The market for solicitors' 2010 professional indemnity cover is set to be one of the most challenging renewal periods facing both insurers and solicitors' firms.  This article looks at some of the challenges which will face both insurers and solicitors' firms in the run up to renewal and the effect that recent and possible future reforms will have to this market.  In particular, this article discusses the following issues:

  • The change to the Minimum Terms and Conditions;
  • The effect of Quinn Insurance Limited being placed in administration;
  • The recent reforms that the SRA has decided will be made to the Assigned Risk Pool (ARP); and
  • The suggested introduction of a staggered renewal date.

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The market for solicitors' 2010 professional indemnity cover is set to be one of the most challenging renewal periods facing both insurers and solicitors' firms. This article looks at some of the challenges which will face both insurers and solicitors' firms in the run up to renewal and the effect that recent and possible future reforms will have to this market. In particular, this article discusses the following issues:

  1. The change to the Minimum Terms and Conditions;
  2. The effect of Quinn Insurance Limited being placed in administration;
  3. The recent reforms that the SRA has decided will be made to the Assigned Risk Pool (ARP); and
  4. The suggested introduction of a staggered renewal date.

Change to the Minimum Terms and Conditions

The SRA announced at the beginning of July that from October 2010 professional indemnity insurers will no longer have to provide cover to solicitors for defence costs incurred in relation to disciplinary matters arising from claims. Insurers will still be obliged to provide cover for the defence costs incurred in defending negligence claims.

Often the existence of cover for defence costs incurred in relation to disciplinary matters is a solicitor's only chance of defending proceedings or preventing themselves from ceasing to be able to practice. The removal of cover in this situation will therefore be of great concern to solicitors and represents a significant change to the Minimum Terms and Conditions, which all professional indemnity insurance for solicitors must comply with. The removal of this cover has already triggered calls for creating a legal defence union, similar to that provided to the medical profession, which would assist solicitors facing disciplinary proceedings. Alternatively, this change may result in the market seeing a demand for separate defence insurance to cover the costs of these proceedings.

From insurers' prospective, this alternation to the Minimum Terms and Conditions will be a very welcome change in a market from which it has become increasingly difficult to make a return. The number of cases brought before the Solicitor's Disciplinary Tribunal is increasing. This trend is likely to continue given that the SRA has recently proposed changes to the way that solicitors are regulated and plans to introduce outcome-focused regulation in October 2011 which is bound to result in a more visible complaints process and, therefore, many more disciplinary proceedings than the profession has seen to date. The change to the Minimum Terms and Conditions means that from October 2010 insurers will no longer have to bear the cost of defending the increasing number of solicitors who will be facing such proceedings. This should assist insurers to recoup some of the losses that they have suffered in relation to this market over recent years (or at least avoid incurring yet further losses).

For more detail on the SRA's proposed reforms to the regulation of solicitors click here.

Effect of Quinn Insurance Limited being placed in administration

On 30 March 2010, Provisional Administrators were appointed to manage Quinn Insurance Limited, which insures 2,911 law firms. Although both the Law Society on 15 April 2010 and the SRA on 16 April 2010 confirmed that this was not an "insolvency event" for the purposes of the Solicitors' Indemnity Insurance Rules 2009 and that therefore there was no regulatory requirement for firms to obtain new insurance for the current year, those firms presently insured by Quinn will need to find a new insurance provider before the next renewal on 1 October 2010.

Quinn underwrote almost 10% of the solicitors' primary market in England and Wales in 2009 and has tended to provide more affordable insurance to smaller solicitor firms, which traditionally find it harder to obtain professional indemnity insurance. With Quinn's demise, it seems likely that whichever insurer buys the rights to Quinn's solicitor professional indemnity book will "cherry pick" which of these firms it will offer to indemnify in 2010. Those firms that do not receive such an offer may find it very difficult to obtain insurance, with insurers speculating about the reasons why these firms were not offered cover and being reluctant to insure them.

In addition, these firms (and also solicitors' firms in general) face paying even higher premiums for insurance cover this year, with insurance brokers Lockton not being alone in predicting that premiums will rise by 10% on average. This rise will be due partly to fewer insurers being in the market, leading to less competition, but will also be due to insurers needing to recoup their losses as the number of claims being made against solicitors has risen during the recession, particularly claims concerning mortgage fraud. Given this likely rise in premiums and Quinn effectively leaving the market (which, as mentioned above, has in the past provided more affordable cover to smaller solicitors firms), it seems that more sole practitioner and smaller solicitor firms will either be forced to close, merge with larger practices or enter the ARP.

Reforms to the ARP

The ARP is part of the market based compulsory professional indemnity scheme for solicitors which was instituted in 2000 to replace the Solicitors Indemnity Fund (SIF). The cover provided by the ARP satisfies the Minimum Terms and Conditions that all policies issued by Qualifying Insurers must meet in order that there is no diminution in the protection to the public on a firm's entry to the ARP. Insurers are required to contribute to the ARP in accordance with their own market share.

The ARP is intended as an option of last resort for firms that are unable to obtain insurance in the open market. However, the number of firms in the ARP has increased dramatically in recent years - from 28 in 2007/08 to 166 in 2008/09 and 259 in 2009/2010, over 90% of which are 1 and 2 partner firms. As mentioned above, the number of firms in the ARP will probably increase yet again in 2010/2011. This will put additional unwelcome strain on insurers, for which the ARP is an open-ended and volatile commitment, and will probably cause them to increase premiums further in order to help them fund it.

In light of these problems, the SRA and the Law Society have for some time been considering whether and, if so, how to reform the ARP. In November 2009, the SRA launched a consultation on the future of the ARP, which the chair of the SRA, Peter Williamson, had described as "costing a huge amount of money but demonstrating little benefit". As part of this consultation the SRA considered making the following possible reforms to the ARP:

  1. The SRA ceasing to issue ARP policies from 1 October 2010;
  2. The SRA preventing new firms from being eligible for the ARP after 30 September 2010; and
  3. The SRA reducing the maximum period that a firm could remain in the ARP from 24 months to 12 months (in any 5 year period).

On 4 May 2010, the SRA board formally decided to maintain the ARP, but with a maximum period of 12 months cover. It also decided to prevent new firms being able to enter the ARP from 1 October 2010.

By allowing the ARP to continue to exist, the SRA has overcome warnings that removing the ARP altogether would give insurers, rather than a regulator, the power to decide whether or not solicitors' firms could remain open. It will also go some way to meeting criticism that allowing high risk and failing firms to continue operating for up to 24 months while they are in the ARP exposes insurers to the risk of having to meet more claims generated during this period, when it would have been better to close the firm long before the end of the 24 month period.

However, the SRA's decision not to abolish the ARP altogether means that insurers and firms (through the payment of their premiums) will have to continue to meet the ever increasing cost of funding the ARP. In total, the cost of insuring the profession for 2009/2010 was £241 million, a £15 million increase compared to 2008/09. Should the prediction of a 10% rise in premiums for 2010/2011 prove accurate, the premiums that solicitors' pay for their professional indemnity will have exceeded the peak of contributions to the SIF in 1999, when it stood at £256 million. Bearing this in mind, it seems that both insurers and solicitors' firms are still having to disproportionately contribute to support and meet claims made against high-risk and failing firms, which the abolishment of the SIF was supposed to prevent from happening. It is therefore questionable whether or not a fairer system preventing this from occurring will ultimately ever be achievable while some form of the ARP remains in place.

Potential reforms to the renewal date

In addition to reforming the ARP, it has been suggested that the SRA and the Law Society should reform the current renewal process and, in particular, allow firms to chose their own insurance expiry/renewal dates.

At the moment, all solicitor firms renew their professional indemnity insurance on a single date (1 October). This is said to facilitate the calculation of insurers' contribution to the ARP, provide a simple method to prevent firms from being able to practice without insurance, ensure that any change to the Minimum Terms and Conditions can be implemented from a single date and also increase competition between insurers, which are all completing for business from firms at the same time. However, a single renewal date is said to prevent brokers and insurers from being able to give the attention required to adequately assess the risks involved in insuring a particular firm, which could result in too low a premium being quoted. It is also arguable that a single renewal date actually prevents competition, since only the largest insurers have the necessary resources to process large numbers of renewals and fully participate in the market, with smaller insurers being largely excluded in this respect.

Given that the Law Society in its "Professional Indemnity Insurance Survey" (April 2010) confirmed that 39% of the firms involved in its survey wanted a staggered renewal date, there will probably be much debate about this possible reform in the run up to the October 2010 renewal.

Conclusion

The increase in claims against solicitors' firms and in disciplinary proceedings being brought against individual solicitors has made the market in solicitors' professional indemnity insurance unappealing to insurers. However, with the SRA deciding that from October 2010 insurers will not be obliged to provide cover for defence costs incurred in relation to disciplinary matters arising from claims and with the likely increase in premiums, insurers may be able to stem the tide of losses that they have sustained year on year in relation to this market.

Ultimately, however, the ARP will continue to be a drain on insurers' resources, despite the reforms that will be made in relation to the fund in 2010. The ARP's continued existence threatens to negate any benefit that insurers will receive from both the reforms already decided upon and the suggested changes to the solicitors' professional indemnity market. As such, it is debatable whether an effective market in solicitors' professional indemnity insurance is sustainable at all while the ARP continues to exist and certainly every member of the legal profession will continue to pay a heavy price (in increased premiums) whilst it does.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 28/07/2010.