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SELECT YOUR INSURER WITH CARE

The ‘claims made' nature of Professional Indemnity insurance makes it essential to have an insurer of substance able to write a settlement cheque when the claim is resolved perhaps years after the initial notification. The consequences of being insured by a company that fails can be dire. With many firms looking at merging at present the importance of having reliable insurance cover for the legacy work of the past is even greater.

Insurer insolvency

Brokers do not guarantee the solvency of an Insurer. Intermediaries focused on making a 'sale' will often place cover with risk carriers whose ability to support 'long tail' liability insurance is questionable.

Law Society approval

Being on the ‘approved' list of insurers does not mean that the Law Society or the SRA is making a judgement about the insurers' fitness. Any Insurer prepared to meet the threshold criteria can become 'approved'.

If your insurer becomes insolvent

For firms (sole practioners and partnerships only) with a turnover of up to £1,000,000 there is some protection available (90% recovery) from the Financial Services Compensation Scheme. For any firm with a turnover of more than £1,000,000 or LLPs and Limited Companies there is no recourse to the FSCS, leaving principals personally exposed.

To add further concern, in addition to raising doubts over whether ongoing notified claims will be paid, the firm will have to buy further cover from a market where insurer insolvency could well be a catalyst for significant hardening. Quinn's departure from the solicitors PII market provoked a significant and adverse rating reaction from many other 'approved Insurers'.

If your Insurer withdraws from the market for solicitors' professional indemnity

This can be as tricky as an insurer insolvency, in that once the insurer withdraws from professional indemnity (or any other line of business), claims handling is no longer the 'shop window'. Strategy then usually moves to one of exit at the cheapest possible cost.

If you are looking to sell or merge

Arranging run-off cover for the work of the past will need to be considered. The acquiring firm may want to avoid becoming a successor practice leaving the legacy risk ring fenced into a run-off policy.

The security of the insurer carrying the run-off risk will certainly be of interest in any due diligence.

Starting to assess insurer security

Credit ratings may be a helpful place to start, with greater financial security being offered by those with the higher ratings. Four approved insurers carry a rating of AA- or above but recent global financial turmoil has raised questions about the entire credit rating process.  Concerns over whether it was appropriate for the SRA to allow Quinn to continue to be an approved Insurer, despite the fact that they carried no credit rating at all, could be proved to be entirely justified following Quinn's administration.

Most ‘thought leader' specialist brokers provide general advice from their own assessment of insurers but this is driven largely by credit ratings and not even global brokers guarantee insurers financial wellbeing. Nevertheless you should always seek the views of an informed specialist on the security of any insurer you have in mind and question the basis upon which the broker has reached this conclusion.

E Mail solicitors@ntegrity.co.uk