Changes to Professional Indemnity Insurance arrangements - issues for lenders

Updated May 2011

The Solicitors Regulation Authority (SRA) has published proposals for changes to the Professional Indemnity Insurance (PII) for solicitors.

Of most concern to lenders are the proposals to remove:

• the obligation on insurers to meet the Assigned Risk Pool (ARP) liabilities of any other qualifying insurer becoming insolvent during the 2011/12 indemnity year, and
• the protection of the ARP altogether with effect from October 2013.

In consequence, lenders should review:

• their membership criteria for their solicitors' panels; and
• potential professional negligence claims.

The ARP may not meet part of claims before October 2013 and will meet no claim after this date.

What is ARP?

The ARP is designed to ensure that all firms of practising lawyers have indemnity insurance protection made available to them, for losses due to negligence and other faults.

What will happen to ARP?

The main proposal is to disband ARP from October 2013. Essentially, solicitors who are then unable to obtain PII cover in the market will have to close.

What will happen before October 2013?

Certain transitional arrangements will be made which will have the effect of reducing cover available for those firms who insure through the ARP. In summary:

• In the 2011/12 indemnity year insurers will not be required to meet ARP liabilities of other qualifying insurers who become insolvent. This could lead to only part of claims being met by the ARP.
• In the 2012/2013 indemnity year claims against firms which have no PII cover will be met by the Compensation Fund operated by the SRA rather than the ARP. Since grants under this Fund are discretionary there is a risk that lenders' claims will not be met.

What should lenders do?

You should immediately review your solicitors' panel arrangements (notably in relation to conveyancing work). The SRA reports that the majority of firms covered by the ARP tend to be smaller firms (three partners or less), with a significant proportion being from black and ethnic minorities based in major conurbations undertaking a limited category of business (often conveyancing). Inevitably, these firms are at risk of being unable to obtain PII cover in the future.

You should note that there is a wider review of conveyancing work done for lenders. It is assumed that this review is designed to reduce the risks to lenders in this area of work, but any changes will not be implemented before 2014.

Lenders should review their arrangements for examining cases where firms which are known to be insured through ARP have acted for the lender. There will be a limited period only (up to 90 days) for notifying claims after October 2013 in order to obtain indemnity protection.

What can we do to help?

We have considerable experience in indemnity insurance claims. We will be pleased to advise you further on any policy changes regarding your solicitors' panels arrangements and review potential professional negligence claims.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.