The Solicitors Regulation Authority (SRA) has responded angrily to plans put forward by the Legal Services Board (LBS) to cut the minimum level of insurance cover which insurance companies must have from £2 million to just £500,000.
Compensation Cover Limits
According to the SRA, the current £2 million level of cover does not differentiate between law firms who are structured as a limited liability or as a partnership, and the level of cover figure was just plucked out of the air many years ago. The SRA feels that the cover limits have not kept pace with developments in the legal marketplace, and that there is no real evidence that such high levels of cover are actually necessary.
Paul Philip, chief executive of the SRA, wrote a letter stating his position to Chris Kenny, his opposite number at the LSB. Mr Philip stated that for smaller legal firms who specialise in offer advice on immigration or consumer issues, even cover of £500,000 is going to be far more than they will ever need. Mr Philip argues that by insisting such companies pay for insurance covering them for up to as much as £3million, this is placing restrictions on the way the company goes about their business and puts their customers at a disadvantage.
The LSB has recently announced that it will not make any decision on proposed cuts to the minimum level of insurance cover until August 2015, meaning that legal firms renewing their policies in the autumn of 2015 will have to pay for the highest levels of cover. The announcement was made as part of a warning notice which the LSB issued to the Law Society, saying it was thinking about whether to refuse in part the plans.
The SRA is also opposed to any suggestion that the level of cover be set at an arbitrary limit of £500,000 and are worried about the increasing financial burdens experienced by some legal firms. The SRA believes that the cover levels should be set at the lowest amount possible, taking into account the circumstances of most customers. Arriving at the correct level of compensation is both a judgement call and a balancing act.
The SRA believes that the figure of £500,000 is a compromise which has been arrived at taking into account best practice and the available evidence, and the figure was arrived at without a complete picture of what is going on. Mr Philip also said that the SRA had been in touch with many insurers who stated that they expect to see prices for cover decrease in the future, and there would be basic cover available as well as top-ups to policies for companies doing higher value work.
Since the SRA asked for the rules to be changed in July, they have had some additional information which supports their claims. A leading indemnity insurer went on record to state it would offer cover at levels less than £2 million for cheaper premiums.
The SRA believes that £500,000 may well be appropriate for one sector of the legal market, but that this did not mean that there should be a “one size fits all” approach. They urged the LSB to apply the rules consistently when asking for evidence and applying the rules. They also said that both the LSB and SRA were committed to reform, and both organisations should pull together to pick up the pace of indemnity cover reform.