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2 July, 2021
This has been an extraordinarily challenging professional indemnity insurance (PII) renewal period for CLC-regulated firms. This is in the context of a hardened insurance market which is affecting the sector as a whole.
Aside from the pressures imposed by Covid and Brexit, insurers continue to be under pressure to improve profitability. Insurers also have concerns about the potential for claims arising from the very busy period created by the SDLT holiday.
With the passing of the deadline for renewal, it is important to examine what has happened in the CLC PII market and to learn the lessons from it.
We hope that, after reading this piece, practices, insurers and others with insight and expertise will respond to our Call for Evidence on the operation of PII. That will shape a review over the summer and a formal consultation in the autumn.
Sadly, six practices have not been able to secure cover and have been forced to close. A common theme in all the practices that closed was that they had an elevated risk profile due to the type of work that they did.
These practices were either unable to obtain any quotes or their usual insurer only provided quotes that were not compliant with the CLC’s Participating Insurers Agreement (PIA). These included very high excesses for claims in respect of buyer-funded development or the exclusion of that type of work and an additional payment for run-off, rather than run-off being integrated. Those excesses were so high that there was significant doubt about the practices’ ability to meet them in the event of claims. We will return to these points later.
The PIA was launched in 2016 when the CLC moved away from a Master Policy scheme to an open market for PII. As the regulator, it is the CLC’s role to set the minimum terms of insurance and to set out the regulatory requirement that mitigates the risk of inadequate cover. It is for insurers who have signed up to the PIA to ensure that their quoted terms meet the standards with the market to deliver cover through competitively priced policies.
The PIA and the Minimum Terms and Conditions for PII that it sets out have not changed in that time. They provide comprehensive protection for clients and practices and feature integrated run-off cover in the event of practice closure.
Thanks to our close work with CLC-regulated conveyancing and probate practices, we know that the vast majority of them had submitted at least one, and generally more, proposal forms to insurance brokers well before the beginning of June. Despite that, insurers only began issuing quotes in the second half of the month, with the bulk appearing in the last full week of the month. This does not support a competitive market in PII, and it is one of the major issues that we will address in our review.
Most significantly, two insurers issued quotes which they acknowledged were not compliant with the PIA they had signed up to. In a better functioning market and in a year when all insurers felt able to take on new business, this would not be a great concern, as practices could simply look elsewhere. But in a very hard market, this caused considerable difficulties and huge anxiety for the affected practices.
Some were able to secure cover elsewhere at the last moment. However, a small number were not and the CLC has taken special measures in relation to a small number of those practices who were able to meet stringent conditions and did not carry a portfolio of the high-risk work.
Those measures include practices lodging funds in escrow to fund the purchase of run-off cover should it be required during the year, the CLC stress-testing firms’ ability to pay elevated excesses and requiring set-aside of cash provision, and undertakings from practices not to carry out certain types of work and not to have done so in the past.
These further CLC measures on top of their PII cover to ensure that, taken together, the practices’ arrangements meet the Minimum Terms and Conditions in full. Thus, those businesses will be able to continue to operate and their clients will enjoy the same protections as before. It is of course deeply regrettable that could not be extended to every practice that found itself in this position.
The role of the CLC as regulator is to set and maintain standards of practice and consumer protection. When firms were forced to choose between either closing immediately – which would present risks to clients as well as being a terrible step for those businesses and their employees – or taking out inadequate insurance, the CLC had to step in.
This is a step that the CLC has taken reluctantly and carefully. Depending on circumstances, different practices will have been required to take different steps, but the outcome is consistent: to ensure that all firms have arrangements in place that deliver the levels of client protection set out in our Minimum Terms and Conditions for PII.
This is a one-off intervention in response to extraordinary circumstances which approach a market failure. The only alternative would have been an additional Compensation Fund levy on all CLC-regulated practices to provision against the increased risk presented by the PII terms not being met by that small number of policies. That would not be acceptable.
The 2022 renewal round will take place on a revised basis. That will be shaped between now and the end of 2021 and we urge you to join us in that work.