Three-month extension to insurance should replace ARP, suggests Law Society

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By Legal Futures

2 February 2011

Hudson: scrapping ARP will encourage insurers to participate in the solicitors' market

A temporary extension of cover should replace the pooled liability insurers have for struggling law firms, the Law Society has proposed.

The extension of existing cover should be for a minimum of three months and its cost based on the current premium, the society says. Also, insurers should notify firms whether they intend to renew their professional indemnity insurance (PII) cover at least six months before the renewal date, although it could run concurrent with the extension period.

The intention is to give firms time to find another insurer, merge with another practice, or close down altogether.

At a stroke, this would remove the deterrent effect on insurers posed by the current assigned risks pool (ARP), while maintaining protection for firms and clients, the society believes. If the firm folds, the current insurer would provide run-off cover.

Under the plan, as well as providing an extended reporting period, insurers would have to respond to proposals within a specified time and make any quotes available for a “reasonable period”.

The Solicitors Regulation Authority is consulting on changes to the PII regime. One proposed change is to allow firms to stay in the ARP only for six months instead of the present 12 months, which in turn was recently reduced from two years. Controversially, it also recommends taking cover for financial institutions such as lenders out of compulsory PII.

The society’s proposal comes in a draft in advance of its submission to the SRA consultation and “does not represent settled policy”. An advantage of the scheme, it says, would be that it can be implemented in full before 1 October – at which time the ARP could cease insuring firms and gradually shut down and run off firms within it.

Des Hudson, the Society’s chief executive said the proposed extension could help encourage insurers to remain in, or to join, the solicitors’ PII market.

He said: “In recent years, the cost and poor regulation of the ARP has been a factor in insurers’ decisions to exit the market or reduce market share and also operates as a deterrent to new insurers looking to enter the solicitors’ PII market.

“Under this possible approach, insurers will only be liable for the risks of firms they actually cover; removing liability for pooled risks that they did not insure in the first place.” The change would encourage insurers to participate, whereas the pooled liability of the current ARP “provides a perverse incentive for insurers to limit market share,” he added.

On the SRA’s plan to remove cover for financial institutions, Mr Hudson said: “We are deeply concerned about the impact of this proposition on those firms doing conveyancing. It seems probable if that went ahead that firms would not be able to act for mortgage lenders and the purchaser.”

He continued: “Lenders will not expend resources checking the insurance arrangements of hundreds of firms before instructing them to act on the mortgage advance. This will be bad for solicitors, lenders and house buyers.”

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