One of the top three solicitors’ professional indemnity insurers will ‘significantly’ cut the number of new law firms it takes on this year, the Gazette can reveal.

Zurich, which had a 13% share of the solicitors’ professional indemnity insurance (PII) market last year, said that it has decided to ‘significantly reduce capacity for new business’ this year because it needs to control its exposure to the assigned risks pool (ARP).

The news will come as a blow to more than 3,000 law firms and sole practitioners who may need to find alternative cover during the coming renewals season because of the expected departure of Quinn from the market, and an announcement by Hiscox that it is pulling out of solicitors’ PII altogether. Zurich covers the full range of the profession, from sole practitioners to international firms.

Market sources indicated that there are no new insurers presently seeking to enter the solicitors’ PII market.

Zurich legal professions manager Jenny Screech said: ‘We have a significantly reduced capacity for new business because we need to control our exposure to the ARP. We have been engaged with actuaries for a number of weeks, trying to work out what our involvement will be this year. We need to very carefully control our capacity, and we will have a much reduced capacity.’ The reduced capacity relates to new business rather than renewals for existing customers.

Screech declined to comment directly on which types of firm are most likely to be affected by Zurich’s decision, but said: ‘The difficulty for the profession is going to be the one- two- and three-partner firms. It’s unfortunate that there isn’t a market solution for the problems this year. If we had been able to achieve some change this year, the profession would have been looking at a very different scenario now.’

Meanwhile, the Solicitors Regulation Authority has announced a tough new enforcement ­programme aimed at firms in the ARP that have not paid their premiums. It said these firms will face regulatory sanctions, court action, and/or an intervention, and those that have not paid their ARP premium by October will be closed down.

The Law Society welcomed the action. President Linda Lee said it ‘should reduce the costs of the ARP, which are ultimately borne by the profession, help to create a more affordable solicitors’ PII market and improve protection for the public’. She added: ‘The Society has been calling for a more rigorous management of the ARP for sometime and we will be providing extra funding to enable the SRA to implement the new measures effectively.’

The ARP is the insurer of last resort for firms that cannot obtain insurance on the open market. It charges punitively high premiums, which many ARP firms fail to pay. As at 14 June, £4.5m of ARP premium was due for the 2008/09 indemnity year, and only £2m had been paid. Claims against ARP firms in that year are estimated at £41m.

The shortfall in premiums and the cost of claims is paid for by insurers in proportion to their share of the solicitors’ PII market.