Is it time to scrap mandatory PII?

So you’re booking your summer holiday and the operator gives you the big dilemma: would you like to take out holiday insurance?

The obvious answer is - or should be - yes. There is always a risk of bags going missing, purses stolen or a nasty encounter with a jellyfish landing you with a hospital bill.

But then that devil on your shoulder pipes up: you’ll keep your valuables on you, take care when crossings roads, avoid all fluorescent alcohol. Plus you’ll feel smug coming back through Heathrow £50 or so richer.

All insurance, to some extent, is a gamble: you weigh up the chances of a problem with the saving you could make if nothing goes wrong.

Most of the time we’re given a choice, but in the legal profession it’s different: every firm has to take out mandatory indemnity insurance. The client is always covered.

But some readers are telling me it is time to think again about this ‘state knows best’ attitude.

This year is threatening to be a perfect storm for smaller firms trying to secure cover.

Fewer insurers are likely to be in the market, those that do will raise premiums due to a perceived higher risk and firms know – like last year – they have no safety net of the Assigned Risks Pool.

Now the SRA is looking to take away the option of unrated insurers too.

It’s all very well telling law firms to only use rated insurers, but that’s a bit like telling flight passengers to avoid budget airlines: you don’t do it as a choice, you do it because you can’t afford anything else.

If an insurer from some eastern European outpost comes forward offering terms that are too good to be true, most will know it’s a risk. But it’s a risk many are forced to take.

Insisting on only rated insurers will have two effects. It will either force those unrated insurers to upgrade, with costs passed down to the law firm, or force them out of the market altogether, leaving the law firm stranded and facing oblivion.

And who is to say that a rating is worth much anyway? The ratings agencies hardly covered themselves in glory ahead of the financial services crash, for example.

So is it time to take away the requirement for indemnity insurance and leave it in the hands of the clients themselves? At the outset of each case, the firm can explain to the client that insurance comes at a cost which they can either take or leave.

If something goes drastically wrong, the client still has the option of a professional negligence claim. But if you want insurance, you pay for it.

Sure, it’s a gamble, and most clients would surely opt to bolt on insurance to their legal fees. But it creates choice for the consumer, puts a stop to the nanny state-ism and stops this merry-go-round of uncertainty at PII renewal time.

Insisting on rated insurers is counter-productive tinkering – is it time for a radical change?

John Hyde is a Gazette reporter