Claims and renewals: How to avoid the pitfalls of PII renewal
Chloë Phillips discusses how to strike the right balance when dealing with your firm's PII claims and renewals processes
It is almost inevitable in today's litigious times that a busy law firm will, at some point, find itself the subject of a claim - with or without foundation. It is not always a straightforward matter to identify when a disgruntled client has turned into a potential claimant, yet there could be serious consequences if a firm fails to notify its insurers of a potential claim in good time.
Professionals dealing with professional indemnity insurance (PII) renewal will be aware, of course, that the firm's claims history will affect the premium payable for insurance and even whether cover will be offered by some insurers. It cannot be taken for granted that a firm will have a range of choices for insurance cover, or even that cover will be offered at all for some firms. It is of key importance to the business, therefore, to get the balance right when dealing with the firm's claims and renewals processes.
It is also essential to ensure that the firm has the right level of cover in place. Since 1 April 2015, law firms in England and Wales have been required to meet an additional outcome in the Solicitors Regulation Authority's Code of Conduct: O(7.13). This requires firms to "assess and purchase the level of professional indemnity insurance cover that is appropriate for your current and past practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make".
Firms must be compliant with this obligation by the earlier of the date on or after 1 April 2015 of the commencement, renewal, replacement or agreed extension of the policy period of any qualifying insurance, or the start of the new indemnity period on 1 October 2015.
What to notify?
Solicitors' PII policies work on a 'claims made' basis, covering claims or circumstances first notified during the policy period. Identifying claims which ought to be notified is crucial. In the current era, where it is usual for firms to shop around for the best-value insurance cover, it is possible that a firm may have cover with a different insurer each year.
In that situation, it is particularly important that the firm has given notice of all claims as soon as possible to avoid an insurer alleging prejudice as a result of having to deal with a claim that should have been notified in a previous insurance period to a different insurer. A firm could then find itself having to meet such a claim out of its own pockets.
What amounts to a "circumstance" that can be notified has, naturally, been the subject of litigation (eg Kidsons v Lloyds [2009] Lloyd's Rep IT 178). A common-sense approach can be taken by assessing the severity of the issue, how prolonged the complaint is and whether a client's interests appear to be prejudiced. If a firm is aware of facts which could result in a claim being made against the firm, then presenting a notification of the relevant facts can protect the firm's indemnity position if such a claim is pursued even outside of that policy period.
To ensure complaints which could be considered claims are not overlooked, it is important that all staff are aware of and updated on the firm's policy on notifying complaints to the firm's nominated complaints handling partner, who will have to decide how to deal with the information.
Having an appropriate risk management strategy and complaints handling system in place is a requirement for all firms and evidence of these systems will be something that insurers will take into account during the process of placing and renewal of business. The firm's compliance officer for legal practice (COLP) is responsible for ensuring that adequate controls are in place.
Renew or replace?
It makes sense for a business to seek the most competitive rate available for professional indemnity insurance, but the cheapest quote is not necessarily the best for the firm. Speaking to a reputable insurance broker who knows the PII market and doing your own homework will pay dividends when it comes to finding the best insurance for the firm.
Firms can now choose from a wide variety of insurers, some well-known names and others new to the market. Insurers that are authorised to conduct business in the UK can become participating insurers (previously known as qualifying insurers) in the solicitors PII market, provided they sign the Participating Insurer's Agreement, under which they agree to offer policies which meet minimum terms and conditions.
While these insurers are regulated by the Financial Conduct Authority, it is still important to give consideration to their pedigree. Importantly, the SRA does not undertake any solvency checks on insurers and does not require a minimum level of financial security for participation in the solicitors' PII market.
Financial stability of the insurer cannot be taken for granted, as many solicitors' firms will be aware, following the demise of Quinn, Balva and Lemma. The SRA has, however, introduced a transparency requirement for all participating insurers. Today, insurers must disclose whether or not they have a financial security rating as well as the provider of this rating.
Also of importance is the claims handling services of the insurer. Should you be facing a claim, you will want to know you can rely on experienced claim handlers to deal with your firm and former client efficiently and fairly throughout what may be a time-consuming and taxing process. The claims handling experience of a firm may be a significant factor in deciding whether to renew with a particular insurer.
In today's competitive market, professional indemnity insurers wanting to attract business from reputable, financially-sound firms should look to demonstrate the quality of the service they provide. It is important to demonstrate this quality in relation to dealing with claims and any extra support on offer which could, for example, include risk management support.
Checklist for PII renewal time
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Plan ahead and expect the process to take longer than you think – diarise an early reminder. A failure to have insurance in place will result in sanctions by the SRA.
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Remember that there is no longer a compulsory start date of 1 October for the policy period, so it is possible to work towards a policy period that suits your firm’s timescale.
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Consider and gather the information that needs to be disclosed to the insurer – statistics about practice types, claims history and, in particular, whether there are any claims or circumstances which have arisen which should be notified before the start of the new policy.
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Make sure all staff are updated and aware of the firm’s policy on notifying complaints and circumstances.
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Consider the appropriate level of cover required in light of the information gathered – a new required outcome under the SRA Code of Conduct.
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Shop around for competitive quotes – using a reputable insurance broker can be a good option to save valuable time for busy partners in practice.
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Consider the pedigree of the insurer in terms of financial stability, claims handling services and whether additional support services are offered (for example, in risk management)
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If renewing with the same insurer, double-check that all the information provided is accurate – do not simply rely on the prior year’s statement of information.
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Read the policy wording – the minimum terms and conditions are often updated annually and can include new definitions and exclusions.
Insurance Act 2015
In February 2015, the Insurance Act 2015 received royal assent, and it will come into force in August 2016. This means the Act will apply when a lot of firms are engaged in the next round of renewals. Before that time, it is important that the partners responsible for dealing with PII become familiar with the new terminology and requirements under this Act.
The Insurance Act 2015 brings about dramatic changes to existing insurance law, which will be relevant for all businesses. The pre-contract disclosure duty will become a duty to give a 'fair presentation of the risk'. Circumstances in which insurers can decline to cover claims are dealt with in the Act, and the current position in relation to 'basis of contract' clauses has changed. It remains to be seen what changes may be made to the Solicitors' Minimum Terms and Conditions. Next year brings a new insurance landscape.
Chloë Phillips is a consultant at BLM (www.blmlaw.com)