The SRA’s proposals
Back in May, the SRA proposed a series of changes to the compulsory professional indemnity arrangements for solicitors. The proposal that grabbed the most headlines was to reduce the level of mandatory cover which all solicitors’ firms must carry from £2 million to £500,000 per claim.
The SRA also proposed:
- Limiting compulsory cover to claims by individuals, small businesses and charities.
- Reducing the amount of compulsory run off cover that insurers must provide from six years to three.
- Introducing an aggregate limit to cap insurers’ ultimate liability.
Controversially, the SRA allowed a consultation period of just six weeks and said that it wanted to implement its proposed changes by October 2014. A backlash followed with many firms, insurers and other organisations raising concerns and predicting chaos during this year’s renewals season.
The SRA received over 140 consultation responses. While many smaller firms were broadly in favour of the proposals, the Law Society (among others) lodged vociferous objections.
Faced with a dilemma, the SRA opted for what it probably hoped would be a well-received compromise. It decided to proceed with its proposal to lower the minimum level of cover to £500,000 (and impose a regulatory requirement on solicitors to assess and purchase an appropriate level of cover) but put everything else on hold until 2015 pending a wider insurance review.
But even that hasn’t pleased everybody. Many still question whether lowering minimum cover will actually deliver positive benefits. At the same time, the Law Society has threatened to lobby super-regulator the Legal Services Board to veto (or at least postpone) the proposed change.
Many sole practitioners and smaller firms will be hoping that they can reduce their insurance premiums by reducing the cover to £500,000 per claim. However, as the majority of claims against solicitors are resolved for under £500,000 it is difficult to see how premiums will reduce by much.
At the same time, are firms who may be struggling to survive financially really going to pass any costs savings they do make on to their clients? If not, how does the change benefit consumers?
The SRA are also relying on firms to make a sensible judgement about the level of cover they need. The majority will no doubt do so. However, there will be those who simply go for the lowest level of cover possible. The fear therefore is that we will see more cases of solicitors being underinsured.
As a result, we may see an increase in claims against the SRA’s Compensation Fund by claimants looking for a “top up” fund. The SRA is seeking to combat this by limiting access to the Compensation fund to individuals and to smaller businesses, charities and trustees.
Another key factor in the SRA’s decision to allow firms to seek lower levels of cover seems to be that, when choosing a solicitor, clients can make their own decisions about the level of insurance protection they need. However, it remains unclear how clients are meant to be able to make informed decisions unless the risks are explained to them or they seek out independent advice.
It is also difficult to see how the new change will make the solicitors’ PII market more attractive to new insurers when the key issues of an aggregation limit and run-off cover remain unaddressed. The prospect of a wider review over the next 12 months also leaves the market with uncertainty.
While it is not yet known exactly what that review will cover, proposal form misrepresentations; partner fraud; run-off cover; and defence costs limits are all being talked about by the SRA.
Few would disagree with the SRA’s aim to make regulation of the solicitors’ profession more proportionate and targeted. There are also many (including insurers and the Law Society) who believe that there are elements of the solicitors’ PII regime that would benefit from reform.
While time may show that their decision is the right one, the SRA’s decision to lower the level of compulsory insurance while at the same time putting on hold more wide ranging reform has the feel of an uneasy compromise that (on its own) seems unlikely to deliver significant benefits.
The SRA has the chance to address these concerns through the further review it says it will commence in the Autumn. However, if that is to deliver long-term benefits for the profession, its insurers and its clients, then a longer and better consultation process will be needed.