Only a few months since Steve Holland warned of the risks for firms (and the clients of firms) insured by Balva if it was declared to be in default, and, earlier this week, as reported in the Law Gazette, this became reality. This was also the fate of Icelandic insurer ERIC (another unrated insurer with a presence on the solicitors PII market until recently) a couple of months earlier.

Impact of being 'in default'

The Financial Services Compensation Scheme (FSCS) has declared both ERIC and Balva to be in default - i.e. either insolvent or unable to pay their liabilities. The first concrete signs that this was imminent came when a panel solicitor to both insurers reported that its costs for claims defence work had not been paid for many months (see SRA Report, April 2014).

The good news is that, with default events now triggered in respect of both ERIC and Balva, this means that the FSCS scheme can step in to assist where claims are made to it from firms and individuals. The scheme will offer protection for a number of insurance covers, including Professional Indemnity policies, placed with either insurer*.

FSCS does not provide full cover protection

While the FSCS provides 100% cover for a narrow category of compulsory insurances, this does not include PII, for which, in common with other general insurances covered by the scheme, 90% of any claim will be covered.  The remaining 10%, along with any defence costs incurred, will now be the responsibility of the insured firm.

Protection offered by un-rated insurers

While we understand that some unrated insurers may have the benefit of re-insurance by higher-rated carriers, in our opinion this is more likely to protect creditors than policy-holders or their clients if the insurer becomes insolvent.

A number of lenders have made it clear that they will not instruct law firms that are insured with un-rated insurers because of their perception that there is an increased risk that any claims may not be met.

What alternatives are available?

This year Lockton has access to a wider range of insurers than any other broker - including but not limited to three exclusive insurer relationships.

This year, as it looks likely that firms will have a greater choice of PII limit of indemnity than ever before, it is even more important that firms ensure that they are not merely 'sold a policy' but actually get proper professional advice on the best cover and insurer for them (firms that undertake insurance mediation activities, for example, will not be able to reduce their cover to the new £500,000 minimum).  Nor do many firms benefit long-term from the 'one year wonder' bargain basement policy.

Why not read our PII Buyer's Guide - for more information about your PII purchase - and make up your own mind about which broker you want as your partner through the process.

We've also got an FAQ section on our Professional Indemnity pages. If you still can't find the information you're looking for, just get in touch by email, telephone, or arrange for us to call you back.

*  Firms previously insured with Balva and seeking compensation should apply through Caytons Law