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Insolvent Insurers - Where's the beef?

Insolvent Insurers - Where's the beef?

Background

It does seem an age since the demise of Quinn as a PII insurer in the open market for Solicitors in England and Wales, being one of the more recent entrants and exits from that competitive world.

It is for some a painful reminder that PII is truly a market and that the profession chose to move to an open market way back in 2000 as a replacement to the SIF. As we are seeing in the business and banking world, markets do fluctuate and not always for the better.

Sadly Quinn is not alone, as more recently the market experienced the arrival and remarkably rapid departure of Lemma. This is a stark warning that going outside the A rated market (whether directly or on the advice of your chosen PII or other broker) is not for the fainthearted.

Whilst A rated is no guarantee of absolute security, it does at least give credence to your stance that you want an insurer that will be there to stand by you in your hour of need.

Your choice

You will always want to be in control of choosing your insurance partner for what is one of the most important risk transfer mechanisms you have. There are various factors you must take into account when choosing that insurer but their security rating is one of the most important considerations you must make.

This is not new.  This should have always been a major factor but for many firms it has become less of a focus, even though its importance has never diminished.

In the same way a broker must disclose its earnings, insurers must now declare their security rating and it should be a question that you ask in the same breath as when asking for the price. As we know from the global challenges currently faced, ratings can and do change, not always for the better.

UK Plc being a recent example, it does however add to the nervous feeling for some. The same must be the case if you decide to or indeed are advised by your broker to insure with an unrated insurer.

Specialist brokers

Whilst you may ask your specialist PII broker for their advice on particular insurers, be aware that if that broker is tied to XYZ insurer or if they provide an execution only service, you risk that you will not receive fully independent (or indeed any) advice on this key metric in your selection and decision process.

Reputation protection - Yours not the insurers

Another factor for consideration is the reputational damage your insurer becoming insolvent can do. There are many readily recognisable insurers serving the legal profession with good security ratings and whilst there can be no guarantees against any insurer's security, eyebrows may be raised if the insurer you have chosen becomes insolvent and it comes to light that you were aware that they had no security rating. If that has been your chosen strategy, could it lead your clients to question your decision making?

Give me solutions not problems

So, the answer is that as spring, albeit brief and snowy, becomes summer, lawyers really must set out the best stall they can to present their firm in the best light. Some would say you need all your ducks in a row.

A specialist PII broker who works closely with the A rated insurers will be happy to advise you on the best strategy and how to implement it. For those firms that are already close to that broker as to their COLP COFA and active risk management programme, this will not be a large leap.

For others there is the time now to work on this to ensure you are not attracting the unnecessary attention of your regulator (RAG time) and to enable you to choose your existing A rated, or move to such a place in 2013.

Be aware that a serial insured, who hops around the market on each renewal, may find that the claims and circumstances record is less polished and boiler plate than you wish for. Your insolvent insurer can leave you, as the owners of the business, having to meet the claims without any risk transfer in place.

You become by default 'self insured'. That will put in sharp focus your financial strength and draw you to the attention of the SRA. The FSCS is not a magic solution.

FSCS and ARP - Last days?

There is no recourse to the ARP after 30 September 2013; however until then a firm may end up in the position where the only lifeboat is the ARP. That scenario is where your insurer becomes insolvent. That insurer is still the Qualifying Insurer (QI) in respect of the policy - it is just that if your firm notifies a claim, the insurer may not be able to pay the claim in full. Your firm becomes an unsecured creditor of that insurer.

 

In the 4 weeks after insolvency, until the insured law firm has replacement PII in place, any claims made are made on the insolvent insurer and, as such, the insured may face a huge shortfall.

Failure to replace the policy within 4 weeks is regulatory breach.

It must be remembered that claims are made against  the firm and not against the insurer.so what if this risk transfer mechanism collapses? What about the saviour that is the FSCS? How much of a shining light is it really?

The FSCS does have a scheme and all QIs are covered by it. There are specific limits for Solicitors and the rules are said by The Law Society to be 'complicated'.

They set limits as to financial levels for businesses and are summarised in the Practice Note at https://www.lawsociety.org.uk/advice/practice-notes/insolvent-qualifying-insurer.

For the purposes of this bulletin however in broad terms the limits are:

  • Partnerships - can claim if annual turnover does not exceed £1m and net assets do not exceed £1.4m
  • Corporates (including LLPs) - can claim if turnover does not exceed £1m, if they have either no more than 50 employees or a balance sheet net asset not exceeding £3.26m
  • Individuals - can bring a claim regardless of the figures<


The FSCS Compensation Limit is 90% of the total amount claimed. As can therefore be seen from this brief overview, the limits are low and probably mean that many firms simply cannot turn to the FSCS scheme even though all the QIs are covered by it.

The urgent advice from your specialist PII broker when an insurer goes in to run-off, is surely that in the 4 week period you must find a new QI, absent which currently it is either what is left of the ARP hospice/hospital, or closure of your firm and a concurrent exposure for the partners to meeting claims and facing regulatory action. You should expect your specialist PII broker to be available to you 24/7 in such circumstances as time is of the essence in moments like this.

Conclusions

If you feel you may be approaching the situation of having an insolvent insurer attached to you, we urge you to talk with  a specialist PII broker with alacrity. They will be able to advise you on the insurers in the market that are suitable for you to approach and the best way to ensure you are seen in the right light. Your claim and circumstance record needs careful review, especially with occurrences that are reserved but unresolved. Your broker can discuss with you how best to review this without waking sleeping dogs unnecessarily.

If your financial stability is in focus for you with your broker, you will be reflecting on the RAG metrics identified earlier in this bulletin, although hopefully you will already have worked on previous iterations of those within your own business, to avoid the financial precipice envisaged by the SRA. Whilst you may have currently sound relationships with your bankers, this is the time that those relationships may be tested. Your COLP and COFA should be umbillically connected to your management team in these crucial times.

Resources

www.sra.org.uk
www.lawsociety.org.uk/representation/campaigns/pii/
www.lawsociety.org.uk/advice/articles/pii-insurer-insolvency/
The Law Society - Practice Note - Insolvency of a qualifying insurer - 30 01 13
Law Gazette

For further information on this or for a discussion on how Wesleyan Active Risk Management can help your specific business:

Phone: 0800 107 8171

Email: PIIenquries@wesleyan.co.uk

This article is a general guide and is not a substitute for professional advice. No responsibility can be taken for any loss incurred by anyone acting or failing to act on the basis of this article.

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