Legal Business Blogs

Increased scrutiny of finances by insurers as 185 firms fail to get PII by first cut off

Insurers are joining banks in upping their scrutiny of law firm finances in light of recent insolvencies as 185 law firms fail to obtain professional indemnity insurance (PII) by the 1 October deadline.

The Solicitors Regulation Authority (SRA) received applications for an extended indemnity period (EIP) from 185 law firms. Of those firms, ten have since secured cover, leaving 175 firms in need of PII before the end of the 90-day period afforded by the EIP.

If a firm fails to secure cover by this time, it must close. However, the failure to obtain insurance also has a more immediate impact, as after 30 days into the EIP a law firm may only work on existing instructions while it attempts to obtain a qualifying insurance policy.

The EIP was introduced by the SRA this year as one of a series of measures brought in since 2011 to improve financial protection arrangements. Before this, firms would apply to enter the Assigned Risks Pool (ARP), the last resort mutual insurer, with firms no longer afforded this safety blanket.

However, much like firms in the ARP, firms securing insurance in these later stages of the process are likely to find their premiums are considerably more expensive.

The renewals season has already seen increased expense and turbulence this year, particularly in the wake of the exit of unrated insurers Balva and Berliner from the market in June and September respectively.

Following the demise of Latvian underwriter Balva, which captured 7% of last year’s PII solicitors market, accounting for 1,300 firms in total, German-based Berliner was lined up to carry forward its PII book ahead of the 1 October renewal deadline.

However Berliner, which was reported to have collected around £20m in premiums, faced an uncertain future too as its managing agent Apro wrote to firms last month warning that it may not be able to underwrite any further solicitors business. Premiums already taken out are being held in a separate client account, with, aound 1,000 firms understood to have been affected, according to a Law Society statement.

According to global insurance broker Marsh, premiums for firms with good risk profiles continue to be relatively low despite these exits, as a result of capacity and competition in the market. But firms with a high proportion of current or historic conveyancing work are finding it tough, with some insurers refusing to underwrite new business for firms that have in excess of 30-35% conveyancing business.

Head of UK regulated professions at Marsh, John Kunzler, said of the renewal landscape for small and medium sized firms: ‘Underwriters are applying an increased level of scrutiny to the finances of smaller firms. This is due in part to the number of insolvencies in this space and the obligation for underwriters to provide run-off coverage for six years, regardless of whether they have been paid any premium.’

The move comes as banks have upped their lending criteria for law firms, including expecting to see proof of future strategy rather than just past performance.

Kunzler added: ‘The presence of unrated insurers in the small and medium-sized space is a worrying trend. Firms that choose to work with an unrated insurer and select their renewal on price alone are taking a gamble, as there may be no track record of financial stability or claims payment, should the worst happen.’