The latest report from the SRA makes it clear that far more than the previously reported 141 firms have failed to obtain Professional Indemnity insurance at the last renewal. It seems likely that the number will run into several hundred of firms which is far more than would normally be seen for firms in default, classed as non-applied firms.
These firms will still benefit from the automatic 90 day extended policy period however this will expire on 29th December. These firms will need to close their business if they have not secured cover by the end of the 90 days.
Without knowing the identity of the firms in question, it is difficult to be certain as to the circumstances that have caused them to be unable to secure renewal - but the forced departure from the market of Balva, and it's 'successor' insurer, Berliner, so late in the day would certainly point to a fair number of the firms facing closure as being ones previously insured by Balva.
Balva fall-out
There is no doubt that the lure of significantly lower premiums offered by unrated insurers such as Balva has been hard to resist for many firms, facing the double whammy of recessionary pressure on fees and increasing PII premiums. But it is clear that, in the current market, these premiums have not been sustainable. Large law firms, and firms undertaking low risk work or with a sustained claims free record have benefitted from significantly lower premiums since the profession's PII was moved onto the open market. It has tended to be smaller, higher risk practices that have ended up insuring with unrated carriers - leading to a toxic cocktail in which the insurers least able to sustain heavy losses have insured the highest risks, and at unsustainable rates.
The fall-out from this, as we all know, has been crippling levels of claims and unrated insurer collapses/enforced withdrawal from market - leaving the innocent victims - those 'good risk' practices insured with the likes of Balva - facing a last minute scramble to find a new insurer at short notice. Firms that have chopped and changed insurers regularly, or moved to an unrated carrier are likely to have found it difficult to obtain terms from established rated insurers. The rated insurers are unlikely to be keen to offer terms to a firm who is in the cessation stage of the 90 day extended period. There would need to be a compelling case that convinced an underwriter that the firm was well run, financially robust with a good track record and that there were exceptional circumstances that had led them to be non-renewed.
What is the position facing firms that have been forced to wind down?
Those firms closing their doors by 29th December will be covered by the automatic run-off cover provided by the Minimum Terms and Conditions. The last insurer is obliged to provide 6-years run-off cover whether or not they are paid the premium, which is just as well, as firms are unlikely to have sufficient funds to pay for the run off premium which typically ranges from 225% to 400% of the last annual premium.
Partners of firms insured with Balva are at risk
A firm last insured with Balva, will have the uncertainty as to whether they will have an insurer capable of settling a claim which may of course be many years into the future. An additional dilemma for a firm closing down and wishing to pay Balva for the run off premium, will be whether this money will actually be buying any peace of mind at all. Ultimately there is no guarantee that Balva will be solvent in a year from now, let alone in 6 years time.
An insolvent insurer would leave partners of a partnership liable for any claims made against their erstwhile practice. Even though firms with less than £1m fees should be able to seek reimbursement of up to 90% from the Financial Services Compensation Scheme - that still leaves partners facing a 10% shortfall.
This could be a very real risk for the hundreds of firms likely to be facing closure - many of which will have been insured with an unrated carrier of very uncertain financial standing.
For those who thought that the warning about insuring with unrated carriers were simply scaremongering, the current situation should provide a harsh reality check. The profession can no longer assume that another unrated market will simply take on the book of business where one has left the market. There can be no guarantee of the solvency of any insurer however Insuring with an un-rated insurer has to playing a game of Russian Roulette.
Impact for the profession
In a recent survey of our solicitor clients, over 60% stated that the fact that Lockton will only use rated insurers was very important to them.
The financial fall-out from these firms in default may well end up being borne by the profession. With the Assigned Risks Pool no longer providing a safety net for non applied firms, the cost has been shifted to the Compensation Fund. In the past the ARP has paid out million in claims for non-applied firms and the estimated number of such firms now, can only mean this cost is about to increase.
Any firm who continues to practice without a valid PII policy after 29th December 2013 will not be covered by its last insurer for work undertaken after the 90 day extended period has expired. Claims emanating from work post 29th December will be directed to the Compensation Fund.
Insurers will continue to provide cover to the firm for all work up to 29th December however they will be able to seek recovery of claims paid out for new work carried out during the cessation period. Firms who entered the cessation period should only have undertaken work to discharge any of its obligations for existing instructions. Any firms who ignored this restriction and continue in private legal practice regardless, are exposing themselves to insurers exercising rights of recovery for any claims paid.
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