Small firms turning to unrated indemnity insurers

The percentage of law firms relying on insurers without a credit rating for their indemnity cover has almost doubled, a Law Society survey has found.

The survey of 600 firms ranging from sole practices to firms with 25 partners revealed that 16 per cent used unrated insurers in the financial year just ended, compared to 9 per cent in 2012-13.

Almost a quarter, 22 per cent, of sole practices relied on them, and 13 per cent of two-four partners firms. This compares with only one per cent of 11-25 partner practices.

Des Hudson, chief executive of the Law Society, said: "Smaller firms need to make much better use of their available market and they need to obtain quotations from all insurers willing to offer cover.

"They should then assess these quotations based on a range of factors, including the insurer's financial security rating. This is not a purchasing decision that should be made solely on price.

"It is essential to know that an insurer is financially secure and will be able to meet any claims made on a policy, due to the long-term nature of solicitors' PII, particularly run-off cover, which must be provided for six years."

Hudson said that although the indemnity insurance had remained stable for three years, firms should not get "lulled into a false sense of security".

The survey found that the total market share covered by unrated insurers was 12.5 per cent. The society said, in its response to the report, that while it was for the SRA to assess the risk of insurer failure, which could result in "client detriment and exposure for principals", Chancery Lane was working hard to mitigate the risk and provide a stable market.

Two thirds of firms, or 67 per cent, obtained cheaper premiums in the last financial year. The median premium for all firms in the survey dropped from 24,988 to 20,458.

The median premium for sole practitioners dropped from 7,000 to 5,743 and for two-four partner firms from 50,234 to 45,000.

Just under half of firms applied to only one broker, with large firms more likely to use a broker to approach more insurers.