professional indemnity


Mary Gavigan


DIRECTOR, FINANCIAL ADVISORY SERVICES PRACTICE LECG


Stephen Robertson-Dunn


SENIOR MANAGING CONSULTANT


Professional cover for Solicitors


Solicitors’ PI has been evolving since it was opened up to the insurance market in 2000. Mary Gavigan and Stephen Robertson-Dunn explain the recent developments, and the current state of the market


ntil 2000, all solicitors’ professional indemnity insurance was written through a mutual fund known as the Solicitors Indemnity Fund (SIF). Due to the immense problems affecting the SIF, solicitors’ PI insurance was opened up to the broader insurance market. The problems facing the SIF were largely driven by an increase in claims, particularly those which arose in respect of the property market (conveyancing claims) in earlier years.


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The open market has proven to be highly competitive with many entrants and leavers over the years. The overall cost of PI to the profession has reduced given the more competitive, open market conditions. In fact, one report puts the savings to solicitors as being in excess of £1bn.


Solicitors however, are required by the Solicitors Regulation Authority (SRA) to have certain minimum terms and conditions for their cover, which does not allow much flexibility or scope for insurer risk


assessment. Even though there is an open market, some see entrance as unviable due to these restrictions.


The market currently operates in such a way that it is difficult for insurers to obtain information about a particular solicitor. There is a desire for greater


transparency on the disciplinary record of solicitors to assist


14 insurancepeople MARCH 2011


insurers with their ability to assess risks.


The lack of information was highlighted last year in Quinn Direct Insurance v The Law Society. In this case the Court of Appeal upheld the High Court’s decisions that the Law Society was able to refuse to disclose information about a solicitor in respect of a matter its professional indemnity insurer was investigating.


One of the most controversial issues facing the market is the Assigned Risks Pool (ARP). The SRA operates the ARP to give solicitors access to insurance, when they cannot obtain cover on the open market. The ARP is ultimately funded by the insurance market, who may choose not to insure, or indeed refuse to insure the relevant solicitors in the first place. The cost of this ARP and concerns about its regulation has contributed to some insurers exiting the market.


The increased cost of ARP claims is linked to the increasing numbers of small firms using the pool in recent years - numbers have risen from around 70 firms to over 300. Accordingly, there has also been an increase in claims being paid out, from around £5m per annum to £40m more recently.


Given these concerns about the market, the SRA recently published a consultation document proposing widespread


changes to the way the solicitors’ PI market operates. The consultation period closed on 28 February 2011.


The consultation explains how the SRA is proposing to change its approach from regulation based on detailed rules, to a system that is principles based, and outcomes focused, as well as ensuring that the regulation activities are based on a clear understanding and assessment of risk.


Change is desired because there is concern that the current, and very broad and


undifferentiated minimum terms and conditions approach, increases the risk to the public rather than reduce it.


The SRA’s objective is to have a scheme which protects clients from financial loss caused by firms’ impropriety, and also to give confidence to the public in the solicitors’ profession where the actions of certain solicitors could otherwise lessen it. The consultation paper sets out proposed principles and proposed regulatory changes. It suggests putting into place certain changes by October 2011 and other changes during 2012.


Notably, in connection with the


ARP, the SRA consultation paper is proposing to reduce the time for which a firm is allowed to be in the ARP from 12 months to six months. The proposal also sets out that firms in the ARP would have to have plans to obtain open market insurance cover, and if this is not possible then they will have to undertake an orderly closure. The hope would be that this improved regulation will reduce the cost of the ARP.


Meanwhile, in January 2011, the Law Society published its own suggested approach to the ARP - asking members for input in order to give a comprehensive response to the SRA’s


consultation. The Law Society has proposed that an alternative to the ARP would be to get firms to enter into an extended reporting period with their current insurer, and during this period seek to obtain insurance cover elsewhere. If they cannot obtain insurance, then they will plan for an orderly shutdown.


Whatever the outcome of these consultations, there are likely to be big changes ahead for the solicitors’ professional indemnity market.


Solicitors’ PI insurance now thriving in more competitive, open market conditions


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