Posted by Todd Davison, managing director of Legal Futures Associate Purbeck Insurance Services
Davison: Some insurers are making personal guarantees a condition of cover
It may only be January but the April 2022 renewal season for solicitors’ professional indemnity insurance (PII) will soon be upon us.
Starting the process now will allow good time for your broker to search out the best provider, premium and payment solution but the leaders of solicitors’ firms also need to be ready for the fact that they may need to sign a personal guarantee to secure cover.
This will place a huge amount of additional responsibility on the shoulders of these business leaders and could even put their home and other personal assets at risk if the practice should fail.
Big rise in premiums
With annual premiums rising and a reduction in the number of insurers offering cover, PII has become very tricky in recent years. Last spring, premiums increased by 27% on average across all solicitors’ firms, up from 21% in October 2020 and 17% in April 2020, based on a report by the broker Lockton.
This rise in premiums looks set to continue for the April 2022 renewal season given an upward trend in the severity of claims experienced by insurers operating in this market.
Rising premiums aren’t the only challenge solicitors face. According to the broker Howden, primary limits were reduced last year and excesses rose in addition to premiums. Just to add to solicitor’s woes, some insurers have pulled back from the excess layer market due to some high-value claims, making premium rises almost inevitable.
SME law firms face demand for personal guarantees
But perhaps the most worrying trend we are seeing is the increased scrutiny of the financial position of SME law firms and demand for personal guarantees.
Indeed, amongst the reduced number of insurers in this market, certain insurers offering PII are now requesting personal guarantees from the partners and leaders of small LLPs and incorporated businesses as a condition of cover.
Solicitors will be familiar with the ins and outs of personal guarantees but, for the sake of clarity, a personal guarantee is a written promise by the guarantor (usually the director of the law firm) to personally repay debts owed by the business.
In the event the business is unable to meet repayment obligations, the insurer has recourse to the director to recover any monies due. Signing a personal guarantee can therefore put the director’s home and other personal assets at risk. If they own their home with a partner, they may also need to sign the personal guarantee. That is never going to be an easy conversation.
The demand for personal guarantees stems largely from the minimum terms and conditions (MTC) set by the Solicitors Regulatory Authority for participating insurers to provide six years’ run-off cover, whether or not the run-off premiums are funded by the firm; the run-off premium is typically 300% of the latest annual PII premium.
The personal guarantee provides the insurer with means of recovery in respect of the run-off premium in the scenario where the firm fails and enters an insolvency procedure.
Insurers’ calls for the regulator to relax the rules have been to little avail and personal guarantees now appear to be an enduring requirement in the marketplace.
The net result is that the leaders of firms are not only facing significant premium increases and higher excesses, but they are also being told by some insurers that they need to put their home and other personal assets on the line in order to secure the insurance cover they need to operate.
Personal guarantee insurance can mitigate the risk
In response, professional risks personal guarantee insurance (PGI) has emerged as a solution to help protect those personal assets. This can be arranged through your insurance broker when securing PII cover.
PGI is an annual policy providing cover where the run-off premium cannot be met by available cash resources of the firm.
Solicitors should be preparing for the likelihood that a personal guarantee will be required. At the outset, ask your insurance broker to shop around and confirm as soon as possible whether one will be needed. They should also confirm the run-off premium so that you can understand exactly what’s at stake should the business face insolvency.
The next step is to investigate personal guarantee insurance as a solution to help mitigate the risk.
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