Closure through inability to obtain Professional Indemnity insurance (PII)
In this article, written by solicitor Richard Nelson, we outline some of the key issues to consider if you're facing difficulty in obtaining PII insurance.
For the last two or three years it has been increasingly difficult to obtain PII and this year promised to be the hardest yet.
Many insurers have either dropped out of the market altogether, declined to cover some work types, or decided not to take new business meaning that solicitors are hostage to the quotes of their existing insurers.
There has always been a weighting based on work type but this year many underwriters are refusing to cover residential conveyancing and are looking very hard at personal injury firms.
The result is that many firms who wish to continue will not be able to find insurance cover and will be forced either to merge sell or to close. Others may find the price hike unacceptable particularly as it increases the run off cost if the firm has to close subsequently.
Closure for this reason will have the same consequences as those mentioned above but there are one or two features which may be more relevant in these circumstances.
The Principal(s) may not have anticipated the need to close and so will probably not have taken any preparatory steps and will need to arrange the closure in the very short period between realisation and the end of their insurance period.
For those that find themselves without insurance there is the possibility to extend their current policy by up to 3 months to enable them to make further enquiries of the wider market. This extension will be at a cost pro rata to their last premium and for the first month of the extension they will be entitled to practise as normal, accepting new cases and providing advice.
For the second month they will not be entitled to take new cases but will be able to work on those cases which had been opened by the last day of the first month of the extension. At the end of the second month they must cease to undertake any casework and must focus on the administrative issues surrounding the closure of the practice.
At the end of the three month extension they must take run off cover. Needless to say if they find alternative insurance during three months they can move over to the new policy and practise as normal.
"This is a time to look at the prospects of the firm and its forecasted profitability. Can the firm thrive sufficiently to provide security and required rewards? What are and will be the staffing requirements and liabilities? Are you able to recruit as well as generate sufficient levels of work?"
One thing that it is sensible to take into account is the cost of the insurance and the risk that at the end of that period similar difficulties may arise at a higher exit cost.
Although it seems to be a negative approach when considering whether to close or to accept insurance at a higher premium one should take account of the fact that as the run-off cover premium is a multiple of the last year’s premium, a higher premium means a higher run-off payment on closure. The multiple for run off is between 2.5 and 3.5 times the annual premium although this can be negotiable.
Examples exist of small firms who have accepted renewal at double the cost of the previous insurance resulting in a run-off commitment well into six figures and double the size of the previous commitment.
Be aware that the numbers may not stack up if the reality is that you will not be able to renew at the end of the next year. This may mean you should grasp the nettle now.
If you decide not to continue you may wish to look for a merger partner or a successor practice or look to sell the goodwill of the practice.
If you conclude that you must close the other notes in this series set out relevant matters to consider and steps to take.
Richard Nelson is a solicitor in private practice at Richard Nelson LLP specialising in solicitors disciplinary, regulatory and practice management matters. He is a member of the Solicitors Assistance Scheme and the Regulatory Processes Committee of The Law Society. Any comments made or views expressed are his own and not those of or on behalf of any other organisation or party.
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