How to decide on the appropriate level of professional indemnity insurance (PII) for your law firm

June 2024

Deciding on the appropriate level of professional indemnity insurance to purchase for your law firm can be a complex process and include a variety of factors.

What is required by the Solicitors Regulation Authority (SRA)?

Before delving into the factors for consideration, it’s important to recap on the Solicitors Regulation Authority (SRA) requirements.

Rule 3.1 of the SRA Indemnity Insurance Rules states: “an authorised body must take out and maintain professional indemnity insurance that provides adequate and appropriate cover in respect of current or past practice taking into account any alternative arrangements the body or its clients may make.”

Law firms must have the compulsory primary £2m or £3m of cover required by the SRA’s Minimum Terms and Conditions (MTCs), but whether any additional cover provided by an “excess layer” is required is for the firm to decide. PII operates on a 'claims made' basis, which means that it is the policy in force when the claim or circumstance is first notified that will respond, not the cover in force when the work was undertaken. This is particularly relevant if a firm chooses to reduce its limit of indemnity as the lower limit would apply to all future claims.

Assessing what is “adequate and appropriate”

What is deemed ‘adequate and appropriate’ regarding level of cover will differ from one law firm to the next and depend upon your individual business and circumstances.

Within its Practice Note on Adequate and Appropriate Indemnity Insurance, the SRA advises that “they will want to see evidence that you have made a reasonable and rational assessment of the appropriate level and wider terms of professional indemnity insurance cover required.” They go on to say, “if a firm or individual can demonstrate to our satisfaction that they made an assessment, which includes consideration of any relevant factors listed in this guidance, and reached a reasonable and rational decision as to the appropriate level and wider terms of professional indemnity insurance cover, then we would not second guess that decision or take action for breach of this requirement.” Therefore, it is crucial that you can demonstrate that you have undertaken a ‘reasonable and rational’ assessment, which is reviewed throughout the year and at each renewal.

These are the considerations that are listed in the SRA Practice Note:

Your client profile
The number and type of client matters
The value of engagements you undertake each year
An estimate of the probable maximum loss for each type of work undertaken (in most cases it is unlikely that the loss, and your potential liability for it, will be the full value of any underlying transaction or asset)
Your historical claims experience
What alternative arrangements you or your clients may make to cover potential losses
In the case of an SRA authorised body, the level of additional cover in place (called top up or excess layer cover) above the minimum requirement and the extent and level of any cap on your liability to clients that you impose above that requirement
The extent to which the information provided to clients about insurance cover is transparent and appropriate to their needs. In the case of an authorised body, it may sometimes be appropriate, for example, for clients to accept risk above any SRA minimum level of cover, but this should be based on sufficient information being provided to enable them to make an informed decision to do so.

Whilst the SRA list is reasonably comprehensive, we advise that you should also take the following into consideration before making any decision:

Aggregation: Although the professional indemnity insurance operates on an 'any one claim' basis, there is a clause within the wording relating to aggregation. This allows insurers to categorize a series of related claims as a single claim and therefore subject to a single limit. If your work is more susceptible to multiple claims that could be aggregated, it would be sensible to consider higher indemnity limits.
Claimants costs: Ensure the cover offers adequate protection to cover both the claim and the claimant solicitors costs. Costs can be considerable and whilst defence costs are payable in addition to the limit of indemnity, claimants costs form a part of the claim payment borne by Insurers subject to the excess and can exceed the actual value of the claim. It is therefore important that you factor this in.
Historic work: There needs to be ongoing consideration of historic work. If you have increased your cover previously to take on a high value piece of work you need to carry out a risk assessment to ensure that it is appropriate for you to reduce your cover. Furthermore, it would be prudent to carry out a firm-wide matter and client risk assessment to ensure that the level of cover remains adequate for work concluded previously.
High value case: As stated in the SRA Practice Note, it is unlikely that the loss, and your potential liability for it, will be the full value of any underlying transaction or asset. However, you may be presented with a situation where a client wants to instruct the firm in a transaction where the value exceeds your limit of indemnity. Caution is required in this situation and you need to document your assessment including your discussions with the client. Contact Miller to discuss. We can provide you with indicative costs for any additional cover required, and discuss the risks around the particular piece of work. It is often helpful to moot these points and our team is happy to help. Note that if you increase your limit of indemnity for a particular transaction this will need to be maintained until you are satisfied that the limitation date for bringing any claim arising out of the work has passed.
Contractual obligations: Reflect on whether you have any contractual obligations with clients to have a specific level of cover. If such agreements exist, reducing the coverage limit could result in a breach of contract.
Inflation & value of assets: Whilst this is impossible to predict with any certainty it is worth factoring this into your decision-making process. The value of estates and assets within tends to increase in value year after year.
Statutory interest: PI claims usually include an amount for statutory interest on the loss therefore always leave yourself some wriggle room and work on a worst-case scenario plus a buffer. Interest accrued over a long period of time can be substantial so when considering what you could be sued for make sure you include interest on top.

Our advice would be to review your PI cover regularly to ensure it meets your requirements, both in respect of limit of indemnity and breadth of cover. Remember, it's not just about having insurance, but having the right level of insurance!

If you would like to discuss any points covered in this article, or anything connected to your PII policy, please get in touch.