Todd Davison, Managing Director of Purbeck Insurance, explains why personal guarantees are becoming a feature of the professional indemnity insurance market and what the partners and leaders of small and medium sized law firms and LLPs can do to mitigate the risk.
The renewal season for solicitors’ professional indemnity insurance (PII) is fast approaching. Allowing good time for your broker to search out the best provider, premium and payment solution is key, but the leaders of solicitors’ firms also need to prepare for the uncomfortable fact that they may need to sign a personal guarantee to secure insurance cover.
PPI has become an incredibly difficult market in recent years with annual premiums rising and a reduction in the number of insurers offering cover. According to a report by the insurance broker Lockton, published in 2021, premiums increased in spring 2021 by an average 27.3% across all solicitors’ firms, up from 21.4% in October 2020 and 17.3% in April 2020.
Based on the upward trend in the severity of claims experienced by insurers operating in this market, the rise in premiums looks set to be a feature of the April 2022 renewal season.
Primary limits down, excess up
In addition to increasing premiums, the insurance broker Howden has reported that primary limits were reduced last year and some insurers have also requested an increase in the amount of the excess in addition to an increase in premium – dealing a double blow to the legal industry.
An increase in high-value claims has also meant some insurers have pulled back from the excess layer market making premium rises inevitable.
More scrutiny over finances
Added to this, there has been more scrutiny around the financial position of SME law firms and certain participating insurers requesting personal guarantees from the partners and leaders of small LLPs and incorporated businesses when offering PII to solicitors.
What is a personal guarantee?
A personal guarantee is a written promise by the guarantor (usually the director/managing partner 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 recover monies due from the guarantor. Signing a personal guarantee can therefore put the guarantor’s home and other personal assets at risk.
Why is there demand?
The demand for personal guarantees stems largely from the Minimum Terms and Conditions (MTCs) set by the Solicitors Regulatory Authority (SRA) for participating solicitors’ PI insurers to provide six year’s run-off PII cover, whether or not the run-off premiums are funded by the solicitor’s firm. The personal guarantee signed by the owner or partner in the law firm therefore provides the insurer with means of recovery in respect of the run-off premium in the scenario where the solicitor’s firm fails and enters an insolvency procedure.
In essence, heads of firms are not only facing significant premium increases and higher excesses, they are also having to put their home and other personal assets on the line in order to secure the insurance cover they need to operate.
Despite approaches to the SRA by the insurance sector for a relaxation of the rules, personal guarantees now appear to be an enduring requirement in the solicitors’ PII marketplace.
Mitigating the risk
In response, professional risks personal guarantee insurance has emerged as a solution to help protect the personal assets of the directors of solicitors’ firms acting as personal guarantors to secure insurance cover. This can be arranged through your insurance broker when securing PII cover.
As the April 2022 PII renewal season approaches, it makes sense to prepare for the likelihood that a personal guarantee will be required. Ask your insurance broker to confirm the run-off premium to understand exactly what’s at stake should the business face insolvency and investigate personal guarantee insurance as a solution to help mitigate your personal guarantee risk.
Purbeck offers a professional risks personal guarantee insurance (PGI) policy specifically for the partners/directors of solicitors’ firms. The annual insurance policy provides insurance cover for the directors of solicitors’ firms that have provided personal guarantees to insurance companies in respect of PII run-off premiums. The run-off premium is typically 300% of the latest annual PII premium and the policy indemnifies a defined contribution towards the sum insured as set out in the policy schedule. The insurance policy provides the director with unlimited access to a support desk which provides proactive advice, assistance and claims service.
Purbeck Insurance Services is a personal guarantee insurance specialist supporting small and medium sized enterprises and promoting business confidence. All PGI policies are backed by an A-rated insurer.
Purbeck Insurance Services is directly authorised and regulated by the Financial Conduct Authority and is a Managing General Agent.