PII – a flawed framework

The European Commission has had its eye on the cross-border insurance market for some time. Just a few weeks ago, it published a report on insurance contract terms. Now it has published yet another report, but this time on the obstacles faced by businesses obtaining cross-border insurance in Europe.

Interestingly, one of its principal findings turns out to be well-known to solicitors, and something which I raised when I wrote about the last report. To put it in blunt words, and not the measured tones of the Commission, there is a structural flaw in the compulsory insurance market. In the public interest, authorities oblige certain service providers to take out compulsory insurance.

But in some member states, including for our own profession in England and Wales, that insurance can only be found in a private market-place which is under no similar obligation to provide insurance to those service providers. Into the gap between the two, certain innocent providers fall, as we saw in England and Wales when many law firms were obliged to close last year. The flaw effectively outsources the regulation of (in our case) solicitors, from the SRA to the private insurance industry. Welcome to the free market!

It is worth raising this topic again, because there are solutions available. In some member states, the legal professional organisation runs the insurance scheme itself, and ensures that all its members have coverage. This used to be the case for solicitors in England and Wales – a long time ago. There are obviously variations on how this can work, leaving some flexibility to the regulator.

At least with such a solution, regulation, and in particular the decision as to which lawyer should have the right to practise, is kept with the regulator. To the extent that I have a voice, I urge that this solution be reconsidered now for solicitors in England and Wales.

The European Commission has certain proposals in its recent report, but they are not radical. We lawyers feature quite heavily, because, like motor insurance, we are one of the few examples where insurance is obligatory around the EU. As we will see, the Commission favours the ‘let’s-all-talk-about-it’ solution, rather than imposing clear requirements on an insurance industry which has not shown itself at the forefront of cross-border initiatives.

The report highlights that it is sometimes the differences in member states’ legal systems and legal requirements that cause problems for obtaining cross-border insurance. Some of the variations in the PII market are: differences in the amount of cover between member states, and the consequent cost of the premium; the fact that insurance is negotiated in some member states individually on the market by lawyers themselves, and is elsewhere bar-negotiated, as mentioned above; the different approaches of ‘claims made’ or ‘acts occurred’ as triggers; and the variation between limits based on individual claims or an annual aggregated approach.

The European Commission’s solution? It hopes that collective negotiation by bars, as well as the mutual recognition of home country cover by host bars in other member states, may lead to an eventual answer.

The Commission also expresses the hope that, in order to avoid double insurance for cross-border activities, the bars in different member states will come to an agreement on mutual recognition of national insurance cover. They refer to such an agreement being reached between Paris and London, saying that since 2008, the mandatory insurance of lawyers registered with the Paris Bar has been recognised as broadly adequate by the SRA. They wish such agreements would spread.

Behind the hopes and wishes, there is a serious problem. The insurance industry has shown itself to be slow to embrace cross-border PII products. The consequences are expense and obstacles for lawyers carrying out their professional practice.

The obvious solution is to impose some compulsory framework on the insurance industry – but the equally obvious response to this proposal is that the insurance industry is a private endeavour being compelled by others (through legislation which makes insurance compulsory in certain sectors) to take a risk with its own money. We are back to the conundrum. How can compulsory insurance be squared with a private insurance industry?

Jonathan Goldsmith is secretary general of the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs