Buying the right professional indemnity insurance (PII) is one of the most important decisions a solicitors' practice will make, so here we answer some of the questions we’re most frequently asked by law firms.
There are three very good reasons why you need to purchase a PI insurance policy:
The introduction of the Solicitors Act 1974 meant that it became law for every legal practice to have professional indemnity insurance in order to protect the public and to uphold the reputation of the profession. The Solicitors Regulation Authority (SRA) contractually requires insurers to provide a minimum level of PI insurance.
Regardless of the regulatory requirements, from a commercial perspective clients will require a law firm to have PII if they are to use its services.
3. Risk management
Well-managed law firms would not contemplate putting their business at risk from claims made against the practice by not having the protection of a PII policy.
What does professional indemnity insurance cover?
Solicitors' professional indemnity insurance will provide coverage in the event of a claim from a third party alleging the likes of negligence, a breach of trust or confidentiality, or defamation arising out of the provision of services provided by your practice. The PII policy will meet the costs of any damages awarded, claimant costs and the costs of defending the claim.
The key features of PII coverage include:
- Civil liability
- Any one claim basis of coverage
- Defence costs to be in addition to the limit of indemnity
- The excess is not applicable to defence costs
PII policies are provided on a ‘claims made’ basis, which means they will cover any claim made during the period of insurance, regardless of when the actual work which led to the claim was undertaken.
The PII policy also covers your law firm for claims made against it up to six years after it closes. Known as ‘run-off cover’, this gives you peace of mind after you’ve retired or sold your business that any possible claims will still be covered. Whilst insurers are obliged to provide run-off coverage, it is not provided for free and an additional premium applies. The cost will vary depending upon insurer and must be highlighted by them at the point of quoting.
How long does my PII policy last?
Typically, PII policies are for a minimum period of 12 months. Since 2014, solicitors have been able to renew their policies all year round. This means that law firms can renew their policy at any time and can benefit from longer periods of insurance.
How much PII cover should I buy?
The SRA requires minimum limits of professional indemnity insurance:
- Sole practitioners and partnerships £2 million
- Limited liability partnerships and Limited companies£3 million
It is important to remember that the SRA also require law firms to assess and buy the ‘appropriate’ amount of PII for their practice. The minimum limits are just that, minimum limits.
Ask these questions to help gauge the level of PI insurance coverage your law firm requires:
1. What type of work does your practice do and what would the worst-case scenario be in the event of a claim?
2. What is the level of PII the firm has agreed with a client it will have? This should include both current and former clients. It should also include any past work undertaken.
3. What is the risk appetite of the practice and what is the minimum level you would be comfortable with?
How is my professional indemnity insurance premium calculated?
The main factors on which your PII premium will be calculated are:
- Type of work your firm does
- The level of fee income
- The firm’s claims history
- Risk management
For example, because conveyancing work is the single biggest source of claims for insurers, if your law firm does this work then the number of insurers willing to cover you will be lower and your PII premium will be higher. Equally, if you’ve had any claims in the past six-to-eight years then your choice of insurers will also be limited and your PII policy will be more expensive.
Additionally, the prevailing market conditions will also affect the cost of your insurance. Now, the market is ‘soft’, with insurers competing for business, pushing down the cost of premiums. But, a combination of factors, such as large claims and the withdrawal of some insurers, could quickly turn the market “hard” once more.
What is the professional indemnity insurance market?
The PI insurance market is made up of:
- Insurers – who pay the claims when things go wrong
- Brokers & MGA’s – who provide advice and access to insurance on behalf of clients
- The regulator – who prescribes the minimum levels of coverage
- And finally, the insured itself
The PII renewal process
The renewal process for PI insurance policies should be straightforward. It begins with a formal invitation from your PII provider inviting you to submit a proposal form for renewal, normally 90 days prior to renewal but no later than 60 days before renewal.
What happens if my law firm can’t get PI insurance?
Your PII policy provides certain protections if your solicitor’s practice is unable to secure new cover before the deadline:
Extended indemnity period
This provides 30 days automatic coverage by your renewal insurer if you do not have any alternative renewal terms.
If no alternative terms are available, then the policy will automatically provide a further 60 days coverage after the expiry of the extended indemnity period. However, you will not be able to take on any new instructions during this period.
Whilst your policy provides such protection, it should be viewed as an option of last resort.