Extended Policy Period: A “safety net” for law firms – or is it?

The insurance market is now open for the 1 October renewal of solicitors’ professional indemnity insurance (PII). The combination of a hard market and Covid-19 means this is a challenging renewal for a number of firms.

Premiums are higher, proposal forms are longer and insurers’ appetite for new business is limited, meaning that it can be difficult to get a competitor quote if you don’t like the terms from your current insurer. Financing for your premium could also be more demanding, with some premium funders producing their own questionnaires for completion. The clock is ticking and it is important that firms understand what will happen if they run out of time.

What happens if a firm does not complete its PII renewal in time?

Firms that have been unable to renew their PII before expiry of their current policy will be covered under the Extended Policy Period (EPP). Cover continues to be provided by your existing insurer and you can operate your practice on a “business as usual” basis for 30 days. If you still do not have insurance at the end of the 30-day period then you move into the “Cessation Period” (CP). The CP is a 60-day period during which your insurer must again continue to cover the firm. In the CP, the firm cannot accept any new instructions, but you can continue to work on existing files as you prepare to close the firm at the end of the 60 days, in the event that you are still unable to secure PII.

In May this year the SRA also announced that it would consider a waiver to enable firms to extend the length of the EPP and CP to a total of 180 days, in the event that they had not been able to secure PII due to practical difficulties associated with Covid-19[1]. However there was little detail regarding how the arrangement would work. It was also subject to insurer’s consent and it would therefore be unwise for firms to rely on the availability of this further extension. Upon closure the firm will need to pay for run-off cover in accordance with the terms of the policy.

The risks of using the EPP and CP

In theory the EPP and CP sound like an easy and straightforward way for a firm to secure some extra time for renewal, but there are aspects of the EPP and CP that can have serious implications for your firm. It is important that you are aware of the following risks:

• Any claims or circumstances notified during the EPP or CP would be notified to your current insurer, but the SRA Indemnity Insurance Rules require any PII you eventually secure to be backdated to the expiry of your last policy. Under this arrangement the notifications would then become the responsibility of your new insurer and you would have an obligation to disclose them prior to inception of the policy. This will undoubtedly cause your prospective new insurer to pause and you could find that terms are withdrawn or premium is increased.
• Under the SRA Indemnity Insurance Rules a firm must notify its insurer and, more importantly, the SRA “as soon as reasonably practicable and in no event later than five (5) business days” of entering the EPP. You really do not want to attract the attention of your regulator in this way.
• Many PII proposal forms ask whether a firm has ever been in the EPP or CP.  If you have, then you will need to disclose this in response to the appropriate question on future proposal forms. It is never a helpful start to attracting a new insurer.

Is there an alternative?

In some instances an insurer will agree to formally extend your policy expiry date upon payment of additional premium. In this scenario any replacement insurance will apply from the revised expiry date and you will avoid the risks discussed above. However, as with most problems, prevention is better than cure. Our advice is as follows:

• If you have yet to complete and submit your PII proposal form, attend to this as a priority. The entire future of your firm depends upon your PII renewal.
• If you have lost contact (or faith) with your current PII provider, find a new one as a matter of urgency.
• Maintain regular contact with your broker/insurer so you are not caught out by any breakdown in communications when you need them most.
• Remember that most insurers require receipt of funds or confirmation of finance arrangements in order to confirm cover. Do not leave your premium finance arrangements too late. Expect finance to be more difficult and time-consuming to secure this year.
• If possible, make sure that renewal of your PII is overseen by at least two of your employees, so that there is someone to take over in the event of illness of the other.

We invite you to contact us if you have any queries in relation to this bulletin or would like to discuss PII and related insurance products for your firm. Please call Neil Pointon on 03333 314715 or email [email protected].