Planning a new law firm or ABS?
Published: Monday, 12 July 2021
What insurance do I need?
In order to obtain your SRA authorisation, you'll need a quote for Professional Indemnity Insurance.
This may be the first time you've had to arrange professional indemnity insurance so here's a quick overview of some key terms:
Professional Indemnity Insurance (PI) protects you against claims for shortcomings in your professional services. PI is a requirement for authorisation with the SRA, who insist that Qualifying Insurers offer policies with a specific minimum wording and features.
You need the following limits of indemnity to meet SRA requirements:
- Sole practitioners and partnerships - £2m any one claim
- LLP’s and Limited companies - £3m any one claim
Will this level of cover be enough?
Not necessarily. Meeting the SRA’s rules is a tick in the box, but the level of cover you need to protect you against possible claims will depend on the types of work you perform, and the consequences of getting things wrong.
The level of cover appropriate to your needs should come from your risk assessment.
What is ‘Aggregation’ and what does it mean for you?
The small print of policies entitles Insurers to treat a series of claims from different claimants that arise from a single cause or source as one claim under the policy. This means that only one limit of indemnity (and possibly excess) could apply to a large group of claims.
This may not be an issue for all firms, but where standardised processes are involved (e.g. conveyancing or personal injury) a defect in the system might result in multiple claimants.
You need to make sure the limit of cover will be adequate for these scenarios.
The PII policy provides ‘claims made’ cover – what is this?
A live policy needs to be in place at the time you become aware of the possible claim even though the cause may have occurred years before. The policy cover claims made during the policy period.
When the matter is notified to Insurers, any resulting claim is covered to the extent of the policy limits in place at the time of notification, even if takes years to resolve.
Each year you trade, the amount of past work that might produce a claim grows.
Once a policy has expired, it must be replaced by another to maintain continuous protection until the business is closed or sold and passed to a successor practice, who will then take responsibility for future cover.
The policy wording that Insurers are obliged to provide by the SRA includes an automatic 6 year run-off provision so Insurers providing cover when the firm closes continue to cover for claims that occur after the firm no longer exists.
Can I buy a policy online?
Insurers rarely offer solicitor PI online as it is a complex risk and more information is needed to for a underwriter to evaluate that risk.
Professional Indemnity for law firms is expensive with pitfalls for the unwary, and a time-consuming processes.
Obtaining PI cover for new firms is not always straightforward, and we recommend investigating this in the early stages of planning your new practice. Typically we'd expect Insurers to quote within a few weeks but this can vary depending on underwriter availability. Your business plan should address areas such as compliance, client acquisition, projected work split including an appreciation of the risks involved and how you will mitigate them, and finally cashflow. The SRA prescribes that all law firms have run off cover for 6 years after they have ceased trading. If a firm becomes insolvent, the insurer must still provide the run-off cover, despite not receiving any premiums to do so. In addition, certain work profiles e.g. conveyancing are more likely to receive claims so Insurers need to understand the proposed work split.
We are always happy to explain the options, how the process works, what information you need and how to maximise your chances of obtaining an affordable quotation for PII cover, in the strictest confidence and free of charge.
Legal Compliance Support and Guidance
Another challenge for new start practices is keeping up with current guidance, including maintaining and evidencing your compliance activities - all things that can take you away from billable work.
We recommend contacting our highly regarded legal compliance partners, Jonathon Bray, who can provide new starts, like you, with the specialist help they need. They can also help to ensure that you have set up your firm in the best way right from the start.
We do not earn any commission or fees from this referral, we have worked with Jonathon Bray Limited over a number of years and value their professionalism and approach to client service.