Should there be a single indemnity scheme?

The Legal Services Consumer Panel's report on financial protection arrangements published on 10 June 2013 could not have arrived at a more appropriate moment: the annual professional indemnity (PI) insurance renewal season starts and an unrated solicitors' insurer loses its licence.

Consistent with its remit, the panel's report is focused on the consumer perspective, encompassing the entirety of the financial protection arrangements for lawyers' clients, across all legal services regulators, and including both PI insurance and compensation funds.

This unique perspective may have enabled the Consumer Panel to make ?its most radical proposal: that there should be a single entity overseeing financial protection across the entire legal services sector, "setting minimum terms and conditions applicable to all legal ?advisors purchasing professional indemnity insurance."

Glimpse of the future

While this recommendation was caveated with the suggestion that it should be modelled and costed carefully, it nonetheless represents an intriguing glimpse of a possible future for lawyers' ?PI insurance.

One of the strongest arguments for this sort of convergence in PI cover across the legal professions is the current diversity of coverage. Is it right that the minimum level of cover for solicitors' firms is £2m per claim, £1m per claim for notaries and only £500,000 for barristers? The panel makes a good point when it says a single scheme would allow all lawyers access to insurance cover based on their "individual risk profile" rather than their professional title.

The relevance of such an argument is however undermined by a key weakness in the report: a lack of quantitative information in certain key areas. This is most apparent when the report moves away from regulatory themes such as claims on compensation funds, and towards more mainstream PI issues, e.g. the prevalence of claims in different areas of legal work.

While claims data may have been ?difficult to find (as the report's authors repeatedly observe), its absence leads to three criticisms of the report. First of all, it seems to have led to some particularly bland observations, such as "Stakeholders have told us that negligence leading to financial loss is a problem."

Secondly, the lack of data undermines the effectiveness of some of the cross-profession comparisons deployed in the report. For example, it is difficult to comment on whether the level of cover for barristers is too low or simply an accurate reflection of their risk profile, without a detailed look at the numbers.

Perhaps most fundamentally however, the lack of data may explain the report's approach to competition. The single most important element to client financial protection is provided by the marketplace in the form of PI insurance. However, the sole significant reference to competition comes in the report's conclusion, where it is suggested (without evidence) that a single PI insurance scheme across the professions "would allow insurers to compete with one another for business, while assuring a minimum level of consumer protection." Nowhere does the report explore whether the separate markets for PI insurance are functioning effectively, or how changes to the client financial framework might affect premium levels and, indirectly, the charges made to consumers by lawyers.

Sharing claims information

Undeterred by this lack of data, the Consumer Panel's answer is to suggest that claims information should be shared with regulators on a more extensive and consistent basis than currently. They suggest for example that the Solicitors Regulation Authority (SRA) could be given a copy of a firm's claim history for consideration "when lawyers are renewing their practising certificates." This will worry those who work in areas that generate higher frequencies of claims (e.g. crime and family work).

Arguably, the consumer perspective should be more focused on areas where the financial protection frameworks produce coverage gaps. It is here the issue of unrated insurers raises its now all-too-familiar head. The panel describes insurer insolvency as "a high risk" and a "concern", but the relevant section of the report is short and lacking in any real recommendations.

While noting that the SRA does not approve or rate insurers, it does not address whether the SRA should (or even can) prevent the unrated from becoming qualifying insurers, nor does it properly explore what may happen to consumers where, like Balva, an unrated insurer has its licence withdrawn and is made the subject of a winding-up process.

The report is a welcome and thought-provoking contribution to the current debate over lawyers' PI insurance and the role of the regulator. The consumer perspective is not always as prominent as it could be in such discussions: consumers need their champions just as much as the regulated need their representative bodies.