Unrated ban could hit firms hard

A move to ban unrated insurers could “spell the end” for many law firms, risk specialist Frank Maher has warned.

The Solicitors Regulation Authority is due to decide at its board meeting next month whether or not to ban unrated insurers from the legal professional indemnity market.

Small firms and those insured with unrated Latvian insurer Balva had a difficult time renewing insurance last October. More than one in eight of these firms linked their difficulties to insurers withdrawing from the market or “going bust”, according to the Law Society’s annual survey of solicitors’ experiences of professional indemnity insurance (PII) published last week.

However, despite increased awareness of the risks, unrated insurers increased their share of the market and now insure more than one in five firms. Overall, one in 20 firms was forced into the extended indemnity period last year.

Frank Maher, partner, Legal Risk, says: “While the Law Society has rightly drawn attention to the risks firms taken when buying unrated cover to save cost, it presupposes that they had the luxury of choice.

“Given the commercial challenges many firms face in this sector, I suspect many did not have that luxury. A decision to restrict cover to rated insurers only, while desirable on one level when you look at the turmoil caused by Balva and Berliner to name but two, could cause massive instability and spell the end for many small firms.

“What is not apparent from the survey is the large number of insurers who have been and gone since the end of Solicitors Indemnity Fund, probably more than in any other sector. That in turn is a symptom of their inability to make a profit out of the business. As I have said before, a root and branch review of the entire scheme is needed urgently.”

Alan Radford, chairman of the Law Society PII Committee, said: “The biggest uncertainty concerns the outcome of the SRA’s proposal to introduce mandatory ratings for participating insurers, which threatens to exacerbate instability in the solicitors PII market. Delays in announcing the outcome will make it difficult for insurers and firms to plan carefully for the next renewal and for the Law Society to advise firms how to use the market effectively.”