Ben Cook takes a closer look at the controversial fund for solicitors with unenviable claims records - the Assigned Risks Pool
According to the Law Society, around 20 firms of solicitors have found themselves consigned to the 'sin bin' that is the Assigned Risks Pool (ARP) following this year's professional indemnity renewals.
Ending up in the ARP is a badge of dishonour for the firms concerned - it means that, due to a poor claims record or a major outstanding claim against them, they have been unable to secure professional indemnity cover or they are unable to afford the rates that have been offered to them.
For firms that find themselves in such a predicament, the ARP offers a vital lifeline. The firms can apply to be covered through the ARP for a maximum of 24 months in any five-year period.
The cover is underwritten by the Law Society's qualifying insurers in the same proportion as their share of the market for compulsory PI cover for all law firms.
For example, the total value of the market for compulsory PI cover for the 2005/06 indemnity period was £234m. Zurich Professional underwrote 23% of this total so it will also underwrite 23% of the ARP (see box).
However, while firms prone to making mistakes may view the ARP as a much-valued safety net, underwriters and brokers are less enamoured with it.
A common view in the insurance sector is that the ARP allows incompetent firms to continue operating at great cost to insurers which have to pay out on negligence claims.
Expected to increase
Firms placed in the ARP have until 30 November to secure backdated cover, allowing them to leave it, while others may fail to obtain cover and will have to face the ignominy of being an ARP member. The number of firms in the ARP is expected to increase overall.
Alexander Forbes Professions director Steve Holland does not believes the final total will exceed last year's figure. "There will be a number of firms that are in there by default, maybe as a precaution, but they have 60 days (from 1 October) to buy cover," he says.
"Last year, there were 40-odd firms in the ARP and there will be about the same number again - firms in the ARP tend to be smaller practitioners in the one to three partner band and they're usually in it for claims reasons."
Indeed, the majority of the firms in the ARP are sole practitioners and some are facing potentially hefty claims. "A lot of them are caught up in The Accident Group problem where some large claims could materialise," First City partner Kelvin Curran says.
He is not a fan of the ARP which, he argues, enables sub-standard firms of solicitors to continue practising.
"I'm not a great believer in the ARP as a concept - if the firm is that bad it shouldn't be in business, but obviously the Law Society seeks to protect its members."
Curran's dim view of the ARP is shared by others in the Lloyd's fraternity.
"The firms in the ARP are firms with horrendous claims experience - that are uninsurable by any other means," the chief executive of a Lloyd's PI insurer says.
"The ARP does not do enough to penalise really bad practices as firms stay in it for two years - if you had a doctor who was killing patients for two years, he would be struck off - you wouldn't wait until he couldn't get insurance."
The ultimate sanction imposed by the Law Society on firms in the ARP that fail to obtain PI cover after two years is closure. However, insurers argue that this does little to stop poor solicitors practising.
Demands on firms
The chief executive of the Lloyd's insurer continues: "At the end of the two years, the firms are wound up but this doesn't stop the partners going elsewhere and continuing to be bad.
"It's not our (insurers') role to police their business - why are such firms allowed to stay in business?"
For its part, the Law Society places a number of demands on firms in the ARP. According to Law Society rules, such firms "will be inspected and monitored (at the firm's expense), may be required to attend courses approved by the Law Society, and may be required to implement specified practice management measures."
In addition, by being forced to pay a high premium for cover obtained through the ARP, firms are hit where it really hurts ... in the pocket. For example, a firm that generates gross fees of less than £500,000 will pay a premium of 27.5%, that is, £137,500. "The firms in the ARP are paying substantial premium," Holland says.
However, charging firms in the ARP substantial rates for PI cover does cause problems for insurers.
Non-payment of premium is one pet peeve among insurers and brokers alike.
"There are some issues, for example, around 20% of the firms don't pay their premium," Holland says.
Yet, despite the headaches it induces in insurers and brokers, it is argued that the ARP performs a vital function in safeguarding the interests of the users of legal services.
Norwich Union PI business manager Trevor Meadowcroft says: "In terms of consumer protection, someone with a legitimate claim against a law firm can be assured that they will be paid."
So what do law firms have to do to escape the ARP?
"To be able to obtain insurance cover on the open market, they need to identify why they needed to be in the ARP in the first place," Meadowcroft says.
"For example, it could be as a result of poor claims experience. Ultimately, firms need to work closely with a risk manager or broker to correct the problems."
Securing cover on the open market will depend on firms currently in the ARP being able to prove they've mended their ways.
Holland says: "Underwriters will ask firms whether they've been in the ARP and will look at what they've done subsequently to see whether they can demonstrate that they've reformed the practice.
"Firms should look at their own track records - maybe there's an individual or a failure in the diary system. Firms should also make sure junior staff are properly supervised."
Which insurers underwrite the Assigned Risks Pool?
The Law Society's qualifying insurers - those that underwrite compulsory cover for all law firms - also underwrite the Assigned Risks Pool.
Each insurer agrees to underwrite a proportion of the ARP equivalent to its share of the premium income from compulsory cover.
A Law Society spokeswoman says: "Currently there are approximately 20 firms that have applied and are being covered by the ARP for 2005/06.
"Up until 30 November, qualifying insurers can backdate cover to 1 October, so some of those in the ARP may leave before the end of the month.
"There may be other firms that still have not arranged their cover and will end up in the ARP. For these reasons the final figure is likely to be different."
The 2005/06 market for compulsory cover is valued at £234m.
Listed on the right are the leading insurers' premium income from the compulsory cover market.