By Martin Ellis of Legal Futures Associate Prime Professions
There a number of very important factors to consider before committing to the renewal of your firm’s professional indemnity insurance (PII). One of the most important considerations is the actual choice of insurer providing the cover for the firm’s compulsory level of insurance.
So what do you need to consider when selecting the right insurer for your firm? In our view, the following should be taken into account in addition to the level of premium being offered. The cost is clearly an extremely important factor but please be aware of all the facts before committing to renew your policy.
In our opinion, it is extremely important that you understand the experience of any insurer you may consider placing your PII policy with. There are some insurers, in recent times, who have no experience in insuring law firms, whether it be in England and Wales or any other jurisdiction around the world. We suggest that the following questions are asked prior to any commitment being made:
- Please explain your long-term commitment to the legal profession.
- Please confirm your security rating awarded by the recognised rating agencies.
- Please explain the profile of your current book of solicitors PII.
- Please advise your methodology towards the management of claims
One of the most important considerations you need to take into account when selecting your insurer is how insurers approach the management of claims.
In recent years there has been a significant increase in the number of insurers outsourcing the claims function. Prior to committing to renew the firm’s policy, we strongly recommend that you ask your insurer who will actually be handing claims, the panel of defendant law firms they use, and how they would track the reserves being established and costs being incurred on your behalf.
In recent times the subject of how firm manages risks it faces on daily basis has been brought to the forefront of insurers’ minds. The PII proposal forms have been adapted to reflect this and a number of questions now directly relate to a firm’s risk management processes.
However, these questions and answers will only tell half the story and we would strongly recommend that a firm prepares a separate brief and concise risk management report stating all of the processes and systems and rectification procedures it has in place.
For example, if a claim has been made against the firm, insurers would like to know if processes and systems or indeed training has been improved or put in place to prevent a recurrence.
It is generally believed that around 90% of claims made against law firms arise from process, administration and/or system failure rather than the inability to practise law. One of the most common areas is the lack of supervision and we would therefore recommend that firms provide a very brief outline as to their supervisory procedures, whether they be departmental or firm wide.
If a firm has achieved the Lexcel and/or the conveyancing quality scheme accreditations, they should emphasise this and any other process or systems in place focusing on the delivery of a quality service to clients.
A number of qualifying insurers assist firms with the implementation of risk management processes. After all, it is in their best interests to do so and to reduce the likelihood of negligence claims. When deciding on the right insurer for the firm, we would strongly recommend that you ask about the services offered by the insurer in this regard.
In the 13 years since the commercial insurance market replaced the Solicitors Indemnity Fund, we have seen insurers enter the market and some have swiftly left. Only a small number have participated from the very beginning and are still going strong in 2013.
Of the top 10 insurers participating in 2012, only five played a role in 2000: AIG, Zurich, Travelers (formerly St Paul), QBE and Aviva (formerly Norwich Union). It should be noted, however, that Aviva has recently announced that it will not be offering renewal terms to many of its solicitor policyholders in 2013. We understand this follows a general review of their market position in PII for SME businesses.
It should also be noted that insurers such as WR Berkley, Hannover, XL and Allianz have in recent years firmly established themselves as serious players in this market. We have, however, seen in 2011 and 2012 that Hannover, for example, reduced market share considerably following a couple of years of significant growth. Although we are unable to be definitive as to the reasons for this reduced participation, we can only assume this was driven by a desire to reduce exposure to the sector.
Prior to selecting your firm’s primary insurer, you should ask about the insurer’s long-term commitment to the sector. Ask for assurances about their longer-term plans and in particular the type of firms they are looking to insure. These are not unreasonable questions to ask. Make enquiries of your broker in this regard. They will be able to advise if the insurer is right for you.
Financial rating of your insurer
A hugely important consideration is whether your insurer is the right insurer for your firm in view of their financial rating. Crucially if they are unrated, should you even insure with them in the first place?
This is an emotive issue because in 2012 a number of firms were offered competitive terms from these insurers and probably felt as though they had no other option. In 2013 we are confident that a greater number of options will be available, so we would urge you not to make a commitment to insure with an unrated insurer before you speak with the team at Prime.
We will be able to advise you on the options for your firm and this will enable you to make an informed decision as to whether opting for an early renewal for example is the best decision. We will know if you are being offered a good deal.
It is generally considered that far too many firms are insured by insurers with no financial rating from the recognised rating agencies. This is of particular concern to the Law Society. We are aware that the society has made its feelings known to the Solicitors Regulatory Authority (SRA) and is lobbying strongly that unrated insurers should not be permitted to register as a qualifying insurer.
A firm offered an early renewal from an insurer with no financial rating should really think twice before giving instructions to proceed.
Basically, we are urging caution around unrated insurers. Unfortunately we saw the collapse of unrated insurer Lemma last September, and with over 25% of all firms insured with insurers who have no recognised financial rating, you can understand why the society is focused in this area.
Information for Balva policyholders
In March 2013 Latvian insurer Balva, which underwrites professional indemnity and liability insurance in the UK through passporting rights, was prevented from underwriting new business in the UK by Latvia’s Financial & Capital Market Commission. The regulator has confirmed that Balva’s license has been suspended as a result of regulatory ‘deficiencies’.
Despite the fact that the SRA has assured the 1,300 firms that hold Balva policies that they have no reason to worry as the restriction does not affect Balva’s obligation to provide cover for up to 90 days after 30 September if firms cannot renew their insurance, the Law Society is strongly recommending that firms who have been affected should research the available market and to obtain quotations from all insurers willing to offer cover for the 2013 renewal period.
Prime is a specialist PII broker. Our team has been dealing with solicitors’ PII for many years and will be able to advise you on the right insurer for your firm. Not all insurers are alike and there are distinct differences between them. It is imperative that you understand the differences so you can make a well-informed decision.