Principles and risk-based regulation - Professional indemnity insurance (PII)

Learning Outcomes

After studying this article, you will be able to explain the purpose and operation of professional indemnity insurance (PII) for solicitors, describe how risk-based regulation shapes PII requirements, and apply the SRA’s principles to scenarios involving insurance and risk management. You will also be able to identify the minimum terms, coverage obligations, and compliance steps required for SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the regulatory framework for professional indemnity insurance (PII) as it applies to solicitors in England and Wales. This article covers the following syllabus points:

  • the SRA Principles and their relevance to risk and insurance
  • the concept and operation of risk-based regulation in legal services
  • the mandatory requirements for professional indemnity insurance (PII) for solicitors and law firms
  • the minimum terms and conditions for PII cover, including coverage levels and run-off insurance
  • the relationship between risk management, compliance, and PII
  • the consequences of non-compliance with PII requirements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the main purpose of professional indemnity insurance (PII) for solicitors?
  2. Which SRA Principle is most directly linked to the requirement to maintain adequate PII?
  3. What is the minimum level of PII cover required for a recognised body or licensed body under SRA rules?
  4. What is the effect of failing to maintain continuous PII cover as required by the SRA?

Introduction

Professional indemnity insurance (PII) is a compulsory safeguard for solicitors and law firms in England and Wales. It protects both clients and practitioners from financial loss arising from professional negligence or mistakes. The Solicitors Regulation Authority (SRA) enforces PII requirements as part of its risk-based approach to regulation, underpinned by a set of core principles. Understanding how PII, risk management, and the SRA Principles interact is essential for SQE1.

The SRA Principles and Risk-Based Regulation

Solicitors must comply with the SRA Principles, which set out the ethical and professional standards expected of all regulated individuals and firms. These principles are central to risk-based regulation and underpin the requirement for PII.

Key Term: SRA Principles
The SRA Principles are the fundamental ethical and professional standards that solicitors and law firms must follow, including acting with integrity, upholding the rule of law, and protecting client interests.

Key Term: Risk-based regulation
Risk-based regulation is an approach where the regulator identifies, assesses, and prioritises risks to the public, clients, and the profession, focusing resources on areas of greatest potential harm.

The SRA uses risk-based regulation to ensure that solicitors and firms manage risks effectively. This includes requiring adequate PII to protect clients and maintain public confidence in legal services.

Professional Indemnity Insurance (PII): Purpose and Operation

PII is designed to ensure that clients are compensated if they suffer loss due to a solicitor’s professional negligence, error, or omission. It also protects solicitors from bearing the full financial consequences of a claim.

Key Term: professional indemnity insurance (PII)
PII is insurance that covers solicitors and law firms against civil claims for losses caused by professional negligence, errors, or omissions in the course of legal practice.

PII is not optional. All SRA-authorised firms, and most freelance solicitors providing reserved legal activities, must have PII in place that meets the SRA’s minimum terms and conditions.

Minimum Terms and Conditions

The SRA sets out minimum terms and conditions (MTCs) for PII policies. These ensure a standard level of protection for clients and the profession.

  • Recognised bodies, licensed bodies (ABS), and sole practitioners must have at least £3 million cover per claim.
  • Other firms must have at least £2 million cover per claim.
  • PII must be provided by an insurer approved by the SRA.

The policy must cover civil liability claims, including negligence, breach of trust, and defamation, as well as the costs of defending such claims.

Continuous Cover and Run-Off Insurance

PII cover must be continuous. If a firm closes or a solicitor ceases practice, run-off cover is required for at least six years to protect against late-arising claims.

Key Term: run-off cover
Run-off cover is insurance that continues to protect former solicitors or firms against claims made after they have ceased practising, for work done while they were in practice.

Who Is Covered?

PII covers the firm, its partners, employees, and consultants for work done in the course of practice. Individual solicitors working for a firm are covered by the firm’s policy.

Risk Management and Compliance

Risk management is a core part of the SRA’s regulatory approach. Firms must identify, assess, and manage risks to their business and clients.

Key Term: risk management
Risk management is the process by which a firm identifies, evaluates, and controls risks that could affect its ability to provide legal services safely and effectively.

Effective risk management reduces the likelihood of claims and supports compliance with the SRA Principles. The SRA expects firms to:

  • review their risk profile regularly
  • implement systems and controls to prevent errors
  • train staff on risk awareness and compliance
  • keep records of risk assessments and actions taken

PII insurers may also require evidence of risk management procedures before providing cover.

Worked Example 1.1

A small firm handles conveyancing and probate work. The partners review their risk register and identify that most claims arise from missed deadlines and poor file management. They introduce a new case management system and provide staff training.

Answer: By proactively managing these risks, the firm reduces the likelihood of claims and demonstrates compliance with SRA Principles and risk-based regulation.

Consequences of Non-Compliance

Failure to maintain adequate and appropriate PII is a serious regulatory breach. Consequences include:

  • being unable to practise reserved legal activities
  • disciplinary action by the SRA
  • personal liability for claims
  • loss of client trust and reputational damage

If a firm cannot renew its PII, it enters an extended policy period (up to 90 days) to arrange cover. After this, it must cease practice if insurance is not secured.

Worked Example 1.2

A solicitor’s PII policy lapses and is not renewed. The firm continues to act for clients without insurance.

Answer: The firm is in breach of SRA rules, may face disciplinary action, and is personally liable for any claims arising during the uninsured period.

Exam Warning

If a firm or solicitor provides legal services without the required PII, they may be committing a criminal offence and risk being struck off the roll of solicitors. Always check that insurance is in place before practising.

PII and the SRA Principles in Practice

PII requirements are closely linked to several SRA Principles:

  • Principle 2: Maintain public trust and confidence by ensuring clients are protected.
  • Principle 4: Act with honesty, including full disclosure to clients about insurance arrangements.
  • Principle 7: Act in the best interests of each client by ensuring compensation is available if things go wrong.

Firms must also be transparent with clients about their PII arrangements, including the name of the insurer and the territorial scope of cover.

Worked Example 1.3

A client asks about the firm’s PII cover before instructing them on a high-value commercial matter.

Answer: The firm must provide details of its insurer and the territorial coverage, enabling the client to make an informed decision about instructing the firm.

Key Point Checklist

This article has covered the following key knowledge points:

  • The SRA Principles require solicitors to act ethically and manage risks to clients and the public.
  • Risk-based regulation focuses on identifying and addressing areas of greatest risk.
  • Professional indemnity insurance (PII) is compulsory for SRA-authorised firms and most freelance solicitors.
  • PII policies must meet SRA minimum terms and conditions, including coverage levels and run-off cover.
  • Firms must maintain continuous PII cover and manage risks to reduce the likelihood of claims.
  • Failure to maintain adequate PII is a serious regulatory breach with significant consequences.
  • PII supports public confidence in legal services and protects both clients and solicitors.

Key Terms and Concepts

  • SRA Principles
  • risk-based regulation
  • professional indemnity insurance (PII)
  • run-off cover
  • risk management
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal