The current minimum level for solicitors’ professional indemnity insurance (PII) cover is £2 million and insurers are required to cover firms for six years after they close even if they are unable to collect any premium due. Under proposals made by the Solicitors Regulation Authority (SRA), the idea of abolishing a minimum level of cover has been suggested as has a reduction in run-off cover from six years to three years. Further, the creation of a “hardship fund” for smaller firms deterred from closing by the cost of maintaining premiums has been proposed.
Similar proposals made by the SRA last year to cut the level of compulsory cover from £2 million to £500,000 were blocked by the Legal Service Board due to concerns about client protection. However, the SRA has reportedly undertaken new research and has confirmed in its discussion paper that its view remains that the limit should be lowered in order to reduce costs and increase flexibility.
The suggestion to abolish the minimum level of cover would, according to the SRA, allow firms to assess their needs and purchase appropriate PII cover. This would allow firms to negotiate limits appropriate to their business activities, resulting in a reduction in costs for firms. According to the SRA, it has been advised by insurers that reducing the minimum level will result in a reduction in premiums.
The SRA has reported that the default in run-off premium is around 50%, which means that the costs of providing the required six years of run-off cover is factored into premium rates. In addition, the SRA has received reports of cases involving sole practitioners who have been forced to keep their businesses going simply because they cannot afford the run-off premium. This has resulted in the SRA’s suggestion to reduce the requirement for run-off cover to three years, and to establish a centralised fund, which would be paid for by the legal profession, to which firms in difficulty could apply for help with meeting payments.
The Law Society is due to consult solicitors on the SRA’s proposals.