A far greater number of solicitors could end up in the assigned risks pool (ARP) and face paying up to half their fee income in solicitors’ professional indemnity insurance (PII) premiums as the crisis in the market deepens.

Industry sources have predicted that more small firms than ever will fall into the ARP because insurers active in the market have declined to cover them. The pool provides PII for a maximum of two years for firms unable to buy cover in the conventional market. However, firms in the ARP pay huge premiums.

A number of brokers told the Gazette on Tuesday they would warn solicitors about obtaining cover from AIG, the world’s largest insurer and the second largest provider of solicitors’ PII, after its financial ratings were cut, which sparked a share price fall that wiped billions off the value of the company.

The major ratings agencies – Standard & Poor’s, Moody’s and Fitch – all downgraded AIG on Monday, which initially led to a 70% fall in AIG’s share price. This triggered worldwide share price falls at other major insurers. AIG’s survival appeared to be hanging in the balance as the Gazette went to press.

Industry sources have also claimed insurers are being extremely slow in giving PII quotes to solicitors. They believe this is a tactic to enable insurers to quote high premiums as close to the 1 October deadline as possible, in the hope solicitors will not have time to look for cheaper cover.

Firms that have been unable to buy cover from qualifying insurers, and have not made arrangements to enter the ARP, face premiums of up to 50% of their fee income. Those unable to find cover from qualifying insurers but who have made proper arrangements to enter the ARP will be charged up to 30% of fee income.

Frank Maher, partner at Liverpool firm Legal Risk, said: ‘There has not been a more difficult market since the end of the solicitors indemnity fund in 2001. Firms have been complacent because they have had such cheap cover for so long.’

AIG declined to comment.

Insurers Norwich Union, RSA and Liberty have all partially withdrawn cover for small firms, while Novae pulled out of the solicitors’ PII market completely in July.