The problem with reducing your indemnity limits

Coins in jar

We are in a hard market for Solicitors’ Professional Indemnity Insurance (PII). In recent months we have seen specialist insurers withdraw from writing Solicitors’ PII, while others are increasing their rates and limiting their appetite.

Many firms are experiencing significant premium increases on both their primary and excess layer (top-up) PII policies. If you only purchase the compulsory primary £2m or £3m cover, then reducing your limit is not an option. It is the purchase of excess layers above the primary limit where firms have a choice. It is in these layers that we are also seeing some significant increases in rate.  This may cause some firms to reflect on whether they can reduce their limit of indemnity to contain their PII spend.  We urge caution with this approach.  

There are various factors that you need to consider:

1. Clause 3.1 of the SRA Indemnity Insurance Rules requires that ‘you must take out and maintain professional indemnity insurance cover that is adequate and appropriate in respect of current or past practice, taking into account any alternative arrangements [you] or [your] clients may make.” Caution is needed to ensure that any reduction in your limit of indemnity still satisfies this requirement, as you could find yourself subject to regulatory action in the event of a shortfall.
2. The limit of indemnity covers both the claim and claimant costs. The latter can be considerable, particularly for any matters that proceed to a full defended hearing.  Seven-figure sums are not unheard of.  Be sure to take this element of the exposure into account when considering the level of cover you need.
3. Your policy is written on a “claims made” basis, so it is the limit of indemnity at the time the claim is made, or the circumstances notified, that will apply to a matter. If you have undertaken higher-quantum work in past years then you need to consider carefully whether you can now safely reduce your limit of indemnity – or whether potential limitation arguments mean your firm is still exposed and should continue to retain a higher level of cover.
4. Similarly, you need to consider whether you have agreed with a client to maintain cover at a specific level. If you have, then you could find yourself in breach of contract by reducing the limit.  The consequences of this could outweigh the savings achieved. 
5. While the primary cover is written on an “each and every claim” basis, there is an aggregation provision which means that in certain situations insurers can treat a group of related claims as one claim, and subject to one limit. While the situations where this happens are rare, you need to consider if the work you undertake is more exposed to the risk of multiple claims that could be subject to an aggregation argument.  In this situation consideration should be given to a higher limit of indemnity.

Howden is a specialist PII broker in the legal professions market. 

Our client base comprises over 650 legal services firms from sole practitioners to Top 100 firms. Given our size in the market we have a strong negotiating position with insurers, which we use to the best advantage of our clients. We have direct access to the majority of Participating Insurers with either exclusive or enhanced access to 5 “A” rated insurers.

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.

Written by Jenny Screech, Consultant, Howden PII. 

Find out more about our PII for the legal profession.