Are you ready to take out a personal guarantee to secure your compensation insurance?


Posted by Todd Davison, CEO of Legal futures Partner Purbeck Insurance Services

Davison: Some insurers make personal guarantees a condition of coverage

It may not be until January, but the April 2022 renewal season for Lawyers’ Professional Liability (PII) insurance will soon be upon us.

Starting the process now will allow your broker to find the best provider, the best premium and payment solution, but law firm executives should also be prepared that they may need to sign a personal guarantee to guarantee. the cover.

This will place a huge additional liability on the shoulders of these business leaders and could even put their homes and other personal property at risk if the practice were to fail.

Sharp rise in premiums

With the increase in annual premiums and the reduction in the number of insurers offering coverage, PII has become very tricky in recent years. This spring, premiums rose 27% on average across all law firms, up from 21% in October 2020 and 17% in April 2020, according to a report by broker Lockton.

This increase in premiums should continue for the April 2022 renewal season given an upward trend in the severity of claims suffered by insurers operating in this market.

Raising premiums isn’t the only challenge lawyers face. Primary limits were lowered last year, according to broker Howden, and deductibles increased in addition to premiums. Just to add to the lawyers’ woes, some insurers have pulled out of the excess diaper market due to high value claims, making premium increases almost inevitable.

SME law firms faced with the demand for personal guarantees

But perhaps the most disturbing trend we are seeing is the scrutiny of the financial situation of SME law firms and the demand for personal guarantees.

Indeed, among the reduced number of insurers in this market, some insurers offering PII now require personal guarantees from partners and managers of small LLPs and incorporated businesses as a condition of coverage.

Lawyers know the ins and outs of personal guarantees, but for clarity, a personal guarantee is a written promise from the guarantor (usually the director of the law firm) to personally repay debts owed by the business.

In the event of the company’s inability to meet its repayment obligations, the insurer turns to the director to recover the amounts due. The signing of a personal guarantee can therefore endanger the director’s home and other personal property. If they own their home with a partner, they may also need to sign the personal guarantee. It will never be an easy conversation.

The demand for personal guarantees largely stems from the Minimum Conditions (MTC) set by the Solicitors Regulatory Authority for participating insurers to provide six-year run-off coverage, whether or not the run-off premiums are funded by the ‘business ; the liquidation premium is generally 300% of the last annual premium of PII.

The personal guarantee offers the insurer the means of recovering the liquidation premium in the event that the company goes bankrupt and enters into collective proceedings.

Calls from insurers to the regulator to relax the rules have been unsuccessful and personal guarantees now appear to be a lasting demand in the market.

The net result is that business executives not only face large premium increases and higher deductibles, but some insurers are also telling them that they have to put their home and other personal assets on the line in order to guarantee insurance coverage. they need to function.

Personal Guarantee Insurance Can Mitigate Risk

In response, the personal guarantee insurance against professional risks (IGP) appeared as a solution to help protect this personal wealth. This can be arranged through your insurance broker when obtaining PII coverage.

The ERP is an annual policy providing coverage when the liquidation premium cannot be covered by the available cash resources of the business.

Lawyers should be prepared for the likelihood that a personal guarantee will be required. Initially, ask your insurance broker to shop around and confirm as soon as possible if you will need it. They should also confirm the liquidation premium so that you can understand exactly what is at stake in the event of a business insolvency.

The next step is to investigate personal warranty insurance as a solution to help mitigate the risk.


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