Opinion: High price of cheap PI cover

SRA should soften consumer focus and clamp down on the unrated sector to secure PI future

Anyone who remembers the closing of the Solicitors Indemnity Fund (SIF) will recall that those hastening its demise felt aggrieved that they had to pay a disproportionate amount for their PI cover to offset against those who endured a greater proportion of claims. How times have changed. 

While the burden of insuring those firms that struggle to obtain cover in the post-SIF era has fallen on the insurance market for most of the past 13 years, things are about to undergo a big shake-up and the -baton is to be passed back in-house, at least partly. 

As of October our compensation fund will provide run-off cover to firms that have been forced to close as a result of their PI insurer going insolvent, such as all-but happened last month with Balva – and Lemma and Quinn before it. And, quite conceivably, others will head down the same route in future. 

Whether the fund has the resources to cope with these sorts of catastrophic events – in addition to the other calls against it including claims against firms who had no cover in place at all – remains to be seen. 

But with the SRA also starting to take its rapidly escalating intervention costs from the same pot, it is easy to see how a cash-call on the profession could be on the cards in the not-too distant future. 

Consumer-focused financial protection seems to be at the heart of the present situation; the minimum terms of PI insurance we must all carry continue to be so heavily biased in favour of the consumer that premiums have to be high if insurers are to stand any chance of making a sustainable return. 

But the SRA insisting on the highest quality PI cover is of little use if no one can afford it, which is where unrated insurers such as Balva have historically come in. 

Typically from outside the UK, these companies tend to charge for PI cover at an unsustainably low level. Of course, this is great for the firm involved and great for keeping the rest of the insurance market keenly priced – until the insurer fails. 

With the spectre of more Balva-style collapses looming for as long as unrated insurers continue to be permitted to insure the profession, the SRA appears to be at a crossroads in the financial protection debate: continue to follow their present route, maintain the minimum terms as they are and use the unrated insurance sector to keep the market for solicitors’ PI keenly priced but volatile. Or soften the consumer focus, remove the unrated sector and/or ease minimum terms for PI so as to allow the insurance market to charge a sustainable rate for the cover it provides. 

While the second approach may sound less appealing – particularly at a time when the SRA has announced that an unprecedented number of firms are experiencing crippling financial pressures – it is likely, over time, to result in a stable platform for firms, insurers and the compensation fund. 

The alternative has the feel of unsustainable in the longer term, particularly with the compensation fund – and therefore the profession – seemingly underwriting the risk.