The Solicitors Regulation Authority has gone ahead with its long-talked-about plan for the minimum limit of indemnity to be reduced to £500k. This move was to allow the many firms undertaking low-value transactions to be able to purchase cover at a reduced level. This is understandable but a £500k limit may not seem enough protection in today’s society.
However, irrespective of the minimum limit, it is about determining the right level of cover for the business and this is not straightforward. Law firms have to consider work undertaken in the previous six years to ensure they have the appropriate level of protection in future. This critical point, often overlooked, explains why brokers constantly ask clients about the adequacy of their cover to ensure they do not breach their indemnity limit, a situation which sadly is becoming increasingly common.
Firms should also consider the cost differential between their current indemnity limit and any lower figure. Going from a £2m or £3m limit to £500k is not going to generate proportionate premium savings, unfortunately. In fact, there may not be much of a saving as insurers’ exposure to smaller claims is unaffected by a reduction in the indemnity limit. Then, if a firm needs to increase its cover from £500k at some point in future, their current insurer may not have the appetite to do this.
For example, if the claims performance of the firm in the intervening period has deteriorated; or if the change in the business profile of the firm is outside the criteria of the insurer or even the very reason for the increase in cover. At this point the only option would be to consider top-up cover with another insurer, but that is likely to be expensive given the low £500k starting point.
In essence, every law firm needs to question the level of cover they need ‘to be able to sleep at night’ rather than look at it from the angle of what will be marginal cost savings for a significant drop in business protection.
Changing renewal dates
Last year saw the removal of the assigned risks pool, which meant that the common renewal date of 1 October was no longer required. But what does that mean for law firms buying PII cover?
The solicitors’ PII ‘season’ has seen insurers and brokers traditionally prepare to deal with the rush in the run-up to 1 October. Last year saw some insurers offer periods of cover greater than 12 months to steer policyholders away from the seasonal ‘bun fight’.
For most firms, getting away from 1 October would be seen as ideal, because their cover can be considered in a less frantic and time-pressured manner. However, habits are hard to change and there is the fear among law firms that insurers will not be interested outside the ‘season’. Despite the SRA’s constant changes to the minimum terms and conditions for solicitors’ PII (something often not seen in other regulated professional sectors), insurers are changing their seasonal stance.
Most want the solicitors’ profession to adopt the traditional ‘all-year-round’ approach as enjoyed with other professions. Law firms should discuss this option with their broker to ensure the right solution is found for them.
Getting the best deal
Quality time spent by law firms in preparing for their PII renewal will ensure that they get the best possible deal. It is all about presenting the firm professionally, informatively and accurately.
Firms should complete their proposal form in as much detail as possible, and legibly – a typed form is better because it avoids the need for underwriters to decipher handwritten submissions. Any required additional information or supplementary forms should accompany the main form.
Claims information is crucial. The latest confirmed claims experience (CCE) should be recent, and obtained from current and previous insurers. If there have been no claims then confirmation will still be required. Most insurer CCE detail can be scant so it is advantageous to accompany this with a brief summary, especially on the larger or complex claim where more detail is required.
Law firms should not be afraid to present, or rather promote, their business to insurers. The sharing of risk management procedures, growth plans (including any planned increase in the number of partners) and other influential information can greatly assist in achieving the best PII outcome. Even changes in procedures following past issues will be helpful, as underwriters always look for proactive changes and improvements to minimise future risk.
Protection beyond PII
PII is needed by a law firm to be able to trade and there is an understandable high degree of focus on and anxiety around arranging this cover. There are other general risks to businesses which are covered under other mainstream insurances, but there are a couple of emerging covers that need to be given serious consideration by law firms.
Management liability cover, often called directors’ and officers’ liability, is becoming increasingly common but was previously only available for limited companies. This cover is now available for partnerships. With the introduction of outcomes-focused regulation and the COLP and COFA roles now carrying a personal liability for individuals, these risks can be covered within this type of insurance.
One of the other emerging insurance products is cyber liability, a cover that is becoming much more important in today’s world of electronic exchange and data storage – the latter is pertinent given the increased use of the cloud or third-party data storage provision.
There are two types of cover: first party, which covers the firm for loss of own data or loss of income following a data breach or cyber attack; and third party, which covers the liability of the firm to third parties (such as clients) arising from a data breach or cyber attack affecting the firm.
Exposures range from brand and company reputation, fines and damages as a result of data breaches, to the loss of hardware, network failure and business interruption in a cyber attack. With cyber crime alone costing the UK £27bn each year and a 50% increase in cyber attacks since 2011, this cover is essential for business protection.
Sean Finnegan is head of financial lines at Arthur J. Gallagher. Peter Jones, director of professional risks, also contributed to this article