What are the main changes currently being considered by the SRA?
The current SRA consultation considers the indemnity insurance rules and compensation fund. Changes are being considered to the minimum terms and conditions (MTC) in a number of areas – client coverage, aggregation limit, reduction of the minimum compulsory cover, run-off cover, defence costs, funding the excess, unpaid premium, avoidance, partner fraud, Legal Ombudsman awards, extended policy period removal and consumer information.
Client coverage. The proposal is to limit the client group covered by the MTC to individuals, SME’s, trusts and charities. The main implication for this is in conveyancing and the view of lenders who, via their trade associations, have voiced objection to this proposal. The SRA and The Law Society really need to determine whether the suggestion of a reduction in the number of Solicitors on panels and a move to Licensed Conveyancers is real or not. They also need to engage with the insurance market to determine what policy terms and condition would then apply to large corporations and whether specific terms would be provided for lenders which meet their requirements.
Avoidance, repudiation, adjustment and denial. Currently under the MTC insurers are unable to avoid or repudiate cover on any grounds other than the permitted exclusions of the MTC. Insurers dislike this position preferring the usual practice under insurance law of utmost good faith and material disclosure (and allowing them to avoid the policy for any breach by the insured) citing a reduction in claims paid and therefore premiums. The consultation considers adopting a similar position to that in Ireland allowing insurers to exclude indemnity for claims by financial institutions in certain circumstances also mentioning removal of sophisticated clients from the MTC. The Insurance Act 2015 will introduce in August 2016 a new duty of fair presentation to the inception and renewal of insurance contracts. This more equitably balances the responsibility on commercial insureds to gather and disclose all material facts and information and introduces new fairer remedies where a breach occurs.
It is welcome to see the SRA seeking to improve and balance the indemnity insurance rules between the interests of law firms and clients. I am of the view that often the discussion centres on client protection when this insurance is also a vital risk transfer mechanism to protect law firms owners from professional risks.
The consultation closed on the 16th September. No date for publication of the results has been given yet.
Is the solicitors PII market broken and if so what needs to be fixed?
I’ll answer this by painting a picture of what a perfect solicitors PII market would look like. Insurers would offer excellent service, charge premiums that reflect minimal claims activity and play fair when it comes to addressing policy issues or claims issues. Insureds (law firms) would be exemplary in their conduct of renewal negotiations, display high levels of maturity in how they manage risk thereby minimising claims activity. The regulator would understand and set the right framework to balance the requirements of client protection with the interests of law firm protection. Brokers – you’ll have to call me about them!
It’s worth remembering that professional risk is high on the agenda of most professions. Property, infrastructure and medical continue to experience significant claims activity and insurance market volatility.
In determining whether or not the market is working you have to draw distinction between the segments that have established themselves. For sole practitioners and smaller firms there are limited choices of exclusive insurer/broker packages and questionable security. Just because an insurer has an A rating does not mean it knows what it is doing (long list of examples could be inserted here). For mid market and larger firms there is more stability and proven expertise. Referring back to my painting there is much work to be done to establish a market performing well.
Reducing the frequency and value of claims has to remain a priority for all law firms. Choose clients carefully and manage the risks proportionately and effectively. Do not take a risk with risk transfer and choose your broker and insurer not just on price but also their expertise and the service they deliver.
Phil Tate is the owner and principal consultant of Consilium – an enterprise risk management consultant and specialist insurance broker to mid-market and larger professional services practices. He has provided risk management and insurance advice to law firms of all sizes for over 15 years.