Earlier this year, the Solicitors Regulation Authority (SRA) announced proposals to introduce a financial strength rating into the criteria for Participating Insurers. Some saw this move as a sensible way of addressing a number of issues arising from the collapse of insurers such as Lemma and Balva. Others saw it as a knee jerk reaction which could have caused chaos, with large numbers of firms facing the threat of closure, and a reaction which ignored the positive benefits brought to the market by responsible unrated insurers.
In the end, the SRA backed down. In doing so, it acknowledged the disproportionate impact that its proposals could have had on sole principals and small firms fighting to remain afloat and obtain insurance. It also recognised that a financial strength rating is not a guarantee of insurer solvency.
But those expecting that to be the end of the matter were in for a nasty shock. On the very same day, the SRA announced a consultation on a series of new proposals which have wide-ranging implications for solicitors’ professional indemnity insurance (“PII”). Not only that, but the SRA says that it wants to implement its proposals with effect from 1 October 2014.
The new consultation
Perhaps the most controversial of the SRA’s new proposals is to reduce the level of mandatory cover that all firms must carry from £2 million to £500,000. The SRA also proposes (1) limiting compulsory cover to claims by individuals, small businesses and charities; (2) reducing the amount of run-off cover which insurers must provide from six years to three; and (3) introducing an aggregate cap for indemnity.
The SRA says its aim is to create greater flexibility and to enable increased competition, innovation and growth. However, while many insurers and solicitors feel that the current system needs reform, and the Minimum Terms & Conditions (MTC) need greater flexibility, the proposals themselves are likely to get a mixed reception.
For example, many solicitors (particularly smaller firms) will be hoping that reducing their cover to £500,000 per claim will lead to lower premiums. However, those of us who act for solicitors facing negligence claims will tell you that even small firms can face big claims and that a low indemnity limit can easily be exceeded if a number of claims fall to be aggregated and treated as a single claim under the firm’s policy. The risk therefore is that more and more solicitors could end up under-insured and facing the risk of bankruptcy. Given this, a decision to take a lower level of cover should not be taken lightly.
The extent to which insurers are permitted to aggregate may of course be affected by the case ofGodiva Mortgages v Travelers Insurance Co. However, the trial of the (potentially) landmark case is not expected to take place until after the end of the SRA’s consultation.
One of the reasons cited by the Law Society for intervening in that case was a concern that a positive result for insurers could leave solicitors’ clients without proper protection. Some are bound to question how that squares with the new proposals being put forward.
Some elements of the proposals are likely to be supported by insurers. For example, they are likely to welcome an aggregate cap, and the proposed reduction in run-off cover, and this may (in itself) encourage more insurers to write solicitors’ PII risks.
What is most striking, and indeed concerning, is the timing. The MTC need a root and branch review to ensure they are fit for purpose for the medium to long term. That is in both insurers’ and the profession’s best interests. And yet, the SRA has brought in piecemeal proposals with a deadline of 18 June to respond. These are the most significant potential changes to the MTC we have seen since PII came to the open market in 2000, and we suggest it would have been far better to stand back and do this properly, with detailed consultation across all major stakeholders.
It therefore remains to be seen whether it is achievable to deal with this within the time frame proposed. Others will be concerned by the uncertainty. Firms whose policies expire on 30 September will be asking themselves whether they should renew early or wait to see the consultation outcome in the hope of a different deal. Likewise, insurers will have to make difficult underwriting decisions without knowing how much the landscape of solicitors’ PII is going to change from 1 October.
The only thing that is clear is that it is going to be a roller-coaster ride of a renewal season (again).