What is the appropriate level of professional indemnity cover for your Practice? A Guide to Top Up Insurance
Top-up insurance (also known as excess layer insurance) is cover above, or in excess of, the compulsory primary indemnity limit set out by the Solicitors Regulation Authority (SRA). It is the principal's responsibility to assess whether this minimum level of coverage is sufficient for their practice.
Under the SRA code of conduct O (7.13) it is your responsibility to assess and purchase the appropriate level of professional indemnity insurance (PII) cover for your current and past practice, taking into account potential levels of claim by your clients and others, and any alternative arrangements you or your client may have. This article is intended to assist you and highlight a number of factors to consider when assessing your PII arrangements, and the potential exposures your practice may face.
As a part of the annual PII review, each practice should assess the likely risk and magnitude of uninsured loss. Below are some factors to consider during this assessment, which will help to establish the level of cover:
- Your practice's likely level of exposure to claims
- Your practice's claims history
- Whether your current cover is consistent with other, similar practices (at Lockton we are able to benchmark your practice's profile against others which will assist in the analysis)
- The size of your practice
- The nature of activities undertaken which could expose your practice to risk, including the nature and level of undertakings accepted
- The amount of money in your client account at any given time
- A single event or series of related events (see aggregation clause section)
It is good practice to consider the possibility of being sued should anything go wrong, and the possible amount of such a claim. You should also take into account whether the work is ongoing or on a one-off basis, as well as the maximum potential exposure of the client and other interested parties.
Some clients, such as local authorities and lenders, may ask for higher limits on certain transactions or when conducting work for them; larger contracts involving sums greater than the compulsory primary indemnity limits need to be carefully reviewed. If you decide that work to be undertaken for any client potentially creates a higher than average risk, additional premium for top-up insurance needs to be factored into your decision about whether or not to accept the retainer.
How to avoid an uninsured loss
The purpose of your insurance policy is to transfer risk and for insurers to pay claims. Ideally liability of a practice should be limited to the policy excess (deductible) that you have selected. Notably, there is a per claim monetary limit under the MTC primary layer cover, which means that unless the practice has purchased sufficient top-up insurance, if one claim exceeds the limit under the policy, the loss may be partly uninsured.
An example of this could be as follows:
Practice ABC & Co Solicitors is a traditional partnership that purchased the £2m compulsory minimum cover level required under the SRA indemnity insurance rules. A claimant successfully sues the practice for £2.5m in damages for professional negligence. The practice's insurer pays the first £2m in accordance with the terms of the PII policy.
The partners of ABC & Co Solicitors are jointly and severally liable to meet losses that arise from wrongful acts of omissions arising from the practice's ordinary course of business. This includes the uninsured component of the claim. This means the partners are liable to meet the outstanding £500k of the claim.
Solution: ABC & Co Solicitors should have purchased top-up insurance to meet any claim that exceeded the £2m compulsory primary limit. Retrospective coverage for a claim is not available, but additional coverage can be sourced at any time throughout the year.
Friday afternoon fraud
With the ever-increasing risk of cyber-attacks and 'Friday afternoon fraud', it is prudent to review how much money is held in a client account at any given time. Should this exceed your current indemnity limit, you can leave yourself exposed to an uninsured loss. For more information, read the Law Society's article warning practices of this risk:
Aggregation clause
The SRA minimum terms and conditions contain an aggregation clause which potentially allows for two or more claims to be treated as a single claim, if they are linked by a unifying factor of some kind. If you were to have a series of linked claims, it could be both a positive and negative situation for your practice. The positive impact is that you would only have one excess (deductible) to pay, but the potential negative far outweighs it, as this could result in you being under-insured.
The aggregation clause is currently being tested in the Supreme Court, in the case of AIG Europe Limited vs Woodman and others. This reinforces the idea that law firms should, when assessing risk, be aware of the potential for multiple claims arising from certain types of error. Further information of the case can be found below:
Regardless of the outcome, we strongly recommend that firms consider the aggregation clause when assessing their excess layer requirements and what is an appropriate level of cover.
How long should top-up cover be maintained?
It is suggested that the minimum period excess layers are kept in force is six years after the completion of work, but as limitation is sometimes greater than this, you should maintain coverage for as long as you feel is appropriate.
While there is still plenty of capital in the insurance market, resulting in more compulsory primary insurance choice than ever before, the catastrophe losses insurers experienced last year has resulted in a record-breaking year for claims. This combined with an increase in the severity of losses, has resulted in some insurers, who were previously prominent in the solicitors excess layer PII market no longer willing to write this class. As a result of this, we have seen increases in the cost of top-up cover. Despite these increases, the price of additional top up coverage is still modest in comparison to a practice's compulsory primary PII cover.
Potential Changes ahead
The SRA released a new consultation in respect of PII on the 23rd March 2018 therefore depending upon the outcome the advice above may be subject to change. Within the consultation the SRA suggest lowering the MTC minimum limit from £2million to £500k, and £1million for firms with conveyance exposure. Naturally this could impact on both the cost and availability of Top Up coverage.
This change has not come into place, and may not come into place, however this is an area of discussion within the SRA consultation therefore it is prudent to be aware of it. Lockton will be releasing an article shortly regarding the SRA's main proposals. In the meantime, they can all be found here:
https://www.sra.org.uk/sra/consultations/access-legal-services.page#download
How Lockton can help
Crucially, if you feel you do not have sufficient cover, you do not have to wait until your insurance renewal is due to obtain excess layer insurance. Contact the Lockton team on 0330 123 3870 or your Lockton Account Executive today to find out more about top-up cover or to get quotations for your practice.
At Lockton we have access to a number of insurers who can provide competitive quotations for your consideration, while making sure that your practice's needs are met. Please note that not all top-up policies provide the same cover. General differences are often based on jurisdictional restrictions, such as US/Canada restrictions or exclusions, cancellation clauses, fraud exclusions, etc. However, at Lockton all our top-up policies are on a full follow form basis that matches the MTC wording.