PII special: guidance for firms
There is now a great deal of information and guidance available to help legal practices find the right professional indemnity insurance (PII) package for their needs. I hope that legal practices will not go into the renewal process without using this free advice.
The Law Society aims to make the PII renewal process as easy as possible, while at the same time encouraging greater transparency in the process. With those goals in mind, for the first time the Law Society has created a PII composite form, which some insurers and many brokers are signing up to. This will hopefully lead to an industry-supported common proposal form. The composite form is just one element of a suite of PII initiatives we are providing for members.
This year it is mandatory for qualifying insurers to disclose credit and financial strength ratings. They must state any rating and the name of the agency that has provided the rating. Insurers must also state if they are unrated. The existence of a rating is another tick in the transparency box, and is an important factor which legal practices should consider when choosing an insurer. The rating demonstrates that the insurer has undergone an independent financial security assessment.
Although it should be remembered that ratings do not guarantee an insurer’s financial solvency, our insurers’ guide may assist solicitors in understanding more fully what ratings do (and do not) mean. We also have a practice note which outlines the potentially severe regulatory consequences in the event of a firm’s chosen insurer becoming insolvent.
Other important changes to the minimum terms and conditions are outlined in the Law Society’s PII practice note, which includes an update on changes to the reimbursement provisions and cover for defence costs. The Law Society’s 2012 Insurers Guide provides a ‘market map’ that outlines the segment of the market being written by the majority of qualifying insurers. It also outlines whether these insurers can be accessed directly or through a broker.
The results from the Society’s annual PII survey suggest that, while a firm may be able to get ‘a better deal’ by approaching all insurers in their available market for a quotation, the level of premium should not be a firm’s sole consideration. There are other factors to consider, such as insurers’ financial stability and maintaining a relationship with your existing insurer, which may provide benefits with respect to claims handling and avoiding coverage disputes.
A legal practice may need to use more than one broker to gain access to the full range of qualifying insurers that are willing to offer PII. Whether multiple brokers need to be used or not depends on the size of the firm and its area of practice. It also depends on the chosen broker and the number of insurers which it can access.
The exclusive arrangements that exist in the solicitors’ PII market mean that some insurers can only be accessed directly through a single broker in particular segments of the market. It may still be possible to access these insurers ‘indirectly’ via sub-brokers. You will have to check with your broker to see if this is the case.
The Society’s proposal form is designed to assist members to access these different markets. While it is recognised that there is some way to go before it receives complete support from the industry, the list of those who have indicated they will accept the form (although some insurers may require supplementary questions) is growing.
If solicitors intend to use multiple brokers to access their full available market, it is important to ensure that no proposal form is sent to the same insurer twice, as this could prove counterproductive. Many insurers work on a first-come, first-served basis, but there is a danger that if a scattergun approach is taken to proposal forms without proper vetting of the information sent, it will result in a declinature and reduce a firm’s chance of getting insurance. The Society’s PII Buyers’ Guide has tips about managing these relationships.
Brokers - disclosure of commission and fees
This month, the European Commission introduced proposals to make the disclosure of any commission and fees received by insurance brokers mandatory across member states. While this would not happen for another five years, it would mean that all brokers, PII included, would automatically need to reveal details of commissions and fees received. But why wait five years to get your broker to disclose this information?
In the UK, the Financial Services Authority requires brokers to reveal details of commissions they receive, if asked. Why do you need to know details of these payments?
Insurance agents and brokers are commonly compensated by the insurer in the form of a commission on the premiums paid to that insurer. Commissions are generally a specified percentage of the insurance premium generated in each transaction. Some intermediaries who also undertake work on behalf of insurers (for example, administrative work, claims handling or sometimes even underwriting activities) may also receive additional commission because of this ‘work transfer’. Brokers can also be compensated by a fee agreed with the solicitors’ practice which is not driven by the volume of premium.
By asking for details of these payments, solicitors should consider whether or not a broker is delivering the quality and value of service commensurate with that remuneration. It might be that a firm is happy with the service the broker provides, or it could prompt a firm to look elsewhere, but it is better to make that decision with all the available information to hand. The Society’s 2012 PII Buyers’ Guide was developed with a heavy focus on the relationship between solicitor and the intermediaries they use to find the right insurance partners. The guide gives insight into the relationships between insurers and intermediaries, as different brokers provide different types of services which will be reflected in their remuneration.
- Know the level of service the broker will provide and expect the broker to meet it;
- Know how much the broker will charge and how much commission it will receive;
- Understand what is meant by sub-broking chains and associated costs;
- Ask the broker to which insurers they have direct access;
- Know if the broker will be conducting a fair analysis of the market that is available to the type of law firm;
- Ensure your proposal form is only seen once by any insurer;
- Make sure the broker provides details about insurers’ financial security;
- Know all the costs associated with the policy, including the annual premium, excess, run-off and extended indemnity period premium;
- Check for penalties if the policy is cancelled before 1 October;
- Consider the benefits of maintaining good long-term relationships; and
- If a firm is not getting the most out of its broker, it can always find another one.
It will be a business decision whether or not to change brokers or insurers this renewal, with advantages and disadvantages to continuity in service. Many solicitors have built a long-standing relationship with their existing broker. This relationship can be beneficial if it means that the broker has insight into how the law firm is run, its risk management practices and its claims history. A specialist PII broker will be able to use this knowledge and experience to the law firm’s advantage by presenting the firm in a way that demonstrates to insurers that it represents a ‘good’ risk.
If a firm’s current broker provides access to an existing insurer that a law firm may not be able to access through another broker then it is worth considering the benefits that continuity can provide, for example, avoidance of coverage disputes that may arise between insurers in different policy years.
Transparency is important as knowing what level of service to expect can help solicitors find an appropriate broker to meet their requirements. It also gives solicitors the option of ‘shopping around’. Equally, it may help solicitors to see the benefits of continuity in the broker and insurer that they currently use.
- Copies of all guidance referred to in this article are available at the LS website.
Elliott Vigar is head of regulation at the Law Society