Industry News

Practice Note: Insolvency of a Participating Insurer

22 December 2016

Unfortunately, it is a sign of the times that insolvency of participating insurers is sufficiently prevalent, or the risk of it sufficiently real for many practices, that the Law Society has felt the need to issue a new Practice Note on the issue.

Hopefully, you will never be in the position of your practice’s professional indemnity insurer becoming insolvent and of it being more a case of knowing that such Law Society guidance exists, rather than having knowledge of its detail. However, the following key points may be worth knowing:

  • you are required to arrange a replacement policy of insurance upon your insurer becoming insolvent as soon as practicable or at the latest, within 4 weeks (unless the SRA has granted you a waiver). Not only would failure to do so be a regulatory breach, it is in your interests that you do so as a matter of urgency (obviously then cancelling the old policy to avoid additional issues relating to ‘double insurance’), as you risk being personally liable for any claims within that period. Also, any replacement policy will not be retrospective;
  • until a new policy is arranged, you are at risk of making payments in respect of the shortfall between the amount of a claim and the amount the insolvent insurer is able to meet.  There will inevitably be delays in relation to any claims involving the insolvent insurer;
  • principals of practices are jointly and severally liable, with sole practitioners personally liable, for any uninsured losses (in full or in respect of any shortfall);
  • in addition to the risk of having to make a payment in respect of uninsured losses, there is also the financial impact of having to pay an additional premium for the replacement insurance policy;
  • compensation may be available through the Financial Services Compensation Scheme, which aims to compensate retail customers and small businesses.  Sole practitioners/individuals are likely to receive some compensation, although legal practices will only be able to claim if their turnover is below the published thresholds, currently, £1 million.  As an unsecured creditor, it is unrealistic to expect very much from the insolvent insurer itself.

ACTION: the main message you should take away is the importance of satisfying yourself about the insolvency of your PI insurer before obtaining insurance and not selecting your insurer based solely on the amount of the premium: any particularly low premiums should be viewed circumspectly.  Refer to the Law Society’s guidance on insurers’ financial security and ratings of insurers published in 2014 (https://www.lawsociety.org.uk/support-services/advice/articles/pii-insurer-insolvency).

If you do have any concerns about your current insurer’s solvency or are notified that any preliminary steps have been taken by the company or its creditors in relation to your insurer’s solvency, you should review your position as soon as possible, including the cost, notice periods and other implications of terminating your PII policy and arranging a replacement policy.  At the very least, you should ensure you collate and update all necessary information to enable you to obtain some quotes and if necessary, put in place a new policy as a matter of urgency, if it progresses to insolvency.

Contact your insurance broker or LBS consultant if you require any assistance placing your insurance or if your insurer becomes insolvent.  


 

Ian Braithwaite
Client Relationship Manager

T: 0113 385 4483
M: 07432 695 289
E: ian.braithwaite@lbslegal.co.uk

For General Enquiries: Email enquiries@lbslegal.co.uk
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