Solicitors Professional Indemnity Insurance: Important Considerations

By Richard Gledhill

In this month’s issue, we are focusing on a couple of issues; firstly we will revisit the options and implications of run-off Professional Indemnity Insurance and secondly, touch on the subject of Qualifying Insurers’ financial rating.

Run-Off Insurance

Members should be aware that, in the event of your ceasing to practice, you have a regulatory requirement to maintain protection for a period of 6 years.

In line with this, and within the Qualifying Insurers’ Rules, your incumbent Professional Indemnity insurer is obliged to provide you with a minimum six years’ run-off insurance cover from the cessation of the practice.

Where a successor practice is involved, you may have the option of merging your cover into that held by the successor practice. The merits or otherwise of doing this will be investigated as part of the formal process of agreeing on the succession, but if this option does prove possible and/or more attractive in terms of premium and/or policy terms, then the run-off cover issue is duly taken care of.

If however there is no successor practice, then you have no alternative but to effect the six-year run-off. The rules in place at least make this a straightforward process – see the guidance notes available on both the Law Society’s and SRA’s websites.

What you must bear in mind, however, is the cost of that six-year run-off insurance. This is not regulated, and will vary depending upon your Insurer – the precise cost will be set out within your policy document and can vary from c225%-350% of your annual premium.

This can, of course, be a significant sum, and we would, therefore, urge members to factor into their financial plans for closure of the practice, the need to pay this as a lump sum at the inception of the 6-year run-off cover. Steps must be taken so as to ensure the premium can be paid, this may of course also form part of your consideration around any sale process, for example where indeed a separate run-off cover is to be effected.

Again we would highlight the assistance given here by both the Law Society and the SRA, whilst your Insurance Broker will also be able to advise.

Insurer Financial Rating

We do not propose to go over old ground here – most members will be well aware of the problems caused within the Solicitors’ Professional Indemnity market a few years ago with the involvement of unrated Insurers who ultimately found themselves insufficiently robust to survive beyond a short time frame.

This has become less of a problem over the last couple of years or so, partly due to market conditions and there being plenty of rated Insurer capacity.

However, we are aware of one Insurer, whose financial strength was not until recently recognised by the SRA, but in what now appears to be a change of position by the Regulator, the financial strength of the insurer in question is now recognised by them, reflective of the insurer in question operating under a “cut through” arrangement with a sister company which does itself carry a financial rating.

We understand the Insurer in question is seeking its own separate financial rating from the usual bodies – time will tell whether this is available and/or granted. We would urge firms to consider the implications here – do you ask the question of your broker?

If you wish to discuss any aspect of this article in greater detail or require assistance in sourcing an appropriate level of cover at a competitive price, please do not hesitate to contact ourselves as below.

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