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Lemma policies officially cancelled – the importance of a PII insurer’s financial security.

pii-insurer-insolvency

TLS policy position

The Law Society is increasingly concerned about the number of solicitors relying on unrated insurers, particularly in the 2012-13 renewal, where there was increased availability of rated insurers within the market. This suggests both that, in some fundamental respects, the market in its current form is not working for a segment of the profession and that a proportion of firms continue to make a purchasing decision based purely on price.   

In light of the recent insolvency of Lemma, we will continue to emphasise the importance of an insurer’s financial security when selecting a PII provider within our member guidance and the Society will conduct a strengthened awareness campaign. We also consider that the Solicitors Regulation Authority should take measures to address the systemic risk of insurer failure, which poses a significant future threat to firm viability and client protection.  

Financial security message from TLS 

There is a common misconception that ‘qualifying insurers’ are vetted by the Solicitors Regulation Authority (SRA) in some way. This is not the case.

The SRA does not undertake any solvency checks and does not require a minimum level of financial security from insurers who participate in the solicitors’ PII market. For this reason, the Law Society has asked the SRA to change the name to ‘participating insurers’.

The recent financial collapse of two insurers, Quinn and Lemma, should make solicitors think twice between accepting a quote without checking an insurer’s financial stability.

The most objective measure of a firm’s financial security is their rating. The existence of a rating is indication that the firm has been assessed by an independent rating agency. It is not a guarantee of solvency, but at least it provides an indication.

Unrated insurers are an unknown quantity. They have not been subject to independent scrutiny from a ratings agency. Are you content to make one of the most important purchasing decisions for your practice blindfolded? If not, then you should consider the financial status and viability of your insurer.

The Law Society strongly advises its members to think about the true cost of ‘cheap’ insurance. If your insurer is unable to meet its obligations, there will be a high price to pay.

You may end up paying more

If your current insurer becomes insolvent in the middle of your policy term, you must find alternative cover within 4 weeks.

This will require you to pay double premium, that is a further premium to a new insurer.

Your new premium may be higher than your previous one, so you may end up paying more than double the cost of that ‘cheap’ quote.

You may have to close your practice

If your insurer becomes insolvent after 1 October 2013 and you cannot obtain alternative cover within 4 weeks, you will have to cease practice.

For this reason, the financial security of your firm’s insurer should be a matter of importance for everyone within the firm, not just partners or the person who deals with professional indemnity insurance (PII) for the firm.

You may have no insurance to pay or defend claims

In the unfortunate event that a claim is made against your firm, you will need an insurer with sufficient resources to rigorously defend it. If your insurer is in administration, claims handling will, at best, suffer delays. There is also a high probability that your outstanding claim will not be met in full.

The SRA relies on the availability of the Financial Services Compensation Scheme (FSCS) to provide protection against uninsured loss. The FSCS only covers small businesses and does not pay the entire claim.

Practices that are not eligible for protection could find themselves wholly uninsured.

You may have to pay a claim out of your own pocket

Depending on your firm’s business structure, uninsured loss can have devastating personal consequences. Principals of a partnership are jointly and severally, and sole practitioners are personally, liable for uninsured losses.

This can lead to bankruptcy and closure of your practice.

For further real life case examples, see the Law Society’s guide to the importance of insurer solvency.

But my insurer is not likely to become insolvent, how does this affect me?

The profession will ultimately pay if a PII insurer with a large number of policyholders becomes insolvent. There is likely reputational damage if clients with valid claims against firms are not compensated.

The Irish Compensation Fund which is meeting claims arising out of Quinn’s failure, has paid out €1,058 million (as at 15 December 2012). Given the high level of claims, there is now a 2% levy imposed on all insurance policies.

The UK equivalent, the FSCS, is funded by FSA-regulated entities. Your insurer will pay a levy towards this scheme. If there are substantial amounts levied, insurers may pass these costs onto policyholders, which may impact on premiums.

 

 

 

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