Professional indemnity insurance
The CILEx Regulation PII scheme
Mandeep Nagra describes CILEx Regulation’s professional indemnity insurance (PII) scheme.
The need for insurance PII covers our entities for civil liability claims arising from the work that they do in private legal practice. These claims most commonly involve professional negligence. PII also increases an entity’s financial security and serves an important public interest function.
PII ensures that consumers do not suffer loss which might otherwise be uncompensated. This is important in maintaining public confidence in the integrity and standing of entities regulated by us.
As part of the move towards becoming an entity regulator, it was essential for us to ensure that there were rules in place to require entities to have PII in place. In developing these rules, we issued a consultation seeking views on the best approach.1
We looked at two ways that entities regulated by us could find cover: through the open market, as is the case for solicitors’ firms, or through a master policy, as is used by the Council for Licensed Conveyancers. We sounded out the insurance market, with the help of our broker, Marsh. We held meetings with insurers to understand what their reaction to our regulatory model would be and, in particular, our approach to risk and competency-based authorisation.
We found that authorising entities on both a risk and a competency basis was received positively by insurers. Insurers advised us that in the past they had encountered problems with legal entities ‘dabbling’ in risky areas in which they were not competent.
The feedback from the consultation and insurance sector led us to go down the route of open market insurance. The research supported our view that this was the best way to ensure competitive rates for our entities.
The open market option requires that the PII provided must be, at the very least, equivalent to the agreed minimum terms prescribed by us. This makes sure that all of our entities are insured to the same level of cover and consumers have the same level of protection.
Our compulsory PII is broadly similar to that of the Solicitors Regulation Authority (SRA), starting with a minimum of £2 million cover. Insurers will also have to provide an extended indemnity period, so if an insurer decides not to reinsure an entity it will have 30 days in which it can continue to practise while it seeks alternative qualifying insurance. If it is unsuccessful, the entity will have 60 days during which it can only work in connection with existing instructions before it must close.
The choice of insurers is restricted to ‘qualifying insurers’ , who have committed themselves to the terms of the CILEx Qualifying Insurers’ Agreement. This agreement obligates insurers to abide by minimum terms and conditions prescribed by us. We currently have 10 qualifying insurers. A list of these insurers can be found on our website, which is updated regularly.
We have worked hard to make the process of obtaining insurance easier for entities regulated by us. We have, in unison with Marsh and qualifying insurers, produced a single proposal form. All of our listed qualifying insurers should provide entities with a quote for insurance from this single proposal form. This will save entities and their brokers having to fill in numerous application forms. The insurance form can be found on our website.2 Another key difference is that entities regulated by us will only be able to seek PII from qualifying insurers with a credit rating of B+ or above.
At the time of coming up with our scheme, we were aware of dramatic insurance failures such as Quinn in 2010, Lemma in 2012, and Balva in 2013. When Balva became insolvent, it held a market share of nine per cent of SRA-regulated law firms leaving around 1,300 legal practices fumbling to find alternative cover. We listened to stakeholders and felt that unrated insurers posed a risk, which, if it materialised, would ultimately have to be picked up by our entities. We were not prepared to subject our entities to this risk.
Also, to avoid a scrum to obtain insurance, we introduced a flexible renewal date. We felt that a flexible renewal date would create a less congested market and allow insurers more time to take a look at individual entities and negotiate pricing.
PII, as with all other insurance, is ultimately about risk. Underwriters are looking at the claims record, financial stability and management of a business. They want to know that an entity is run effectively, with decisions being made for the benefit of the business and not just because an insurer demands it. We understand these concerns, and ultimately carry out our own risk assessment of our entities to ensure that they have in place procedures to manage their practice.
Prior to receiving authorisation from us, we will require an entity to demonstrate that they have or are obtaining a policy of insurance. Where an entity is awaiting PII cover, we will issue the entity with provisional authorisation. This will highlight to insurers that the entity has gone through our risk assessment process and will be authorised by us as soon as they get PII in place. Provisional authorisation does not enable an entity to provide legal services until they have obtained PII cover.
When the PII cover is in place, we will issue the entity with an authorisation certificate. An entity is unable to practise until it has this authorisation certificate. Unless an entity has a waiver from us, PII must be maintained throughout the lifetime of an entity’s authorisation with us. Our PII scheme rules can be found on our website along with our guide on how to obtain PII.3