Balva: learning the unrated lesson the hard way

Earlier this month news broke that Balva, a Latvian insurer and provider of professional indemnity insurance to 1,300 smaller law firms, faced possible insolvency. The Latvian regulator has withdrawn all Balva's operating licences which will in all probability trigger either an insolvency event as defined by the SRA Indemnity Insurance Rules or a (solvent) voluntary winding up. This has come to no surprise to those involved in the solicitors' professional indemnity market and was widely predicted.

Already, law firms affected are reportedly being offered alternative insurance through another unrated insurer - Berliner Versicherung Aktiengesellschaft. "Firms who elect to go with unrated cover should be under no illusions as to the potential risks that flow from that decision, both to the viability of that firm and in terms of the potential for personal liability falling on partners if the worst should happen," '¨Law Society chief executive Des Hudson has warned.

Unrated temptation

The Balva situation follows the problems faced by Quinn and Lemma who were also, for a brief time, major providers of solicitors PII. This, of course, begs the question, why is the solicitors PII market so tempting for unrated insurers and why do so many (usually smaller) firms opt to insure with the less prominent insurers? For the insurers it would seem to be the availability of significant premiums received and a delay in the ensuing claims.

For the law firms the answer historically was price - when we renew our car insurance we often buy based upon price rather than a careful review of the small print contained within the policy wordings. This is even easier (and more attractive) for law firms who have the comfort that their insurance must comply with the minimum terms and conditions (MTC). Linked to this is the decision made by most of the rated insurers to cherry pick their firms, rather than to quote for all law firms, big or small.

Over the last four years many of the insurers who have been behind the solicitors PII market have reduced their exposure to the market and the huge claims spike that followed the property crash. Therefore in more recent years the smaller firms have had little choice about where to buy their insurance as many of the rated insurers turned their back on that segment of the market.

Now it seems that everyone is asking the same question - which insurer will go the way of Balva next? The Law Society have given the profession some very clear warnings, but do firms have a choice of insurer or are they only left with the less well known carriers who are prepared '¨to quote?

Firms closing

Most of the Balva insured firms are smaller high street practices who face huge challenges in the current economic climate and do not have the luxury of being able to afford to pick and choose their insurance from a number of competing insurers. Currently 12.5 per cent (by premium) of the profession is insured with unrated insurers. Unless a new rated insurer decides that now is the time to enter the solicitors' PII market it is hard to see how this is going to change in the near future.

Therefore it seems likely that many of the smaller and even mid-sized firms will struggle to find insurance when their current policies expire. If they are not prepared to take the risk of insuring with an unrated insurer then they will have to close their doors.

It is rumoured that this problem and the impact of the Jackson reforms on claimant litigation practices will force many firms out of business. Firms closing inevitably adds to the burden for the SRA too, which is tasked with ensuring that solicitors firms close in an orderly and transparent fashion.

Failure to comply with this can lead to disciplinary action, a referral to the Ombudsman or intervention, the cost of which will fall to the profession as a whole if the firm cannot pay.

In the past many firms were content to buy from less well known insurers, but the lessons from Quinn, Lemma and now Balva should educate firms that placing PII with unrated insurers is fraught with danger. That is not to say that unrated insurers will be unable to pay claims or that the rated insurers are immune from financial crisis, but clearly the risks are much reduced if you have the luxury of an established insurance market to choose from.

Most observers are now looking at the remaining insurers to see if there is another Balva on the horizon. My feeling is that many smaller law firms are weighing up the benefits of continuing their business when compared to the risks of ending up without very significant personal liabilities if their insurer fails. For those SME law firms this is a far from attractive choice to have to make in an already very difficult market.