Since 1976, it has been compulsory for solicitors in private practice to have professional indemnity insurance (“PII”). The current market-based system has been in place since 2000 and has provided a high degree of protection for firms and their clients at a comparatively low cost overall. The Assigned Risk Pool (“ARP”) was established as a key component of the arrangement allowing solicitors who are unable to obtain insurance cover on the open market to obtain temporary cover so that they can continue in practice. PII policies are written on a “claims made” basis rather than a “losses occurring basis”. Under the current arrangement, if a firm closes without a successor practice then the insurer or ARP on risk at the date of closure is required to provide cover for the balance of the relevant year and for a further 6 years thereafter. This system has given clients a good degree of certainty that they will be covered in the event that they suffer any loss due to the acts or omissions of their solicitors.
Recently, the number of firms obtaining covering under the ARP has been increasing. According to the Solicitors Regulation Authority (“SRA”), in 2007/08 there were 28 firms in the ARP which rose to 150 in 2008/09 and 300 in 2009/10. Whilst the percentage of the profession in the ARP is small (the figure in 2008/09 represents 1.5%, with 98.5% obtaining insurance in the open market), the cost for these few is high. Loss ratios (the ratio of value of claims incurred to the value of premium income received) for the last nine years is said to run at about 600% which has meant regular cash calls on insurers. Reports say that insurers will have to pay £38.6 million in order to maintain funding for the Assigned Risks Pool for 2011. A proportion of the blame for this exponential increase in costs has been levelled at the large number of conveyancing claims resulting from the global financial crisis.
On the back of these escalating costs and other concerns, in November 2009 the SRA launched two consultations to review the ARP and the PII system. As a result, a number of radical changes have been proposed, including the eventual abolition of the ARP. The changes are to be phased in over time, with the more drastic changes being deferred. These include:
– From October 2011, the ARP will continue in its current form with one change. The amount of time that a firm can remain in the ARP will be reduced from 12 months to six months. Insurers will continue to fund the ARP as previously.
– From October 2012, the ARP will continue, but the funding of a claims deficit will be split between the profession and the insurers. This will be on an alternating layered basis with the first £10 million of losses being taken by the profession, the second £10 million by the insurers and so on until £50 million.
– From October 2013, the ARP will be abolished. A firm which cannot get insurance in the open market will be given a mandatory 30 day extension of cover from its insurer of its 2012 policy. After this time, the SRA will prevent firms from taking new instructions and give them 60 days to close down. It will then fall on the incumbent insurer to provide the 6 years run-off cover backdated to 1 October of the policy.
One of the SRA’s proposals was to exclude financial institutions from the minimum terms and conditions of insurance. The Law Society argued against this, pointing out that even sophisticated lender clients may not be expert in relation to the relevant risks or able to guarantee their own protection without the existence of such cover. The SRA decided to postpone any changes in this area until after 2013 and a possible review.
Given the state of flux that the PII market is entering, lenders should be wary of a number of issues:
– Consider whether your solicitors have cover on a regular basis. From this October 2011, firms in the ARP will have their cover reduced to 6 months.
– Consider which of your solicitors are currently covered under the ARP. As changes come into force, solicitors will seek to obtain cover in the market rather than be forced into the ARP and face the prospect of closure.
– Check what the deductible is on a solicitor’s policy. These may be large and will greatly affect the amount of any recoverable loss on any claims made.
Lenders will need to keep a keen eye on developments in solicitor PII cover over the next few years. They should ensure that they have considered the risks and whether they have suitable protection for any claims they might bring. Rosling King LLP is a City firm with extensive experience in advising upon PII coverage issues in the context of lender solicitor claims.
For further information, please contact Owen Rafferty or the Partner with whom you usually deal.