Principles and risk-based regulation - Professional indemnit...

Learning Outcomes

This article explains professional indemnity insurance (PII) for solicitors and how the SRA Principles and risk-based regulation shape insurance and risk management requirements, including:

• Purpose and operation of professional indemnity insurance (PII) for solicitors
• Influence of risk-based regulation on PII requirements
• Application of the SRA’s principles to insurance and risk management scenarios
• Minimum terms, coverage obligations, and SQE1 compliance steps
• Distinction between the SRA’s minimum terms and conditions (MTC) and the duty to maintain “adequate and appropriate” cover
• Continuous cover obligations, including the extended indemnity and cessation periods, and run-off cover
• Insured parties under a qualifying policy
• Consequences of non-compliance and regulatory responses
• Claims-made nature of policies and key scope and exclusion features
• Transparency duties to clients about insurance
• PII requirements for freelancers and non-commercial bodies

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, with a focus on 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 (MTC) for PII cover, including coverage levels, scope, and notification obligations
• “adequate and appropriate” cover as a separate ongoing obligation beyond the MTC baseline
• continuous cover, the extended indemnity period and cessation period, and six-year run-off insurance
• who is insured: firms, principals, employees, consultants, and estates under MTC
• the relationship between risk management, compliance systems (COLP/COFA), and PII
• transparency duties to clients about insurance arrangements and territorial scope
• the consequences of non-compliance with PII requirements and interaction with SRA enforcement
• PII issues for freelancers and solicitors in non-commercial bodies providing reserved services

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.

PII policies for solicitors operate on a claims-made basis: cover responds to claims (or notified circumstances) made during the policy period, not necessarily to when the work was done. This makes continuous cover and timely notification of claims or circumstances critical, including when a firm closes and moves into run-off.

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.

The SRA Principles and Risk-Based Regulation

Solicitors must comply with the SRA Principles, which set out the ethical and professional standards of the profession. PII connects directly to several Principles:

• Principle 2: Act in a way that upholds public trust and confidence in the profession.
• Principle 4: Act with honesty.
• Principle 5: Act with integrity.
• Principle 7: Act in the best interests of each client.

PII is a key risk mitigation control within the SRA’s risk-based framework. The SRA expects firms to consider the probability and impact of harm to clients from their legal work, and to calibrate controls—such as supervision, file management, training, and PII—accordingly. Firms must also have effective governance, systems, and controls; keep records to evidence compliance; and actively monitor their financial stability and material risks. The Compliance Officer for Legal Practice (COLP) and the Compliance Officer for Finance and Administration (COFA) have central roles in identifying and reporting serious compliance risks, including any threatened breaks in insurance cover.

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. Policies are claims-made, so firms must notify their insurer promptly of claims and circumstances that might give rise to claims. Cover responds to “civil liability” in connection with private legal practice, typically including negligence, breach of contract in the provision of legal services, breach of trust, breach of fiduciary duty, and defamation. Trading debts or liabilities unconnected to legal services are not covered.

Key Term: claims-made basis
A policy that responds to claims (or notified circumstances) first made during the policy period, regardless of when the work was carried out.

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.

• For a recognised body (e.g. LLP or company) and a licensed body (ABS), the limit must be at least £3 million for any one claim (exclusive of defence costs).
• In all other cases (e.g. traditional partnerships and sole practices), the limit must be at least £2 million for any one claim (exclusive of defence costs).
• Insurance must be placed with a participating insurer that agrees to write cover on the SRA’s minimum terms.

Key Term: minimum terms and conditions (MTC)
The mandatory baseline policy wording prescribed by the SRA that qualifying insurers must provide to authorised firms, including minimum limits, scope of cover, and client-protective provisions.

Key Term: participating insurer
An insurer that has agreed with the SRA to offer solicitors’ PII on the SRA’s minimum terms and is listed as eligible to provide qualifying insurance.

The MTC require cover for civil liability arising from private legal practice, including vicarious liability for the acts or omissions of principals and employees. Defence costs are usually covered in addition to the limit for damages. Typical features protective of clients include:

• non-avoidance: the insurer cannot avoid or repudiate the policy for non-disclosure or misrepresentation by the insured (although the insurer may have recourse against the insured in some circumstances)
• cover for dishonesty: civil liability arising from the dishonesty of principals or employees is covered (clients remain protected), though the dishonest individual will not be indemnified for their own wrongdoing
• broad “insured” definition: the firm, its current and former principals, employees, and certain service or trustee companies, and the estates of deceased or incapacitated insureds
• aggregation: multiple related claims may be aggregated and treated as one claim for the purposes of the limit
• exclusions: fines and penalties, trading debts, and liabilities not connected to private legal practice fall outside cover

The MTC are a baseline. Firms must independently assess whether the minimum limits suffice for their own risk profile. Many practices purchase top-up cover above the MTC limits, particularly where they handle high-value or complex matters (e.g. clinical negligence, substantial corporate or real estate transactions).

Key Term: adequate and appropriate cover
The firm’s ongoing obligation to maintain indemnity insurance that is suitable in light of its work type, client base, claim values, claims history, and other risk factors—over and above merely complying with the SRA minimum limits.

Continuous Cover and Run-Off Insurance

PII cover must be continuous. If a firm cannot renew its policy at expiry, the SRA scheme provides an extended indemnity period followed by a cessation period (together up to 90 days). If cover is still not secured by the end of that period, the firm must cease practice and arrange run-off cover.

Key Term: extended indemnity period (EIP)
A short period immediately after policy expiry during which the expired policy continues to provide cover to allow the firm to secure new insurance; it is followed by a cessation period during which a firm may not take on new matters but remains covered to wind down existing work.

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.

Run-off cover is required for at least six years following firm closure (covering limitation periods for most negligence claims). Run-off is particularly important on retirement, merger (depending on successor practice provisions), or when a firm is intervened into. If a firm becomes a successor practice to another, the successor’s insurance is generally expected to respond to claims arising from the predecessor’s work.

Who Is Covered?

PII covers the firm and a wide group of individuals for work done in the course of private practice:

• the authorised body
• each principal (current and former)
• employees and consultants
• certain service, trustee, or nominee companies owned by the firm or its principals
• the estate or legal personal representative of a deceased or incapacitated insured

Individuals practising within an authorised firm are covered by the firm’s qualifying policy for work done for the firm’s clients.

Key Term: freelance solicitor
A self-employed solicitor practising on their own, without employees or LLP/company structure, who may provide reserved legal services if specific SRA conditions are met; if carrying out reserved activities they must ensure adequate and appropriate PII.

Freelancers who carry out reserved legal activities must have adequate and appropriate PII. Their cover is not required to be on the SRA MTC, but it must be suitable for the services offered. Solicitors doing reserved work in a non‑commercial body (e.g. not-for-profit) must ensure the body has adequate and appropriate indemnity insurance for all services provided.

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 and impact of claims and supports compliance with the SRA Principles. The SRA expects firms to:

• review their risk profile regularly (including claim trends and near misses)
• implement systems and controls to prevent errors (calendaring, supervision, file reviews)
• train staff on risk awareness, legal updates, and compliance responsibilities
• keep records of risk assessments, complaints, and actions taken
• actively monitor financial stability and business viability, and manage material risks
• ensure the COLP and COFA can discharge their duties, including reporting serious breaches and safeguarding client money

PII insurers may also require evidence of risk management procedures before providing or renewing cover and may price risk accordingly.

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 (and being obliged to enter the extended indemnity/cessation periods and then cease practice if cover is not secured)
• disciplinary action by the SRA (fines, rebukes, conditions, suspension, referral to the SDT)
• personal liability for claims (especially for principals) and potential insolvency
• loss of client trust and reputational damage
• in serious cases, intervention into the firm

If a firm cannot renew its PII, it benefits from an extended indemnity period and a subsequent cessation period (together up to 90 days) to arrange cover or wind down. During the cessation period, a firm must not take on new instructions. After this, it must cease practice if insurance is not secured and arrange run-off.

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. It should immediately stop taking on new work, notify the SRA, and seek urgent cover or enter the cessation process and arrange run-off.

Exam Warning

Practising reserved legal activities without complying with regulatory requirements may amount to a criminal offence under the Legal Services Act 2007 where a person is not authorised or exempt. An authorised firm that continues to practise while uninsured commits a serious regulatory breach and risks losing authorisation; if it then continues to undertake reserved work while unauthorised, this may be a criminal offence. Always ensure qualifying insurance is in place and continuous 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 candid notifications to clients and insurers when things go wrong.
• Principle 5: Act with integrity, which includes not concealing errors or gaps in cover.
• Principle 7: Act in the best interests of each client by ensuring compensation is available if things go wrong.

Firms must be transparent with clients about their PII arrangements, including the name of the participating insurer and the territorial scope of cover. If a solicitor practises through a separate business or freelance model, they must not mislead clients about regulatory status or insurance arrangements and must obtain informed consent where required.

If an error causes client loss or harm, solicitors must be open with the client, explain what happened and the likely impact, and take remedial action where possible (including notifying the insurer in accordance with policy terms). A LeO complaint may result in service-based remedies (including compensation up to a statutory limit), which are distinct from civil liability claims handled under PII.

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 participating insurer and the territorial coverage, enabling the client to make an informed decision about instructing the firm. It should also consider whether its limits are adequate and appropriate for the proposed work, and if necessary arrange top-up cover.

Worked Example 1.4

A three-partner recognised body specialises in complex clinical negligence claims and currently has £3 million cover. Many individual claim values exceed £5 million.

Answer:
Although the MTC minimum for a recognised body is £3 million any one claim, that may not be adequate and appropriate for this portfolio. The firm should assess likely claim values, frequency, and aggregation risk, and obtain top-up cover or restructure risk accordingly.

Worked Example 1.5

A solicitor intends to practise as a freelancer, advising on employment law and occasionally undertaking advocacy (reserved legal activities).

Answer:
A freelancer who carries out reserved legal activities must ensure they have adequate and appropriate PII. Although they are not required to purchase cover on the SRA MTC, the policy must suitably protect clients for all services offered and be continuous. The solicitor must also be transparent with clients about regulatory status and insurance.

Worked Example 1.6

A partnership’s PII renewal is declined at expiry. The firm cannot secure new cover immediately.

Answer:
The firm moves into the extended indemnity period under the expiring policy and should urgently seek cover. If unsuccessful, it enters the cessation period during which it must not take on new matters but may wind down existing work. If cover is still not obtained by the end of the cessation period, the firm must cease practice and arrange six-year run-off.

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; PII is central to this.
• Risk-based regulation focuses on identifying and addressing areas of greatest risk; PII mitigates both the likelihood and impact of harm.
• Professional indemnity insurance (PII) is compulsory for SRA-authorised firms and for freelancers who undertake reserved activities.
• SRA MTC set the baseline: £3m any one claim for recognised/licensed bodies and £2m any one claim for others, with defence costs typically in addition.
• The duty to maintain “adequate and appropriate” cover is separate from the MTC; firms must calibrate limits to their specific risk profile.
• Policies are claims-made; timely notification of claims and circumstances is essential.
• Continuous cover is required; if renewal fails, the extended indemnity and cessation periods apply, followed by compulsory run-off on closure.
• MTC are client-protective: broad “insured” definition, non-avoidance by insurers, and cover for civil liability (subject to exclusions such as trading debts).
• Effective risk management, supervision, and training reduce claims and support insurability; COLP/COFA must ensure systems and reporting.
• Failure to maintain qualifying insurance is a serious regulatory breach that can lead to disciplinary action, intervention, and personal liability.
• Firms must be transparent with clients about insurance arrangements and territorial scope, and be candid if things go wrong.

Key Terms and Concepts

• SRA Principles
• risk-based regulation
• professional indemnity insurance (PII)
• minimum terms and conditions (MTC)
• adequate and appropriate cover
• claims-made basis
• participating insurer
• run-off cover
• extended indemnity period (EIP)
• risk management
• freelance solicitor