Indemnity insurance sails into uncharted waters
Posted by Nigel Wallis, partner at Legal Futures Associate O’Connors LLP
“No man has a good enough memory to be a successful liar” – Abraham Lincoln
It’s not only red grouse that will need to keep their heads down on 12 August this year. The Glorious Twelfth is also the date when the Insurance Act 2015 comes into effect, imposing significant new obligations on law firms buying professional indemnity insurance (PII).
The Solicitors Regulation Authority (SRA) is currently consulting with the profession and others (closing Thursday 24 March) about consequential changes it proposes to make to the minimum terms and conditions of solicitors’ PII. The outcome of this consultation seems pretty clear though.
Emerging from a Herculean consultation by the Law Commission, the Insurance Act 2015 attempts to modernise UK insurance law in the area of non-disclosure with a view to creating a more certain contractual position between insurers and their policyholders.
The Act will impose a new duty on a law firm to make a ‘fair presentation’ of its risk to its insurer. In essence, this means supplying information about the firm which the firm knows about or ought to know about and which would influence a prudent insurer in determining whether (or on what terms) to accept the risk.
The objective is to enable an insurer to consider the placement of a firm’s risk on a more informed basis, or at least put the insurer on notice that it should ask for more information. A firm does not need to disclose information that the insurer knows about or ought to know about or where disclosure of certain information has been waived.
Without overstating it, this new duty is a deep bear trap for the unwary and it will not be sufficient simply to say ‘that’s what we pay our insurance brokers for’. You can be fairly sure that your brokers’ engagement terms on this point will be as tight as a garden tap on a frosty morning.
Every law firm will now have to conduct what’s called a ‘reasonable search’ before presenting its information to its insurer. As regular interpreters of legislation, you will not be surprised to learn that the Act gives little or no guidance on what constitutes a ‘reasonable search’.
Information must be provided in a clear and accessible manner, not chucked together in a Tesco bag like most people’s office expense receipts – a practice politely termed ‘data dumping’.
If you are a managing partner, it is highly likely that you will be the one having to satisfy yourself and your management group that a reasonable search has been carried out and that the firm’s insurance submission represents a fair presentation of your firm’s risk.
In non-solicitor PII markets, deliberate or reckless failure to make a fair representation will entitle an insurer to avoid the policy and return the premiums paid or, where failure is not deliberate or reckless, to ask a court to impose new policy terms or conditions or a higher premium.
Under the minimum terms and conditions of solicitors’ PII, insurers are currently prevented from avoiding policies on any grounds whatsoever, to ensure clients remain protected at all times. Nevertheless, failure to make a fair presentation of your risk will become an increasingly important factor in any decision about what is ‘just and equitable’ if your insurer were to seek reimbursement from your firm under the minimum terms and conditions.
Supporters of the Act argue that the new law will reduce the likelihood of policy disputes. Let’s hope so. One thing’s for sure, it will certainly present more work for insurers, brokers and law firms as insurance placement becomes a more technical and contractual process.
So here are seven tips for getting yourself ready for your insurance placement post the Glorious Twelfth:
- Engage an insurance broker that specialises in solicitors’ PII and can demonstrate they are fully prepared for the new placement regime – and get someone who really understands insurance to check the broker’s engagement terms.
- Tell your broker that you only want to engage in a placement dialogue with quality, rated insurers who can demonstrate a genuine commitment to the spirit and letter of the new placement regime.
- Put internal systems and controls in place to capture and collate all risk information about your firm on an on-going basis and make sure your practice management system enables you to produce clear and meaningful management information reports in a timely fashion when requested by your broker and insurer.
- Put insurance renewal on your board agenda and make sure the person liaising with your broker has sufficient internal authority and powers of persuasion to conduct an effective ‘reasonable search’ for information.
- Keep your own detailed written record of all conversations and exchanges between you, your broker and your insurer so you can evidence everything you have done during the placement process.
- Don’t skimp on resources for your insurance placement – it is one of the most important contacts you will enter into this year, given the balance sheet protection it provides and the arguably increasing risk your business faces from a reimbursement claim by your insurer.
- At the risk of stating the obvious, read and understand your insurance policy. It will not only send you soundly to sleep but also hopefully stop you waking at three in the morning in a cold, cold sweat.
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