On the 8th of October the Solicitors Regulation Authority (SRA) announced that 185 firms had applied for Extended Indemnity Period (EIP) Cover from their existing insurer. The new professional indemnity regime for client protection arrangements means that firms who are unable to secure cover from a participating insurer no longer have the safety net of the Assigned Risks Pool (ARP) and instead must rely on a 90 day extension from their existing insurer. The first 30 days allows the firm a window of opportunity to try to find a new insurer and backdate their PII cover from the 1st of October. If this is unsuccessful, the firm then has 60 days, known as the cessation period, in which to wind down and cease business. The majority of these firms are small practices with one to three partners, however some larger firms have also found themselves in this unenviable position.
Last year there were 27 firms as of the 1st October who had initially applied to the ARP, almost double the number at the 2011 renewal. The sharp increase in "uninsurable" firms applying for the EIP was expected. Some 1,300 Balva/Berliner insured firms were thrown into turmoil with less than three weeks to renewal, and had to scramble to find cover when they discovered the unrated Berliner would not be insuring their firm post renewal as anticipated.
The latest declaration from the SRA may not, however, be the whole picture. Although firms had five days from renewal to inform the SRA that they wished to enter the EIP, it is believed that some firms will have failed to inform the regulator. Lockton predicts that the actual number of firms without insurance is much higher, as there is a suspicion that although the five day notification window has now passed, a number of firms may yet be hoping to secure a last minute deal and so avoid the scrutiny of the regulator.
Firms desperately seeking cover from participating insurers face a tough few weeks ahead to try to beat the deadline. Many insurers have either filled their capacity or will be very selective on who they will insure. Some insurers may question a firm's decision to be insured with an unrated carrier in the first place. There will be some firms who had little choice, but others who simply looked at the cheapest price and have a history of jumping from insurer to insurer. These latter cases will most certainly struggle to find cover and will have to start the process of closing down by the end of October. Some in the profession will see this as the "tail wagging the dog" with the insurance industry acting as quasi regulators, effectively determining who can practice and who cannot. This was not a position which insurers wanted or sought.
A peculiarity of the new indemnity arrangement is the backdating of cover to the commencement of the EIP which took place on the 1st of October, 2013. This is designed to avoid the consequences of double insurance, however it does mean the incoming participating insurer must accept all claims and circumstances notified during the EIP. This will involve the new insurer reimbursing the costs incurred by the outgoing insurer, and waiving its right to seek contribution in respect of any historic claims. Those firms who have been unfortunate enough to have made a significant claim made during the EIP may find themselves rather unattractive to insurers as a consequence.
Once a firm enters the 60 day cessation period, it must not take on any new work. The firm is permitted to continue to work for existing clients as the practice is winding down, but only to the extent that the activity is undertaken to discharge its obligations within the scope of the firm's existing instructions.
Any firm which does take on new instructions runs the risk that insurers will seek recovery of any payments made as part of the insurer's rights for reimbursement.
Senior Vice President, Global Professional Risks Solutions
Steve.firstname.lastname@example.org 0207 933 2444