The 1,300 law firms who have their professional indemnity insurance (PII) with Balva face the prospect of having four weeks to find new cover if the winding-up process the Latvian company started yesterday becomes an “insolvency event”, the Solicitors Regulation Authority (SRA) has warned.
The Latvian regulator has withdrawn all the operating licences issued to Balva in order to protect its insureds.
In April Balva was prohibited from writing new UK business and has been at the centre of continuing debate over the SRA allowing unrated insurers to write solicitors’ PII.
According to a statement from its regulator, the Financial and Capital Market Commission, Latvian law now requires Balva to launch a winding-up process, “by appointing a liquidator and agreeing the procedure for debt covering with the regulator, or transform the insurance company into a legal person that does not pursue insurance business”.
Balva is obliged to continue fulfilling the terms of contracts entered into with their customers.
The options for the future are that Balva continues to meet all of its insurance obligations, that it finds another insurer to take over its business or that it terminates all of its contracts.
The SRA said in a statement yesterday: “The position under the SRA Indemnity Insurance Rules is that, as yet, there has not been an ‘insolvency event’ as defined in the UK. We are seeking advice on the application of the definition of ‘insolvency event’ to this developing situation, working with our partners at the Financial Conduct Authority and the Prudential Services Regulator.
“If an ‘insolvency event’, occurs we will contact all firms currently insured with Balva explaining the action they must take. This would involve [them] obtaining replacement cover within four weeks of any confirmation of any insolvency event. Those that fail to find an alternative insurer would drop into the assigned risks pool.”
The news came a day after the Law Society warned law firms with Balva to make an informed choice about their upcoming renewal before opting for cover from another unrated insurer. It said unrated German insurer Berliner Versicherung Aktiengesellschaft is being touted as an alternative to Balva.
Chief executive Des Hudson said: “We have seen this pattern of insurer entry and exit before. When Balva entered the market, it offered a policy switch to customers of European Risk Insurance Company (ERIC). ERIC is no longer writing solicitors’ PII business within the UK. Now Balva’s customers are being transferred to Berliner. This cycle has destabilising effects for our members and the Law Society hopes to see changes in the solicitors’ PII market that will help to create and maintain stability.
“We recognise that the 1,300 firms with Balva policies may feel pressured to obtain alternative cover as a matter of urgency and some may consider this to be a short-term solution. However, we urge firms to think carefully before simply transferring to another unrated insurer for the longer term without investigation.”
He added: “Our position is buyer beware. We want to ensure our members make an informed decision. While commercial pressures on firms may tempt them to choose the ‘cheapest’ PII quote, the true cost of this cover can be alarming.
“If an insurer becomes insolvent, there may be a very high price to pay, in a personal, as well as business capacity. Uninsured loss can have devastating personal consequences, depending on a firm’s business structure.”
The Law Society’s warning about insurer solvency is being aimed at smaller firms and follows the financial collapse of two other insurers, Quinn and Lemma. At present 12.5% of the PII market (by premium share) is with unrated carriers.