Lawyers unconvinced by proposals to lower minimum PII terms
â€˜Insurers are already addressing the problem. Hasn't the SRA better things to do?'
Proposals for a more flexible approach to professional indemnity minimum terms are unlikely to deliver any tangible benefits for law firms and risk lowering protection for clients, lawyers have warned.
In October last year, the Solicitors Regulation Authority outlined a series of possible changes to professional indemnity insurance rules that include a reduced minimum cover level, a specific premium for conveyancers, making insurance compulsory only for firms providing services to consumers, and introducing a single aggregate limit.
The proposals came in response to SRA research based on ten years’ worth of insurers’ data, which suggested that smaller firms were disproportionately affected by current rules. In a bid to help alleviate the financial burden on these firms, the regulator is now looking at bringing down the minimum cover level from £2m to £750,000 on the expectation that this should lead to lower premiums.
The SRA’s initial plan was to consult on the changes in the spring but, as revealed by Solicitors Journal in April, the consultation is now scheduled to take place in the autumn. In the meantime, however, lawyers and insurers have grown increasingly sceptical about the promised improvements.
‘The savings are likely to be minimal and I query whether anybody will benefit,’ comments Frank Maher, a partner at Legal Risk, a law firm specialising in advising other legal businesses on risk management.
The distinction between consumer and business clients could also distort the market and ultimately reduce consumer choice, Maher says, warning that lenders might just decide to ‘walk away from smaller firms’. Much as firms who had cover with unrated insurers were regarded with suspicion, he says, firms deciding to take advantage of a minimum cover reduced to three-quarters of a million pounds could see themselves taken off lender panels.
Broker Richard Brown, of Miller Insurance, agrees. ‘Premiums aren’t going to be massively reduced for smaller firms; it would just create a two-tier system. Lenders already require panel firms to take a much higher level of cover; this would just give lenders more opportunity to remove smaller firms from panels.’
This could be compensated by the requirement for specific – and likely higher – levels of cover and premium for firms undertaking conveyancing work, but for stakeholders, the market has already come up with its own solution to the issue.
Like most lawyers doing some conveyancing, Solicitors Journal columnist Russell Conway, senior partner at Oliver Fisher, has taken top-up cover – up to £8m. Even though conveyancing only accounts for 10 per cent of his firm’s work, there is no way he would opt for the proposed minimum of £750,000 cover as ‘the risk is just too high’.
What’s more, Conway says, ‘PII renewal forms are very detailed these days; what insurers are doing already addresses the problem. Hasn’t the SRA better things to do?’
Danielle Peters, a partner at Hertfordshire Crane and Staples responsible for the firm’s professional indemnity, takes the same approach. Her firm also buys top-up cover and she is concerned that the proposal to reduce the minimum cover could be counterproductive.
Because smaller firms tend to be high risk, they shouldn’t be encouraged to reduce cover levels, she argues. This could be detrimental to clients and, ultimately, it would be a disservice to these smaller firms. ‘Reducing cover wouldn’t promote these firms to the public; as a client, I would want to make sure that my solicitor has appropriate cover in place.’
For Guy Adams, managing partner at West Country firm Pardoes, top-up cover is essential: ‘It pays for my sleep. Any prudent business person buys top-up cover; the additional cost isn’t that much.’
Charles Hawtin, head of client services at Chancery PII, a joint venture between Miller Insurance and the Law Society, questions the very assumption behind the proposals. The data used by the SRA, he says, did not include data from insurers that have since left the market, especially unrated insurers such as Balva, Quinn, and Berliner. ‘It’s clear the SRA didn’t have access to the data by unrated insurers that have folded,’ he says. ‘Plus, some claims are still maturing.’
Looking at cover levels is also the wrong question, he continues. ‘Instead of talking about reducing PII cover, the SRA should be looking at the root cause of claims. That’s where more of the focus needs to be. The firms who embed risk management in their processes are those that do best.’
The SRA has calculated that lowering indemnity costs by 15 per cent as a proportion of turnover would bring down the cost of PII by about 1 per cent as a percentage of turnover. For 2-4 partner firms, for instance, PII would be 4.5, rather than 5.5 per cent of turnover.
There is no definitive explanation why smaller firms are more high risk. The most common ones are that they operate in high-risk areas, that their scale doesn’t allow for the same systematic approach to risk, and that they simply haven’t kept up with the times. Whatever the answer, a regulator-driven reduction in premium levels is unlikely to translate into a more careful approach to risk, which is the only real issue in practice.
Jean-Yves Gilg is editor-in-chief of Solicitors Journal