SRA unveils major indemnity reform plan

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By Legal Futures

6 December 2010

Cover: should corporate clients be under the compulsory scheme?

Allowing the exclusion of claims by financial institutions and an end to every law firm renewing its professional indemnity insurance (PII) on the same day and are at the heart of Solicitors Regulation Authority (SRA) plans to shake up client financial protection arrangements next year.

In a consultation published today, the SRA also floats the idea of removing all corporate clients from the scope of compulsory PII cover from October 2012.

The SRA’s review of financial protection was established because of the difficulties many firms were facing with their PII, and the wider problem of the huge cost of the assigned risks pool (ARP) for firms that cannot find cover.

Although this year’s premiums for the compulsory layer of cover was initially reported as £214m – a surprising fall from £246m in 2009/10 – the consultation paper says the SRA estimates that the true figure for 2010/11 is about £260m. “Our view is that a number of insurers have structured policies this year so as to reduce the level of premium payable for the qualifying element of the insurance in order to limit their exposure to the ARP,” it says. The SRA recently began an audit of insurers to check on this.

The SRA has put forward four proposals for implementation on 1 October 2011:

  • Remove the restriction of the single renewal date. Firms will have the freedom to renew their PII cover at any time and for any period they want;
  • Remove financial institutions from the compulsory minimum terms and conditions of insurance (for work conducted from that date). Firms and insurers will be free to arrange cover for claims by financial institutions but this will be a commercial decision for both;
  • Reduce the time allowed in the ARP from 12 months to six, and require ARP firms “to develop and implement effective plans to either exit the ARP into the open insurance market or undertake orderly closure”; and
  • Require insurers to inform of the SRA about firms that fail to pay their premiums and firms that insurers believe may have misrepresented information.

The consultation goes on to seek views on changes the SRA is considering for a second wave of reform in October 2012 as part of a “coherent and long-term approach to client financial protection that is implemented in manageable stages and which develops alongside the development and implementation of the SRA’s wider approach to regulation”:

  • Permit additional exclusions of “non-individual clients” from insurance cover;
  • Change the role of the ARP either by limiting it to providing run-off cover for firms without insurance, or restricting the work that firms can undertake while in it;
  • Change the way in which the ARP is funded by considering either a direct levy on the profession or a levy as a percentage of insurance premiums;
  • Consider whether the functions of the ARP could be added to the existing Solicitors Compensation Fund;
  • Consider whether insurers should be able to cancel policies for non-payment of premiums or for fraud or misrepresentation in proposal forms; and
  • Consider changes to the mechanism for funding the compensation fund (currently done by direct levy on solicitors and firms).

Richard Collins, the SRA’s head of standards, told Legal Futures that the proposals sought to strip out elements of the current system that replicated the scale of the cover previously enjoyed under the Solicitors Indemnity Fund and which “take responsibility away from firms managing their own risk”.

The SRA has hitherto resisted changing the single renewal date but Mr Collins said it had looked at what market failure the single date is the answer to. Further, the administrative difficulties of rolling renewal are being addressed by work to change the operational side of the SRA, Mr Collins added.

He identified the issue of defining who is a corporate client as the main problem with excluding cover for them.

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