Cash-strapped law firms have been driven to obtaining professional indemnity insurance from unrated insurers this year, risking regulatory sanctions where an insurer becomes insolvent, a leading broker and the Law Society have warned.

Unrated firms, listed by the Solicitors Regulation Authority, are those without a published credit and financial strength rating.

With premiums from rated insurers remaining steady this year, unrated insurers have proved ‘an attractive option for smaller firms’, Martin Ellis, director of broker Prime Professions, told the Gazette. ‘Some of these firms are struggling financially and as a result reducing the cost of PII is a priority.

‘It is fair to say that most firms do not wish to insure with an insurer who has no recognised financial rating but some simply have no other viable option.’

The Law Society is increasingly concerned about the number of solicitors relying on unrated insurers, particularly this renewal season.

Elliott Vigar, head of regulation at Chancery Lane, said: ‘This suggests both that, in some fundamental respects, the market in its current form is not working for a segment of the profession; and that a proportion of firms continue to make a purchasing decision based purely on price.’

The risk of insurer insolvency is real, Ellis’s fellow director Jake Fox said. Gibraltar and Ukraine-based insurer Lemma went into liquidation in October.

Lemma did not insure any law firms in 2011-12, but historic claims for the five-year period in which it provided cover to the legal market will be affected. With reference to Lemma, Vigar added: ‘We are also considering further policy options to address what may constitute a significant future threat to firm viability and client protection.’

Replacement cover provided at short notice is likely to be more costly, Fox advised, further stretching struggling firms. Insurers’ final figures have not yet been collated for this year’s renewals season. Prime’s assessment of the market is based on the experience of the 1,000 or so firms for which the broker acts.