The SRA has published a consultation paper seeking views on its proposal to make some very substantial changes to compulsory professional indemnity insurance cover for solicitors. In this briefing note, we summarise a number of the key proposed changes.
This is not the first time that changes to compulsory cover have been proposed by the SRA. In November 2014, the Legal Services Board rejected the SRA's proposals to reduce the level of compulsory cover to £500,000 on the basis that there was not enough evidence the changes would reduce the premium for PI cover, and there would be increased risks to clients.
In July 2015, the SRA released a discussion paper mooting various changes to the minimum terms and conditions on which compulsory PI cover must be written (MTC). Then on 20 October 2016, the SRA published an analysis of professional indemnity insurance trends for law firms to inform the way forward.
The proposals published in the current consultation are set against a background of wider regulatory changes, including major amendments to the SRA Handbook including changes to allow solicitors to practice outside regulated firms.
Proposed changes to compulsory PI insurance
The SRA consultation proposes the following changes in respect of compulsory cover:
- the minimum level of compulsory cover required for each claim will be reduced from £3 million (or £2 million depending on the firm's structure) to £500,000 for claims apart from those arising from conveyancing services.The minimum level of cover for conveyancing services will be £1 million.
- The SRA estimates that this will provide a premium saving for firms of 5-10 percent.
- The SRA intends to mitigate risks to clients arising from this change by using thematic reviews, informed by data sharing and matching across insurers and agencies such as the Land Registry, to spot firms that may be at risk of under-insurance and taking appropriate regulatory action. Firms will be required to provide appropriate information to clients on insurance arrangements.
- A separate component will be introduced into the insurance arrangements for conveyancing services, so that firms that do not need to include this component will not be required to buy cover in respect of such work. Hence conveyancing claims will not be covered by the policy.
- Compulsory cover will be excluded for financial institutions, corporate and other large business clients.
- The SRA proposes basing the exclusion on the turnover of the client in the financial year in which the act giving rise to a claim occurred.
- The SRA is seeking views as to whether this should be an exclusion on terms that the MTC can never include these clients, or that it would be a permitted exclusion. Firms carrying out this work will still be required, by a term in the Indemnity Insurance Rules, to buy appropriate and adequate cover for these clients.
- The SRA's view is that large corporations are more sophisticated and should be able to assure themselves about the adequacy of insurance arrangements relating to legal services, and that the change allows the emergence of more proportionate and suitable arrangements for these clients.
- More flexibility to be allowed in arrangements for defence costs (although defence costs would continue to be excluded from the calculation of when an indemnity limit has been reached). For example, this would allow caps on defence costs or excess arrangements that include defence costs.
- The SRA's view is that these changes are likely to give rise to a 4 -7 percent premium saving for firms, and in addition, a requirement on firms to pay as soon as a claim starts to accrue defence costs will alter firms' behaviour leading to a reduction in the number of claims "unnecessarily defended".
- A total cap to be introduced for the level of cover during the six-year run-off period, of £3 million for firms that need cover for conveyancing services and £1.5 million for other firms.
Areas where no changes are proposed
A number of proposals have been mooted by the SRA in the past that it has decided not to proceed with. These include:
- Provision for a sideways aggregation cap for a single indemnity period.
- Exclusion of coverage for claims arising from external cyber fraud or criminal activity that results in loss from client accounts.
- The SRA's view is that the risk from such crimes to individuals is particularly damaging, and it is not reasonable to leave these consumers unprotected. The Consultation specifies that it expects firms to notify it when they have suffered a cyber attack (including near-misses) and that a portfolio of measures are needed to address the issues here such as education and awareness of the risks.
- Allowing insurers to exclude liability for dishonesty so that innocent partners cannot claim an indemnity.
- Alteration of insurers' obligations so that they are not required to pay the excess where the insured does not pay.
- Allowing insurers greater remedies where a firm fails to make a fair presentation of the risk in line with the Insurance Act 2015.
- Reduction of the length of run-off cover, and removal of the requirement that insurers must provide cover if the premium is not paid.
There are also proposed changes to the Compensation Fund. Essentially these would limit the circumstances in which the Compensation Fund will pay out and the people and entities to whom payments will be made.
The SRA is also seeking views on the following areas:
- Whether there are difficulties in relation to how the successor practice rules operate, and whether there are any alternative approaches.
- The SRA is reviewing the steps it takes when an insurer notifies it that they are refusing to provide cover. It is said that the most common reason for this is that a person at the firm has acted dishonestly and the other partners have condoned the dishonesty. The SRA indicates that it is difficult for it to challenge insurers' position, which it states can be "controversial" as the dispute is between the law firm and the insurer. It suggests that there are a range of options for closer engagement such as:
- allowing the SRA to become involved in an arbitration between a firm and an insurer or changes to allow them to access arbitration decisions more easily; and
- allowing the SRA to attend conferences with counsel or experts that examine cases where dishonesty is alleged and cover has been denied.
The SRA states that the data it has received indicates that in a 10 year period, £1.6 billion was paid from the MTC level of cover, and an additional £400 million was paid for firm's defence costs. The proposals obviously have the potential to significantly affect these sorts of figures.
The SRA has made it very clear that the driving force behind the proposed changes, and the SRA's current regulatory overhaul in general, is to encourage new entrants into the legal market, and hence to increase competition and create more affordable legal services.
The impact of the wide ranging proposals in this Consultation will be the subject of much debate.
The Consultation will close on 15 June 2018.