PI insurance policies and cover
- Are longer term PI policies available this year?
- Should I consider an 18-month policy?
- What kinds of claims does PI insurance cover – are there any exclusions?
- Does professional indemnity insurance cover everyone in the firm?
- What limit of professional indemnity do I need?
- What factors should I consider when assessing the level of cover we need for our PI exposure?
- How does the aggregation clause work
- What are the most common causes of PI claims against law firms?
- Which practice areas generate the most professional indemnity claims?
- What is ‘claims made’ cover and what implications does it have?
- What is the difference between a PII ‘claims made’ policy and a ‘claims occurring’ wording used in other insurances?
- Can I extend the Extended Policy Period (EPP) and continue taking new instructions?
- Should my firm increase its excess to try and reduce the overall PII premium?
- Will my excess apply to legal defence costs?
- Are my legal defence costs covered when a claim occurs?
- Does my policy pay for legal costs if an investigation is brought by the SRA?
- Should I buy cyber insurance as well as PII?
- Should I buy management liability cover in addition to PI insurance?
- How do I check the rating of my insurer and why is this important?
- I am 65 with no succession plan in place. Why won’t an alternative insurer provide a quote for me?
- How does the Solicitors Indemnity Fund (SIF) operate?
Closing down a legal practice
- I may pack up my law firm and become a freelancer, what do I need to do?
- Run-off cover – how does it work and what do I need to know?
- Why is run-off so expensive?
- How much will I pay for six-year run-off cover if the firm should need to close?
- Can I get an alternative run-off quote?
- Can I pay my run-off premium by instalments?
Other special situations
- What information do insurers want if I am a new start up?
- I am converting into an LLP. Can I transfer my PI insurance to the new firm?
- I am considering acquiring a practice known to me. What information do I need to provide the insurer with?
Handling PI insurance claims
- What claims support does the broker provide?
- How can a broker’s involvement on a claim be beneficial to the outcome for my firm?
- Why are we asked not to disclose insurers' involvement when a claim arises?
- Why am I not allowed to admit liability without the insurer’s consent?
- Why am I not allowed to make an offer of settlement without the insurer’s consent?
Jargon buster, professional indemnity insurance
- What is Minimum Terms and Conditions (MTC) cover?
- What is the Extended Policy Period (EPP)?
- What is retroactive cover?
- What is an aggregate capped excess?
- What does ‘insurers are re-allocating capacity’ mean?
- What is an insurance broker’s ‘exclusive insurance facility’?
- What is ‘wholesale’ broking and what does it mean for my firm?
- What is a ‘co-insurance’ facility and what are the benefits to my firm?
- What is ‘broker duplication’?
- What is a Managing General Agent (MGA)?
- What is the Participating Insurers Agreement (PIA)?
- What are reserves and how do they affect my premiums?
The three experts
Law Firm Ambition is grateful to the three specialist legal sector insurance brokers who collaborated with us to come up with this long list of FAQs and answers. (Updated 17 July 2024)
Brian Boehmer is a partner at Lockton.
Gary Horswell is the managing director of Ntegrity.
Piers Winton is a partner at Paragon.
PI insurance policies and cover
1. Are longer term PI policies available this year?
Longer term policies are available again, pleasingly not only for lower risk firms.
But for firms that are in periods of change, which may include leadership changes, profile of work adjustments or significant growth, these may not be available.
Brian Boehmer, partner, Lockton
2. Should I consider an 18-month policy?
As we see the start of a softening market, extended policies are being offered to many more firms. This is not every firm though, and some insurers will not offer 18-month options for new business, but we are certainly seeing a move back to the pre-Covid norm in this area.
If the market continues to soften, you should consider whether an annual policy may save your firm money.
Many firms value the certainty of knowing where they stand for the longer policy period. But, in contrast to recent years, if insurers are offering longer policies at a flat pro-rata premium it is likely that they think the premiums will continue to come down.
Piers Winton, partner, Paragon
3. What kinds of claims does PI insurance cover – are there any exclusions?
Primary PII cover is designed to provide broad coverage to protect the general public along with the reputation of the legal profession. The ‘minimum terms and conditions’ (MTC) wording set by the SRA guarantees this.
In the event of a claim being made by a third party, arising from your practice’s provision of legal services, your firm can be confident that they are properly insured. The claim could arise from an alleged negligent act or omission, defamation, or a breach of trust and/or confidentiality.
But whereas the exclusionary language is minimal in the MTC wording, the same is not necessarily true of any additional insurance that is purchased. Insurers are permitted to apply exclusions.
So, a firm may end up with cover up to a certain limit for a particular claim, but no cover beyond that limit if the claim is excluded from the additional layer(s) of insurance.
1st party cyber risk is typically excluded from all PII coverage now, including for the legal profession. This is not a restriction of coverage, as there was no intended provision of the coverage.
Brian Boehmer, partner, Lockton
4. Does professional indemnity insurance cover everyone in the firm?
Yes, the policy provides cover for claims against current and past principals, staff and consultants.
Gary Horswell, managing director, Ntegrity
5. What limit of professional indemnity do I need?
See: In light of the cost, should I consider lowering my limit of indemnity? in Professional indemnity insurance for law firms FAQs: Part one
6. What factors should I consider when assessing the level of cover we need for our PI exposure?
Key factors include:
- Your practice’s likely level of exposure to claims – influenced by the practice areas undertaken and your typical clients.
- The nature of activities undertaken which could expose your practice to risk, including the nature and level of undertakings accepted.
- Your practice’s claims history, especially if there are any particular trends that can be identified.
- The maximum value possible for a single claim, influenced by your largest transaction values undertaken, or the entirety of the value of an estate.
- The total value if a series of claims from related events were to occur (aggregation, see 7).
- The total amount of money in your client account at any given time. Your PII limit should reflect at the very least the average amount in the account at any given time.
Claims are covered by the insurance in place at the time of notification, but can take years to settle. Will today’s limit be adequate to settle a claim being paid finally in, say, 5 years’ time?
Whatever the limit of indemnity in the policy, this is the maximum insurers will pay to a claimant, so it needs to allow for the compensation payable and the claimant’s legal costs.
Brian Boehmer, partner, Lockton
7. How does the aggregation clause work
The aggregation clause contained within the SRA’s Minimum Terms and Conditions 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.
For example, if a single item of negligent advice, repeated many times to different clients led to 10 claims of £1m each, the insurer would only have to cover the first £3m if the 10 claims could be shown to be aggregated. The remaining £7m would have to be paid by the law firm (but it may only have to pay one excess).
The increasing body of case law around claims aggregation confirms that every case is judged on its own particular facts. This means that the risk is difficult for law firms to judge, so a higher level of cover is advisable.
Gary Horswell, managing director, Ntegrity
8. What are the most common causes of PI claims against law firms?
Common professional indemnity claim causes include:
- Failure to record instructions and advice given.
- Failing to distinguish the role from that of other professionals.
- Missing time limits.
- Failing to record the scope of the retainer.
- Lack of supervision.
- Advising outside areas of expertise.
- Conflicts of interest.
- Duties to third parties not considered a client.
- Identifying the client.
- Time pressures.
- Cyber losses and data breaches. (See 17 )
See: What types of legal work increase premiums the most (and least)? in Professional indemnity insurance for law firms FAQs: Part one
See also: Five highly practical factsheets explaining how to avoid professional negligence claims in residential conveyancing, wills and probate, commercial property, company and commercial, and commercial litigation.
Gary Horswell, managing director, Ntegrity
"Over recent years we have seen an increase in the volume of the errors leading to PI claims. The underlying causes are primarily fee-earners being stressed, fatigued, over-worked, or under pressure, whether at home or at work."
Lianne Shing, risk management consultant, Travelers
9. Which practice areas generate the most professional indemnity claims?
While not up-to-date, the diagram below is a good illustration. It shows that in the six years 2012-2018 the number of claims notified could be broken down into the following practice areas:
- 35% Residential conveyancing
- 15% Wills, probate, trusts
- 14% Commercial conveyancing
- 10% Personal injury litigation
- 6% Other litigation
- 4% Matrimonial/family
- 3% Landlord and tenant
- 3% Employment
- 3% Financial advice and services
Source: Lockton Companies LLP
Brian Boehmer, partner, Lockton
"While conveyancing tops the list above, errors can creep into all practice areas. 'Risk aware' firms actively identify and manage the risks that lead to errors, which can reduce or avoid PI claims."
Lianne Shing, risk management consultant, Travelers
10. What is ‘claims made’ cover and what implications does it have?
PI insurance policies protect the insured firm against claims that are first made against them during the policy period. This remains true even if the work giving rise to the claim was done by the law firm years before.
PI insurance is often referred to as “long tail liability”, as it can take several years before a loss to a client crystallises and turns into a notification of a claim.
Each year, your law firm is effectively insuring all of its past work that could yet result in a claim. (This is why insurers ask for details of the fees and claims from previous years.)
Brian Boehmer, partner, Lockton
11. What is the difference between a PII ‘claims made’ policy and a ‘claims occurring’ wording used in other insurances?
As explained in 10 above, a ‘claims made’ policy covers claims notified to insurers during the policy period, even if the work giving rise to the claim was done by the law firm years before.
In contrast, a ‘claims occurring’ policy covers injury or damage sustained during the policy period, even if the claim does not arise until years later.
Two examples make this easier to understand.
A law firm that receives a claim today about a will that it wrote 50 years ago will be covered by the PI insurance cover in place today, because PI cover is on a ‘claims made’ basis.
Whereas a building firm that receives a claim today about employer’s liability regarding asbestos work done 50 years ago will be covered by any employer’s liability insurance that was in place 50 years ago (assuming that the current building firm is the same legal entity as the one 50 years ago, and assuming that the insurance is traceable).
Gary Horswell, managing director, Ntegrity
12. Can I extend the Extended Policy Period (EPP) and continue taking new instructions?
In response to the pandemic, the indemnity rules were changed to allow firms that were facing practical difficulties in obtaining indemnity insurance to apply for a waiver to extend the EPP/Cessation Period – but only if their insurer has agreed to that extension.
But the key point about EPP is to avoid it in the first place. Given the increased due diligence undertaken by insurers and the potential slower response times, there is all the more reason to return your proposal form to your broker (or insurer) as early as possible to secure your insurance cover.
Understandably, insurers view EPP negatively, especially if there is no legitimate reason for entering it. Some insurers will not quote a practice that has fallen into it.
However, for firms that are having difficulty getting insurance cover, perhaps because of especially challenging circumstances, the SRA’s change to the rules offers a potential lifeline. It may help firms to continue to take new instructions while they seek cover, particularly if they can extend the initial 30-day period.
Brian Boehmer, partner, Lockton
13. Should my firm increase its excess to try and reduce the overall PII premium?
The excess is the amount that you agree with your insurer will be paid by the firm in the event of a successful claim.
For example, a firm with revenue of £500,000 might choose to have an excess of £2,500 (0.5%).
Increasing your excess could decrease your PI insurance premium, but it needs careful consideration. Premium discounts for increased excesses are not as generous as they once were. Any discount will be affected by your firm’s claims history.
While it could decrease your PI insurance premium, it can be a dangerous route to go down.
Increasing your excess by a few thousand pounds is unlikely to significantly reduce your premium. On the flip side, you are potentially exposing the firm to further liability. If a client makes a successful claim against your firm, you will pay the first part of any financial compensation to the client, up to the limit of the excess.
Piers Winton, partner, Paragon
14. Will my excess apply to legal defence costs?
The insurer will pay for your defence costs (legal and other costs) without your excess applying: (see 15).
If a client makes a successful claim against your firm, you will pay the first part of any financial compensation to the client, up to the limit of the excess.
Gary Horswell, managing director, Ntegrity
15. Are my legal defence costs covered when a claim occurs?
Yes. Legal defence costs pre-authorised by the insurer are covered. So always approach your insurers for authorisation in advance of engaging professionals and obtain written approval for incurring any costs.
The exception is if an investigation is brought by the SRA (see 16).
The issue of ‘reasonable and necessary costs’ is covered in the SRA’s Minimum Terms and Conditions (see 2).
Piers Winton, partner, Paragon
16. Does my policy pay for legal costs if an investigation is brought by the SRA?
No, typically your PII policy will not provide cover for these costs unless explicitly stated as an extension of the standard wording.
Some PII policies pay for legal costs of an SRA investigation provided there is a potential claim from a third party under your PII policy.
But if the enquiry is a pure conduct matter with no potential third-party claim, this is a risk that can be covered by a separate Management Liability Protection policy that sits alongside your PI insurance policy.
Gary Horswell, managing director, Ntegrity
17. Should I buy cyber insurance as well as PII?
Put simply, yes.
For cyber cover, it is advisable to purchase a separate cyber policy. Costs are modest compared to PII premiums.
Law firms are well known targets for cyber criminals, due to the large volumes of cash and data that firms handle on a daily basis.
A cyber policy not only gives clarity on what is covered, it also usually provides an Incident Response Team of experts who can instantly be called on to help. That instant expert help can be invaluable in a crisis.
In contrast, using a PI insurance policy to insure against a cyber-related loss is problematic. While there now are some additional cyber clauses that can be added to a PI policy, in the vast majority of cases insurers are adding in cyber exclusions, or making stand-alone cyber policies mandatory.
Given the dramatic increase in cyber attacks against law firms, a stand-alone cyber policy has never been more important.
Piers Winton, partner, Paragon
"Law firms have a duty of care, and a reputation, for safe handling of personal data and financial transactions. Cyber crime can affect both, in ways that may not be covered by a PI policy, so standalone cover should be considered a 'must have'."
Lianne Shing, risk management consultant, Travelers
18. Should I buy management liability cover in addition to PI insurance?
Professional indemnity insurance covers claims brought against the firm. Whereas management liability cover (called a Directors and Officers policy, or D&O) covers any claims brought against individuals in a firm in a management position.
Typically, the policy protects the partners/directors/members, the COLP and the COFA as individuals. It can also include entity cover, in case proceedings are brought against the firm. In a heavily regulated sector such as legal services, the risks of such a lawsuit are higher than in a less regulated business.
Like a cyber policy, it is not a mandatory insurance, but it is a product a firm should certainly consider.
Piers Winton, partner, Paragon
19. How do I check the rating of my insurer and why is this important?
In the past a number of firms have suffered after trying to save money by moving to a cheaper insurer. Quinn, Lemma, Balva, to name a few, are insurers which had sub-par ratings and were forced to withdraw from the market when claims materialised and their losses mounted.
The firms insured by these companies suddenly had to find alternative insurance (and some were not given any compensation).
Ensure you understand the capacity and financial stability of your insurer, and how long they have been in the solicitors PII market. Do not be lured in by cheap pricing alone.
See the SRA’s financial rating list of the PI insurers.
Piers Winton, partner, Paragon
20. I am 65 with no succession plan in place. Why won’t an alternative insurer provide a quote for me?
In this scenario, it is likely that sooner or later the firm will cease to trade if it is not acquired by another firm. And a firm that may soon cease to trade is not an attractive proposition for an insurer. For a start, the insurer is likely to end up ‘on the hook’ for six years of run-off cover. (See 23)
Insurers are ideally looking for professionally run firms that have a viable business model and plans for the short, medium and long term. Renewing the insurance each year for such firms is relatively straightforward and the risk of claims arising tends to be lower.
Succession is an obvious issue for any sole practitioner. If the firm’s owner is reaching retirement age with no succession plan in place, getting PI insurance may be more difficult.
Brian Boehmer, partner, Lockton
21. How does the Solicitors Indemnity Fund (SIF) operate?
The Solicitors Indemnity Fund (SIF) acts as an important safety net, providing ‘expired run-off cover’.
This cover is to deal with any claims that arise once the six-year run-off cover has expired, as claims can happen 15 or even 25 years or more after closure.
Solicitors Indemnity Fund explained
The Law Society (of England and Wales) established the Solicitors Indemnity Fund in 1987 to provide compulsory professional indemnity cover to solicitor firms in private practice.
In 1999 the solicitor’s profession elected to move towards an insurance-based open market scheme, with the consequence that SIF entered into run-off with effect from 1 September 2000.
With the agreement of The Law Society, SIF has provided ‘expired run-off cover’ to firms that ceased without a successor since 1 September 2000, but only after the primary run-off period of six years had elapsed.
The Solicitors Regulation Authority took over the management of SIF on 1 October 2023. It was previously managed by the Law Society, through a specialist team set up for this purpose.
SIF is funded by mandatory annual contributions from solicitors and law firms. These are typically calculated based on the size and type of practice, the number of partners, and sometimes the claims history of the firm.
Gary Horswell, managing director, Ntegrity
Closing down a legal practice
22. I may pack up my law firm and become a freelancer, what do I need to do?
You would be required to purchase run-off cover for the closure of the regulated practice (see 23).
Then you would need to find suitable freelance insurance, although there are still only a few products available from insurers.
Gary Horswell, managing director, Ntegrity
"If you fit the SRA's definition of a 'freelancer', speak to your insurance broker about freelance policies. As ever, consider the reputation of the insurer and price, but also the breadth of cover of the policy."
Lianne Shing, risk management consultant, Travelers
23. Run-off cover – how does it work and what do I need to know?
Once a firm stops practising (and there is no successor practice responsible for insurance) the insurer covering the firm at the time of closure must provide six years of run-off cover. This will provide the firm with six years of additional cover from the end of a current policy following the date of closure. (After the six years, the Solicitors Indemnity Fund (SIF) takes over the cover (see 21).)
On being advised that the firm will cease to trade from a particular date, the insurers will bill the practice for the run-off premium due.
Any retrospective claims that are brought against the firm are covered by the insurer. The owners of the firm have no ongoing liability.
Typically, run-off cover will cost between 200-350% of your expiring premium (check your wording). For example, a firm that paid £20,000 + tax at their last renewal would pay £60,000 + tax for their run-off cover (assuming the run-off, as set in the policy, was 300%). The cost of run-off must be disclosed to the firm during the insurance quotation process.
Run-off cover is a contractual duty for insurers. Put simply, in the example above the insurer is obliged to take on six years of claims exposure in return for three years of premium – which is not an attractive proposition. So the likelihood of being asked to provide run-off cover is one of many risk factors that insurers weigh up when pricing PI insurance cover for a law firm.
See also: The Travelers run-off calculator and its related notes.
Brian Boehmer, partner, Lockton
24. Why is run-off so expensive?
When a firm closes, another practice that takes over the files can uncover potential claims from errors or matters overlooked. It is normal for many claims to surface in the two or three years after closure, but the insurer cannot then charge any additional premium or impose any new terms in light of a risk that is turning out to be worse than expected.
(In contrast, all other professions have to buy this cover annually, allowing insurers to vary terms over time to reflect changes in the claims record.)
Furthermore, insurers are often unable to recover run-off premiums. This potential loss has to be factored into the costs applied to all firms.
Lastly, run-off is a one-off cost generally paid in a lump sum for all six years, which makes it appear to be even more costly.
The bottom line is that insurance is a competitive market and any pricing reflects the market at that time.
One option is to make provisions for run-off throughout the lifetime of a practice. For example, new practices quite often set aside a monthly amount to contribute to this provision.
Gary Horswell, managing director, Ntegrity
25. How much will I pay for six-year run-off cover if the firm should need to close?
The premium for six-year run-off cover varies between insurers. It is generally 300% of the last annual premium, but it can range from 150-400%.
It is payable in full prior to the date of closure.
Brian Boehmer, partner, Lockton
26. Can I get an alternative run-off quote?
While not unheard-of, insurers generally will not compete to take over run-off cover. It is felt that the best insurer for the run-off risk is the one insuring the risk when the law firm last renewed.
Piers Winton, partner, Paragon
27. Can I pay my run-off premium by instalments?
Typically, no. Most insurers require a single payment in full, because once a firm stops practising its revenues also cease. The insurer providing run-off cover is obligated to pay for claims regardless of whether premiums have been paid.
However, there are instances of insurers agreeing to run-off premium through instalments, where those future payments can be relied upon to materialise.
Piers Winton, partner, Paragon
Other special situations
28. What information do insurers want if I am a new startup?
For a start-up practice an insurer will need the following information as a minimum:
- Proposal form
- Business plan
- Profit & Loss forecast
- Cash flow forecast
- CVs of all partners/directors/members of the new practice
Gary Horswell, managing director, Ntegrity
29. I am converting into an LLP. Can I transfer my PI insurance to the new firm?
There is no need to transfer the policy. You remain liable for claims arising against the previous entity. The solution is simply to add the new LLP to the ‘insured’ named in the policy.
The minimum limit of indemnity you are obligated to buy (as set by the SRA) will increase from £2m to £3m. If your current limit is below £3m, normally your insurer will charge an additional premium for the increased cover on a pro rata basis for the length of time remaining on the policy.
Piers Winton, partner, Paragon
30. I am considering acquiring a practice known to me. What information do I need to provide the insurer with?
The sooner you engage with your broker, and in turn your insurer, the better.
First and foremost, the insurer will want to know whether you as the purchasing firm will become the ‘successor practice’. A successor practice takes over liability for all future claims made against the firm, including claims concerning legal work done in the past. If, under the terms of the acquisition, your firm will not become the successor practice, the firm being acquired would have to buy run-off cover (see 23).
Secondly, the insurer will particularly want to see and understand:
- The claims record for the firm being acquired
- The last completed proposal form
- The due diligence you have carried out
- The finance and cashflow implications
- The complexity of the acquisition
- The finance and cashflow implications
- A well thought out integration plan
- Plans for the firms' IT systems
Are you just acquiring a book of clients in a niche that you are already highly expert in, or are you expanding in a more risky way? More offices, more staff, different IT systems, different (or even just slightly different) legal work, different types of client, or simply firms with different cultures are all potential problem areas. Your plan needs to recognise the difficulties and show a credible strategy/process for dealing with each one.
Piers Winton, partner, Paragon
"Provide your broker with as much detail about the potential acquisition as you can. Your insurer can then understand, discuss, and confirm how the acquisition might impact your PI insurance."
Lianne Shing, risk management consultant, Travelers
Handling PI insurance claims
31. What claims support does the broker provide?
A specialist broker will usually have a dedicated specialist claims team. The claims advocates will support clients in all aspects of claims handling:
Some insurers also have specialist panel solicitors who are appointed automatically in the event of a claim been made.
A specialist broker with strong relationships with all of the leading insurers should be familiar with their individual approaches to policy interpretation. This in turn will affect how best to approach a particular issue.
Brian Boehmer, partner, Lockton
32. How can a broker’s involvement on a claim be beneficial to the outcome for my firm?
A specialist broker claims team can provide proactive advice at every stage, starting before notification of the claim.
Knowing the insurer’s likely tactics and strategy, the broker can provide valuable advice and assistance dealing with a claim.
This may include advice on any ‘reserves’ requested by the insurers. (See 47)
Brian Boehmer, partner, Lockton
33. Why are we asked not to disclose insurers' involvement when a claim arises?
Insurers prefer their involvement not to be disclosed earlier than necessary.
This is because, historically, insurers have had a reputation for settling most claims quickly rather than incurring the significant cost of fighting a claim. So early disclosure can encourage the claimant to pursue the claim more vigorously.
Instead, insurers prefer to have some time to analyse a claim in the first place and understand if the insured law firm is actually liable.
Piers Winton, partner, Paragon
34. Why am I not allowed to admit liability without the insurer’s consent?
It is a requirement of most solicitor professional indemnity claims policies that insurers have the right to take over conduct of any defence of a claim. That includes the decision of whether the insured law firm should admit liability or not.
Insurers are often concerned that some law firms may be overly willing to admit liability and make offers of settlement, to preserve the commercial relationship with the client.
Furthermore, some insurers have strict reinsurance obligations that contractually prevent them from allowing an insured law firm to admit liability until the insurer’s claims department has certified that there is indeed a liability.
Give the insurer time to analyse whether the law firm should admit liability. Once fault is admitted, it can be difficult for an insurer to avoid paying a claim in full even when the firm turns out not to have been at fault.
Any admission of liability without the insurer’s prior express consent runs the risk of the insurer asserting that its rights have been prejudiced – so its obligation to pay the claim is altered.
Piers Winton, partner, Paragon
35. Why am I not allowed to make an offer of settlement without the insurer’s consent?
It is a term of most solicitor professional indemnity claims policies that insurers have the right to take over defence of a claim. That includes making an offer of settlement.
Insurers insist on being involved in claim settlements because they have the specialist expertise and they will be the organisation making the payment.
The insurer will want to confirm that there is no further exposure to liability, that any settlement sum is reasonable, and that any settlement will close the dispute properly.
An offer of settlement without the insurer’s prior express consent runs the risk of the insurer asserting that its rights have been prejudiced – so its obligation to pay the claim is altered.
Gary Horswell, managing director, Ntegrity
Jargon buster, professional indemnity insurance
36. What is Minimum Terms and Conditions (MTC) cover?
The Solicitors Regulation Authority’s Minimum Terms and Conditions sets out the scope of professional indemnity insurance policy protection for law firms in England and Wales.
In effect it sets the rules under which insurers have to provide this insurance.
For example, it prescribes matters such as:
- Legal defence costs
- Prior and successor practices
- Limits of indemnity
- Excesses
- Run-off cover
- Exclusions
- Special conditions
- General conditions
- Definitions and interpretation
Gary Horswell, managing director, Ntegrity
37. What is the Extended Policy Period (EPP)?
The Extended Policy Period is for law firms that are unable to obtain insurance in the open market by the renewal date of their existing policy. This can result from a deterioration of the firm’s risk profile, or a change of strategy/focus on the part of the insurer.
EPP runs for 90 days and operates as follows:
Firms facing practical difficulties in obtaining indemnity insurance can apply for a waiver to extend the EPP/Cessation Period – but only if their insurer has agreed to that extension. (See 12)
Background
The Extended Policy Period (EPP) was previously known as the Extended Indemnity Period (EIP), which in turn was created as the solution to the problematic Assigned Risk Pool (ARP) back in 2013.
The problem was that firms with a poor claims record entered the ARP but then never managed to exit. Instead, they carried on trading and the claims count kept increasing. This caused huge losses for the insurers who were left ‘on the hook’ to pay for it all. This in turn led to insurers leaving the market and increased premiums for firms with a good claims record.
Gary Horswell, managing director, Ntegrity
38. What is retroactive cover?
Retroactive cover is the cover given for work undertaken in the past.
It means that work you completed before you took out your policy can be covered by your PI insurance, as long as it was undertaken after the retroactive date. Typically, this would arise when a firm starts up, with any PI insurance commencing from the date of establishment.
Brian Boehmer, partner, Lockton
39. What is an aggregate capped excess?
An aggregate capped excess is the total maximum liability that your law firm is exposed to contribute towards claim settlements during the policy period. It is designed to limit the amount you pay in a year of several claims.
Take the example of a firm with a £10,000 excess capped at £30,000 in the annual aggregate. In a year with five claims of over £10,000 each, the firm will pay a £10,000 excess for each of the first three claims, but nothing after that.
Brian Boehmer, partner, Lockton
40. What does ‘insurers are re-allocating capacity’ mean?
Insurers have a finite amount of capital. Every year they make strategic decisions as to how to use this capital. They shift capital out of markets that they believe offer deteriorating returns and increase the funding available for markets offering the best returns.
In insurance jargon this is called re-allocating capacity. Once an insurer reaches the targeted amount of insurance premiums for a particular market (eg PI insurance for the UK legal sector) they are usually unwilling to take on any additional business.
By spreading and limiting their exposure to risks in this way, insurers have a better chance of achieving financial stability themselves.
Piers Winton, partner, Paragon
41. What is an insurance broker’s ‘exclusive insurance facility’?
An exclusive insurance facility is one that a law firm can only access via that one insurance broker.
An insurer may agree to such an arrangement as a means of controlling the volume and quality of enquiries, or simply as part of close relationship with a particular broker. (Brokers act as a filter. In general, insurers want to be offered the chance to quote on the most promising applications and want to avoid being asked to quote on the least promising ones.)
If your firm uses a local general insurance broker who then arranges cover via a wholesale broker, this can add a layer of cost and may well result in higher premiums. Some brokers present themselves as having access to the entire insurance market, but then simply forward your proposal form to the specialist placing brokers who do have this access. No single broker has access to all available insurers offering PII to SRA-regulated firms.
Gary Horswell, managing director, Ntegrity
42. What is ‘wholesale’ broking and what does it mean for my firm?
If you use a local general broker to arrange PII and other insurances, they may well send your PII proposal to a wholesale broker.
Wholesale brokers are usually volume operators who will deal with insurers, leaving the local brokers to advise you.
This approach can sometimes slow the quotation process and result in greater cost. It is worth asking how your broker will work for you.
It is not uncommon for law firms to have three brokers in a chain between them and their insurer (without knowing it).
It can lead to higher costs, as each broker takes a fee. It also creates a chain of communication between you and your insurer, which can lead to an extended renewal process and drawn-out negotiations.
Gary Horswell, managing director, Ntegrity
43. What is a ‘co-insurance’ facility and what are the benefits to my firm?
Co-insurance is when two or more insurers share a risk, rather than a single insurer providing 100% of the cover needed.
This approach can sometimes help to spread risk, resulting in a more affordable premium.
It is most suitable for firms with potentially high claims. Firms with as few as four partners sometimes use it, but it is much more common with firm of 11 or more partners as the likelihood of larger contract values is greater.
It also means that all of your eggs are not in one basket. For example, if your insurance is provided by four co-insurers and one of them runs out of capacity (or withdraws from the market completely), it should in theory be relatively easy to find another insurer to fill this smaller gap.
During hard market conditions when insurers are nervous, co-insurance can be the only way to secure cover for some firms.
Gary Horswell, managing director, Ntegrity
44. What is ‘broker duplication’?
Broker duplication is where an insurer receives a law firm’s proposal form from more than one broker.
This can reflect badly on the firm and should be avoided where possible. Where more than one broker is involved, give explicit instructions as to which insurers they can and cannot approach directly on behalf of your firm.
Brian Boehmer, partner, Lockton
45. What is a Managing General Agent (MGA)?
From a law firm’s standpoint, a Managing General Agent is for all intents and purposes an insurer, but it does not take on the risk itself.
An MGA is a specialised type of insurance agent that has been granted underwriting authority by an insurer (or reinsurer) to administer programs on its behalf. The MGA writes policies and takes a share of any profits, and the insurer (or reinsurer) takes the risk and pays for any claims arising.
MGAs are specialists in their space. While insurance companies may change their strategies and switch in and out of particular insurance markets over time, MGAs offer stability to the market by their ability to change the insurance companies backing them.
Piers Winton, partner, Paragon
46. What is the Participating Insurers Agreement (PIA)?
This is the agreement that insurers sign up to in order to be allowed to insure an SRA-regulated legal practice. So it covers England and Wales.
The PIA sets out the terms and conditions to provide professional indemnity insurance, including the Minimum Terms and Conditions (see 36).
Piers Winton, partner, Paragon
47. What are reserves and how do they affect my premiums?
Reserves are the insurer’s estimated cost of a claim. A reserve can be applied as soon as a potential claim is first notified, or at any point where the insurer judges that liability is likely and can be assessed with some degree of accuracy.
Reserves can change through the lifetime of claim as the dispute matures, increasing or decreasing. If no claim is to be paid, it disappears altogether.
Insurers typically provide a breakdown of the reserves they apply, split between the potential claim compensation and the investigation and legal defence costs.
It is worth checking that your insurer has the correct picture when considering your firm’s claims profile, as it affects the pricing of premiums. A large reserve can lead to an increased premium, just as a large paid claim can. But reserves can be inaccurate, due to the challenging nature of predicting the outcome of a particular matter.
Piers Winton, partner, Paragon
"Take time to focus on what you’re doing, who you’re doing it for and how much it could cost if you’re found liable for their loss. Effective and robust risk management processes could help avoid notifications being made against your firm in the first place.
James Kerr, vice president (Europe), Travelers
Why do law firms choose Travelers?
It’s because Travelers has unmatched expertise and longevity in the legal sector, with a dedicated team of experts in underwriting, claims and risk management.
See also:
- Professional indemnity insurance for law firms FAQs: Part one (How to keep your PI insurance costs down; The PI insurance application process)
- Five highly practical factsheets explaining how to avoid professional negligence claims in residential conveyancing, wills and probate, commercial property, company and commercial, and commercial litigation
