SRA proposes major changes to insurance arrangements

SRA proposes major changes to insurance arrangements

The SRA has published a number of proposals as to how it will could deal with issues relating to professional indemnity insurance (PII).

The proposals include:

  • removing the single renewal date for PII for firms from October 2011, so that they can renew cover at any time of the year,
  • ending mandatory cover for work done for financial institutions, and
  • reducing the time firms can stay in the Assigned Risks Pool (ARP) from 12 to six months.

The proposals, which are set out in a consultation paper published yesterday, follow a comprehensive independent review of client financial protection arrangements.

Commenting on the proposals, SRA Chief Executive Antony Townsend said:

“Although the current insurance arrangements provide excellent financial protection for clients, there is a widespread acknowledgment that they create an annual crisis for many law firms at renewal time, that they are not sufficiently focused on the particular risks of each firm’s practice, and that they are not fit for purpose for the changing legal services market.

“We believe that the changes proposed for 2011 will bring benefits for firms, helping more to obtain open-market insurance by abolishing the single renewal date?which causes problems for firms and insurers alike?and giving more flexibility over what cover is required. These proposed changes, coupled with further tightening of our management of the assigned risks pool, will reduce risks and costs while maintaining client protection.

“For the longer term, we set out our views on what the regulator’s role should be, in terms of regulating in the public interest, to ensure there is sound client protection for those who need it.

“These are potentially significant changes to the financial protection arrangements and it is vital that we get views from all parts of the profession, consumer representatives, insurers, and other stakeholders. Please respond to our consultation paper.”

The key changes proposed for October 2011 are:

  • removing the restriction of the single renewal date. Firms would have freedom to renew their PII cover at any time they wished;
  • permitting the exclusion of cover for claims arising from work done for financial institutions from the minimum terms and conditions. This would mean cover for work undertaken for financial institutions conducted on or after 1 October 2011 would not be a regulatory requirement, although firms and insurers would be free to arrange cover if they wished;
  • limiting the amount of time a firm can stay in the ARP to six months, and to require firms entering the ARP to create and implement a robust and credible plan, to be reviewed by the SRA, that will either address the underlying reasons why cover was not obtained on the open market so that open-market cover can then be obtained, or will enable the firm to close in an orderly fashion within the six-month period;
  • clarifying the requirements on insurers to provide information to the SRA regarding firms that fail to pay their premiums or that insurers believe may have misrepresented information, enabling the regulator to deal promptly with risks.

whilst further options for discussion for October 2012 or beyond include:

  • permitting additional exclusions of corporate clients from the minimum terms and conditions, over and above the proposed exclusion of financial institutions;
  • changing the role of the ARP, possibly by ending its role as a provider of policies of qualifying insurance completely, and so limiting its role to the provider of client protection to firms that do not have PII. This would mean any firm that failed to obtain insurance from the open market would be required to close;
  • altering the way in which the ARP shortfall is funded by considering either a direct levy on the profession or a levy as a percentage of insurance premiums;
  • considering whether the functions of the ARP that remain and those of the Compensation Fund could be combined into the Compensation Fund;
  • considering whether insurers should be able to cancel policies for non-payment of premiums or for fraud or misrepresentation in information provided by the firm to the insurer (in which case financial protection for clients would be provided by the Compensation Fund or the ARP);
  • considering changes to the mechanism for funding the Compensation Fund.

Full details can be found in the consultation paper Future client financial protection arrangements which can be found on the SRA web site at www.sra.org.uk/sra/consultations/client-financial-protection-arrangements.page.

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