The professional indemnity insurance (PII) market has been incredibly challenging for some time, with annual premiums rising and a reduction in the number of insurers offering cover. As anyone working the legal sector will know, Solicitors’ PII cover has been no exception.
The past two renewal seasons for Solicitors’ PII in April 2021 and October 2021 have seen significant increases in the annual premium for Solicitors’ primary cover and those firms with paid or reserved claims or disciplinary activity generally saw higher increases in the cost of their cover. Added to this, Personal Guarantees are becoming a standard requirement of primary cover and as a consequence, the directors and partners of Solicitors firms now faced with this prospect are turning, somewhat ironically, to insurance cover to mitigate the risk.
A recent report suggests Solicitors’ PII rates are set to remain high for some time based on the volume and cost of claims being experienced by the insurance market. Indeed, the report by the insurance broker Lockton, published earlier in 2021 predicted the outlook was ‘bleak’. This was based on an upward trend in the severity of claims experienced by insurers operating in this market. According to the report, premiums increased in spring 2021 by an average 27.3% across all solicitors firms, up from 21.4% in October 2020 and 17.3% in April last year. On average, practices with at least four partners saw premiums increase more than 30%. Even for practices that had been claim-free, the average increase this year was almost 23%.
In addition to increasing premiums, the insurer Howden, has reported that primary limits were reduced which in some cases, meant Solicitors firms needed to access the excess layer market for additional cover. There have also been instances of the insurance market reducing their participation on risks to 50% for some policies leaving Solicitors firms looking for cover through another Participating Insurer for the remaining 50%.
Some insurers have also looked at self-insured excess levels and requested an increase in the amount of the excess in addition to an increase in premium – dealing a double blow to the legal industry.
An increase in high-value claims has also meant some insurers have pulled back from the excess layer market making premium rises inevitable.
Finally, there has been more scrutiny around the financial position of law firms and an increasing number of insurance companies offering Solicitors’ Professional Indemnity Insurance are now requesting Personal Guarantees from the partners of law firms as a condition of cover.
This has largely been triggered by the Minimum Terms and Conditions (MTC) set by the Solicitors Regulatory Authority for participating Solicitors’ Professional Indemnity insurers to provide six-year’s run-off PII cover, whether or not the run-off premiums are funded by the solicitors firm. The Personal Guarantee signed by the owner or partner in the law firm, therefore provides the insurer with means of recovery in respect of the run-off premium in the scenario where the solicitors firm fails and enters an insolvency procedure.
In effect, the partners of Solicitors firms are having to put their home and other personal assets on the line in order to secure the insurance cover they need to operate.
Along with the 6-year run-off provisions, The MTC impose heavy obligations on insurers including wide mandatory cover; high limits of indemnity and minimal exclusions. Despite approaches to the SRA by the insurance sector for a relaxation of the rules, Personal Guarantees now appear to be an enduring requirement in the Solicitors PII marketplace.
In response, Professional Risks Personal Guarantee Insurance has emerged as a solution to help protect the personal assets of the Directors of Solicitors firms. The annual insurance policy provides insurance cover for the Directors of solicitors firms that have provided Personal Guarantees to insurance companies in respect of Professional Indemnity Insurance (PII) run-off premiums. The run-off premium is typically 300% of the latest annual PII premium and the cover applies where the run-off premium cannot be met by available cash resources of the firm.
The outlook for Solicitor’s Professional Indemnity Insurance market might look bleak but rate changes are often cyclical and the challenges in the market have helped drive insurance innovation with a new solution to the risk policyholders now face. As the April 2022 renewal season approaches, Solicitors should be asking their broker how they can protect their personal assets should their PII cover be dependent on signing a Personal Guarantee.
Todd Davison, managing director, Purbeck Personal Guarantee Insurance