The professional indemnity insurance market was shaken by last year’s adjustments, and now the SRA has additional proposals
Last year was unusually turbulent for firms looking to secure professional indemnity insurance (PII), resulting in brokers voicing concerns over the SRA’s handling of the renewals process after the regulator admitted it had lost track of some uninsured firms.
It was the last time firms had a single date by which they had to renew their PII, and the SRA also scrapped the assigned risks pool (ARP) – the last resort for firms that could not find insurance.
Critics of the SRA have queried how it will cope with renewals throughout the year considering the final year with a single renewal date was, as some said, “shambolic”.
The scrapping of the ARP on 30 September ushered in the SRA’s new extended policy period (EPP), which firms automatically enter if they fail to renew or secure a PII policy by 1 October.
Until then the ARP had acted as a safety net for firms unable to secure cover from qualifying insurers or find replacement cover if an insurer went insolvent, as was the case with unrated Latvian underwriter Balva last June.
The problem of Balva’s collapse was compounded by the withdrawal of Berliner, which had been lined up to take on Balva’s PII book of almost 1,300 firms. The ever-decreasing options left many firms on borrowed time in the EPP while they tried to secure cover elsewhere.
Despite a requirement to keep the SRA informed of their position while in the EPP, several firms failed to do so. Towards the deadline in December it became clear the regulator had lost track of some of them.
At the end of the 90-day extended period of cover, if firms had not secured a policy and notified the SRA to that effect they were under an obligation to close, having had the previous 30 days to prepare an orderly wind-down.
At the end of the EPP, 136 firms had failed to secure cover and the SRA took the unusual step of publishing the names of all those being forced to close as a result.
Six months later, and on top of the 136 that were wound down, 58 firms are facing disciplinary action for failing to maintain contact with the SRA while they were in the EPP, and 23 are being investigated for non-disclosure to insurers in the process of renewing their policies.
Deliberate non-disclosure is regarded as dishonesty by the SRA and would be misconduct enough for it to refer proven cases to the Solicitors’ Disciplinary Tribunal. Ultimately, those responsible could be struck off, but their PII policies would not be voided.
Hardwicke personal injury barrister Colm Nugent worries that the latest investigation into non-disclosure could be an example of draconian regulatory standards placing extra pressure on already squeezed sections of the market.
He says: “The immediately obvious question is – who is to determine the information is sufficiently material and who is to decide whether the failure was deliberate or dishonest?”
He says PI insurers are increasingly concerned about the potential level of claims and their risk exposure following the Jackson reforms, and even more so following sanctions set out in the ‘Plebgate’ case, Mitchell v Newsgroup. That judgment made it clear that if a party fails to comply with a rule, practice direction or court order they will not get any relief from sanctions.
“The Mitchell axe has fallen on small and large firms alike, both high street and national,” Nugent says. “As virtually every failure to comply with a court order, beyond the most trivial, has the potential to result in a claim or defence being struck out. PI insurers may find matters that previously did not merit notification now require it – and firms that don’t may find themselves in dispute with their PI insurers regarding coverage.”
However, the SRA is clear that disciplinary action will only be taken against firms once it is proved that non-disclosure was deliberate.
An SRA spokesperson says: “Sloppy oversights are not good, but we would make sure we dealt with that proportionately and it would not necessarily be treated as dishonesty.”
The watchdog launched a consultation on changes to the minimum compulsory PII cover in May, for which responses were due by
Action by October
The proposals form part of a wider review into proportionate regulation, but is it too soon after the removal of ARP and the single renewal date to be rolling out yet more changes?
SRA executive director Crispin Passmore was appointed to manage policy at the watchdog in October 2013.
Passmore says: “The consultation process is short because we want to do it in a way that will influence the October renewal round.”
Lockton Solicitors practice group manager Brian Balkin adds: “The consultation may cause insurers to hold back on quoting until they know exactly what the wording will be, which will compact the time available and create difficulty.”
Passmore acknowledges the timescale is tight, but says there is a balance to be struck between the time constraints and the benefits of cost-cutting. In other words, getting the proposals through this year could prevent firms forking out another high premium when there is a growing consensus that one-size-fits-all cover is placing an unnecessary burden on much of the market.
The SRA has made five proposals including solicitors’ cover being reduced to £500,000, an aggregation limit for exposure and making PII compulsory only for firms with the most vulnerable clients (see box).
Balkin is more curious about what has been left out of the consultation. Considering the SRA’s investigation into non-disclosure he would like to see a clause in the consultation paper on the impact of non-disclosure on the integrity of cover.
“If a firm has not disclosed something there may be action to take against the individual by the SRA but they’re still insured, whereas in most professions the policy would be voided,” he explains.
That said, he acknowledges that the regulators are in a difficult position when it comes to rules that may leave a firm uninsured – ultimately, the SRA has to protect the consumer.
As Marsh managing director Sandra Neilson-Moore points out, these issues mainly affect the smaller firms. The top 100 firms in the UK would not have the same problems securing PII, and even if they did they would not be putting vulnerable clients at risk in the same way.
She believes the level for minimum cover is too high for rank-and-file firms.
“If you’re a sole trader who just does a little work it becomes impossible if you need £2m of cover, and we want these cottage industries,” she says.
An honest attempt to help
Although the SRA comes in for a lot of stick over the conflicting pressures placed on firms by PII requirements, both Neilson-Moore and Balkin agree there is a limit to which the profession’s regulator can mitigate this.
Neilson-Moore believes the latest consultation is an honest attempt to help smaller firms stay in business. Factors such as unrated insurers entering the market are not the fault of the SRA, but fall to the Financial Conduct Authority (FCA) to regulate.
“The SRA is trying to give them as much choice as they can while still protecting the consumer,” she adds.
Balkin also points out that Solvency II, a new set of regulatory requirements for the European insurance industry, is due to be implemented on 1 January 2016.
It is possible, he suggests, that the SRA is ducking the unrated insurance issue for the time being, in the knowledge that it may be unable to operate under the rules in a couple of years anyway.
“It’s hard to tell small firms they can’t use unrated insurers because it would take thousands out of business,” he says. “Maybe the SRA thinks the proposed changes will help other firms back in to the market and soak up the loss of the unrated insurers if Solvency II means they’re unregulated to carry on.”
Unsurprisingly, Passmore concurs.
“The job of the regulator is to work out how to get the right level of consumer protection without piling the cost so high that it prices firms out of the market,” he says.
His long-term aim is to scrap the one-size-fits-all system and take a more sophisticated approach, recognising the need to protect the rule of law and public confidence.
He says he has read responses to the consultation that suggest scrapping a minimum requirement altogether and simply making “appropriate cover” a requirement.
But, he feels, this would be a step too far as the most vulnerable consumers would struggle to assess the risks associated with their claims and choose appropriate firms.
Does the emergence of alternative business structures (ABS) pose a problem when vulnerable consumers are the primary concern?
Neilson-Moore says there should be no need to compel large ABSs to buy insurance. As more corporate-minded entities, she says they simply regard it a business expense. Moreover, the rigorous assessment process ABSs have to undergo to be granted a licence by the SRA means insurers see them as attractive businesses with easily identifiable risk profiles.
Until the SRA’s response to the consultation submissions is published it is impossible to predict how the board will proceed. However, it is unlikely that this year’s renewal period will be as uncomfortable for firms as last year.
Balkin says he cannot imagine seeing any major insurers pulling out of the market this year. If the reforms go through, the market may even become attractive to other insurers, creating a more secure environment for firms seeking PII.
The SRA’s five proposals to reform solicitors’ PII
Five proposals are set out in the SRA consultation document on PII, beginning with the suggestion that mandatory cover for solicitors be reduced from £2m – or £3m for LLPs and alternative business structures – to £500,000.
That would be a welcome recommendation for the smaller end of the market. But with no cap on the number of claims insurers are liable for during the period of insurance, the exposure risk will remain unpredictable and unpalatable to some.
Acknowledging that this may have deterred insurers from entering the market, the regulator goes on to propose an aggregation limit to total exposure.
The document calls for the market’s views on an appropriate cap, saying its initial plan to cap total exposure at £1m was deemed “too big a step to take at this stage”. It seems clarity is required on what limit could be placed on aggregate claims without placing consumers at risk.
The consultation says any limit could be a significant reduction in cover, but it also states that firms dealing with higher risk cases and transactions, such as those doing clinical negligence, catastrophic injury and probate, must ensure they have obtained the appropriate level of cover.
Assessment of the proper level of cover for the types of work carried out is likely to ease concerns for insurers. A cap would offer some certainty as to the level of exposure they face and potentially alleviate some of the growing reticence underwriters are showing to insure smaller law firms.
Possibly the most radical proposal is to make PII compulsory only for firms with the most vulnerable clients, such as individuals, small and medium-sized enterprises or social enterprises turning over less than £2m.
Arguably, this would reduce the need for caps and aggregate claims limits, or at least make it easier to define what they should be. Would it affect the SRA’s sense of responsibility when it came to providing the EPP in future?
SRA executive director Crispin Passmore agrees it would be game-changing, but says these proposals are not the last word in reforming the system. If they gain approval from the SRA’s board when they meet in early July they will be implemented straight away, but the review will be ongoing.
The final two proposals are to reduce compulsory run-off cover to three years instead of six and change the SRA Handbook to reflect the need for firms to assess their own need for cover beyond the minimum specified.