How would the Solicitors Regulatory Authority's (SRA) professional indemnity insurance reforms impact on you?
Will the SRA's professinoal indemnity insurance proposals save me money?
Unless exposure for insurers is reduced as a result of all the SRA's proposed reforms, firms with a high risk profile will not make a saving on their professional indemnity insurance. Firms who have an excellent claims and risk profile already obtain favourable rates.
The cost benefit analysis of a proposed reduction in minimum cover versus the opportunity to win new work (for example in the property sector where lenders have already indicated that they would not include firms with less than £2m level of cover on their panel) will mean that the majority of firms will purchase additional cover negating any of the minimal cost saving from the lower minimum level of primary layer cover.
A larger cost saving would be derived from the suggested cap on insurers' liability being introduced, however this brings its own set of issues.
How would capping insurers' liability affect me?
The SRA have proposed an aggregate cap on insurers' liability. Depending on the level at which the cap was set (there are currently proposals for £1.5m or £5m) this would help de-risk solicitors professional indemnity insurance for insurers. Insurers currently have to pay out on an unlimited number of claims, with limited rights to aggregate claims (subject to the ultimate outcome of the AIG Europe Limited v OC320301 LLP & Ors case).
High risk firms could be more likely to be offered terms - which some might argue the SRA should not be incentivising.
Should a firm hit its liability cap in any one year, payments would either have to be made from the firm's assets or the Compensation Fund. In some circumstances clients with valid claims may not be protected.
The practical repercussions could be that responsible firms will seek to increase their level of aggregate cover at an additional cost.
Would a reduction in the run-off term expose me to additional risk?
Sixty per cent of claims that follow the winding down of a firm occur in the first three years (according to research by Charles Rivers Associates for the SRA). 40% of post-closure claims arise after the proposed 3 year run-off period. Given current limitation periods, partners/members of closed law firms could face significant exposure to their personal assets which would offset the benefit of any reduction in the cost of run-off.
There are also repercussions for client protection and the cost of funding of the Compensation Fund.
Conclusion
Until the risk profile of the profession is addressed wholeheartedly, the costs of professional indemnity insurance will remain in line with the commercial realities of doing business. While the headline costs of primary layer professional indemnity insurance may reduce marginally for some, the costs will simply be redistributed.
To discuss your concerns regarding the reforms, and how they may impact you or your practice, get in touch.