Is your PII fit for purpose?

The SRA's proposed changes are a red herring for many firms, argues Chris Marston

We now know that the Legal Standards Board (LSB) has extended its decision timeframe in relation to the Solicitors Regulation Authority's (SRA) proposed changes to minimum cover, so the matter has gone away as far as this year's renewal is concerned.

But let's be honest, when the SRA published its consultation paper on professional indemnity insurance (PII) in May, most of us were surprised. It came out of the blue, and one wondered what had driven it and why the rush? 

The outcomes, announced two months later, were much less of a surprise, with the SRA deferring a number of proposals, but announcing a new £500,000 minimum level of cover. The introduction of an aggregate claims cap, a limit to the scope of cover for some client types and a reduction in run off cover to three years are in the long grass for now, but are likely to return.

There's been a lot less talk about the SRA's new requirement for firms to ensure they have 'appropriate' PII cover, reflecting their work, market and client types. Solicitors have not had to make such a judgement before and despite the neat fit with outcomes focused regulation (OFR), many practitioners may feel ill equipped to make the decision.

Own goal

From my background in the banking sector, it seems likely that mortgage lenders will want conveyancing firms to carry larger PII protection, particularly in areas where property prices are higher. Could these changes be an 'own goal' for the profession, which wants mortgage lenders to have large panels?

Firms will have to decide the right level of cover, but it seems likely that only small firms doing low risk/low value work would be able to operate at the new minimum level, not least as many clients will be alive to the issue of PII cover levels and will ask questions before instructing.

Our own member firms see this year's PII review as 'business as usual' as each is required as a condition of membership to carry a minimum of £10m of cover - but as our members go to the market in a combined £1.2bn placing, they get the benefit of their collective buying power, while paying a premium which reflects their own firm's risk profile.

So how should firms go about deciding on an appropriate level of cover? These are the top tips from our group PII placing contacts:

• Values for each type of work. It makes sense to consider the highest values you are likely to encounter this year, bearing in mind a "claims made" policy and limitation period.

• Past work values (up to limitation period, which could be over six years depending on transaction type) including past work to which you are a successor practice.

• Future work values, both anticipated or aspired to, including work that acquired firms or lateral hires may bring with them.

• The definition of "one claim" i.e. if the policy aggregates all claims arising from the same or related acts/transactions. Is the limit adequate to deal with this?

• Your clients' expectations of you and your wish to have competitive advantage.

• Mitigation measures such as any limitation of liability through your terms of engagement or per transaction; specialist or counsel's advice on high risk/value transactions.

• Headroom can buy peace of mind. Most of the cost is in the primary layer of cover, so any top-up is comparatively cheaper.

Judgement call

A higher excess can reduce your premium, but it's a judgement call based on your cash position and your claims record. LawNet members who are comfortable with a higher excess, benefit from using our own captive insurer to insure the excess portion, but as the insured parties effectively own the insurer, this is generally more cost effective than in the open market.

The other key aspect has to be keeping on top of quality and risk management. We see our firms' premiums averaging just over 2 per cent of fee income, whereas anecdotally the average across all firms in England and Wales is closer to 4 per cent, and we know that's because underwriters like the attractive risk profile of our ISO quality accredited membership.

Chris Marston is the chief executive of LawNet www.lawnet.co.uk