Ethics guidance

Professional Indemnity Insurance cover

Issued on 14 July 2015

The guidance below should be read in conjunction with the case studies on Professional Indemnity Insurance cover published on 14 July 2015.

Status

Whilst this note does not form part of the SRA Handbook, we may have regard to it when exercising our regulatory functions.

Who is this guidance relevant to?

Managers of all firms.

The Principles

The relevant principles are

  • Principle 4 - act in the best interests of each client;
  • Principle 5 - provide a proper standard of service to your clients;
  • Principle 8 - run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles.

The Outcomes

With effect from 1 April 2015 a new Outcome was introduced in to the SRA Code of Conduct 2011 as follows:

  • O (7.13) you assess and purchase the level of professional indemnity insurance cover that is appropriate for your current and past practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make.

Our expectations

We will expect firms to be compliant with this obligation by the earlier of:

  • (1) the date on or after 1 April 2015 of the commencement, renewal, replacement or agreed extension of the policy period of any qualifying insurance; and
  • (2) the start of the new indemnity period on 1 October 2015.

Currently firms are required to take out and maintain professional indemnity insurance (PII) of at least £2 million any one claim (or £3 million in the case of a limited liability firm). The current minimum levels are likely to be sufficient for many small provincial firms dealing with private client and small business matters but we will expect all firms to carry out an assessment and to consider whether the minimum level is sufficient. When assessing compliance with the Outcome we may take into account a range of factors including:

  • evidence that the firm has made a reasonable and rational assessment of the appropriate level of its PII cover;
  • the client profile of the firm;
  • the number and type of engagements;
  • the value of engagements undertaken by the firm;
  • an estimate of the probable maximum loss for each type of work undertaken (in most cases it is unlikely that the loss, and the firm's potential liability for it, will be the full value of any underlying transaction or asset);
  • the historic claims experience of the firm and any prior practice;
  • the extent and level of liability capping above the minimum level of cover;
  • what alternative arrangements the firm or its clients may make;
  • the level of additional cover in place (called top up or excess layer cover) above the minimum requirement;
  • the extent to which the information provided to clients about PII is transparent and appropriate to their needs. It may be appropriate for clients to accept risk above the minimum level, but this should be based on sufficient information being provided to enable them to make an informed decision to do so.

If a firm is able to demonstrate to our satisfaction that it made an assessment and reached a reasonable and rational decision as to the appropriate level of its PII cover then it is very unlikely that we would challenge that decision. For help on assessing appropriate cover please take a look at our case studies.

Further help

If you require further assistance with understanding your obligations please contact the Professional Ethics team.

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