciplinary proceedings
- Dishonesty, a fraudulent act that has been commissioned or condoned by an insured individual
- Bodily injury including death and property damage
- Employment issues, wrongful dismissal etc
- Penalties and fines or orders to pay costs in the investigation into professional conduct
The insurance company may be able to seek recovery of their payments if a firm is found to have engaged in non-disclosure of relevant factors, misrepresentation, dishonesty or fraud.
Your insurance policy is a contract between you and your insurer. Like any contract it is prudent to familiarise yourself with its wording. In particular you should always read the policy exclusions.
Due to the complexity of the risk, online quotations are not yet available for law firms. Please call us for our solicitors' quotation pack on 0345 251 4000.
What level of cover (limit of indemnity) is required?
The SRA specifies the minimum level of professional indemnity cover a firm must carry, depending on the structure of the firm.
- Firms as defined by the SRA are obliged to have cover of at least £ 3 million for any one claim.
- In the case of sole practitioners and partnership firms the requirement is at least £ 2 million for any one claim.
Extra cover on top of the SRA’s minimum requirements can also be purchased if required. This is called an 'excess layer' or 'top-up' and the total amount of cover will depend on the size of the firm and its exposure to risk.
Although it's not law firm specific, you can also read our informative guide on choosing the right level of professional indemnity cover.
All practicing solicitors need professional indemnity insurance
If you are a solicitor in practice you are required to have professional indemnity insurance by the regulatory body of the country in which you practice.
In England and Wales the representative and regulatory functions are separated. The Law Society represents the profession, while the Solicitors Regulation Authority (SRA) is the regulatory body
Solicitors are required to have professional indemnity insurance cover for the entire time they are practising and need to show their regulator that they have professional indemnity insurance in place as part of the practising certificate renewal process.
Trading without professional indemnity insurance
Trading without adequate professional indemnity insurance is a serious breach of the regulatory requirements and a firm will be prevented from trading and closed down if they can-not obtain cover. The availability of professional indemnity insurance for every law firm should not be taken for granted as there are numerous examples of the SRA closing down firms who were unable to obtain cover.
This system means that the insurance market is in effect deciding who can or can't practice. So we cannot over emphasise enough the importance of internal risk management and maintaining a good risk profile, as evidence of a firms cover is required every year by the SRA.
Obtaining your quotation
For a general chat, some free advice, or for a competitive professional indemnity insurance quotation, please contact us on 0345 251 4000 or email email@example.com.
This guidance note is intended for information purposes only. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. This guidance note shall not be reproduced in any form without our prior permission. © 2018 Professional Indemnity Insurance Brokers Ltd