Insight

Tempted to reduce your Limit of Indemnity to save money on your Professional Indemnity Insurance? Beware. 

Published

05 July 2024

Written by

Jenny Screech LLB (Hons)

Read time

3 minutes

Any law firm considering a reduction in the limit of their professional indemnity insurance (PII) cover needs to take care.  You might not achieve the savings you expect and there are practical, commercial and regulatory issues you need to take into account.


If your firm only purchases the compulsory primary £2m or £3m cover, then reducing your limit is not an option. Sole practitioners and traditional partnerships must maintain a minimum cover of £2m each and every claim and LLPs and other incorporated practices must have £3m each and every claim.

It is the purchase of excess layers above the primary limit where firms have a choice. But there are various factors that you need to consider. We highlight these as follows:

1.  

Clause 3.1 of the SRA Indemnity Insurance Rules requires that:

‘you must take out and maintain professional indemnity insurance cover that is adequate and appropriate in respect of current or past practice, taking into account any alternative arrangements [you] or [your] clients may make.”

Caution is needed to ensure that any reduction in your limit of indemnity still satisfies this requirement, as you could find yourself subject to regulatory action in the event of a shortfall.

2.The limit of indemnity covers both the claim and claimant costs. The latter can be considerable, particularly for any matters that proceed to a full defended hearing.  Seven-figure sums are not unheard of.  Be sure to take this element of the exposure into account when considering the level of cover you need.
3. Your policy is written on a “claims made” basis, so it is the limit of indemnity at the time the claim is made, or the circumstances notified, that will apply to a matter. If you have undertaken higher-quantum work in past years then you need to consider carefully whether you can now safely reduce your limit of indemnity – or whether potential limitation arguments mean your firm is still exposed and should continue to retain a higher level of cover.
4. Similarly, you need to consider whether you have agreed with a client to maintain cover at a specific level. If you have, then you could find yourself in breach of contract by reducing the limit.  The consequences of this could outweigh the savings achieved. 
5. While the primary cover is written on an “each and every claim” basis, there is an aggregation provision which means that in certain situations insurers can treat a group of related claims as one claim, and subject to one limit. While the situations where this happens are rare, you need to consider if the work you undertake is more exposed to the risk of multiple claims that could be subject to an aggregation argument.  In this situation consideration should be given to a higher limit of indemnity.
We invite you to contact us if you have any queries in relation to this bulletin or would like to discuss PII and related insurance products for your firm.

Written by Jenny Screech, Consultant, Howden PII. 

Find out more about our PII for the legal profession.