Insuring ABSs ... with the minimum of fuss?

There has been much speculation as to what impact Alternative Business Structures (ABSs) have had, and will continue to have, on the legal market. Following their introduction under the Legal Services Act 2007 and the Solicitors Regulation Authority (SRA) being approved as a licensing authority at the end of December 2011, there was an immediate flurry of activity which was dampened by the lengthy and document-heavy application process. It is clear though that there has been a turn around and almost two and a half years after accepting the first applications, the SRA reported that, as at the beginning of this year, 218 applications had been approved.

ABSs allow non-lawyers to own and invest in a law firm. They are designed to allow firms greater flexibility to operate in different structures, whether that be in a model with little discernable difference to that of a traditional law firm, a multi-disciplinary practice (MDP) offering a mixture of legal and non-legal services (ie accountancy, surveying or loss adjusting), or simply a specialist legal practice. All this change inevitably brings challenges, not least with professional indemnity insurance (PII) arrangements. Further, it is not just law firms who have PII minimum terms and conditions and it will be challenging for ABSs to ensure they have the correct cover in place.

Although there may be one, or a multitude, of different professionals involved in an ABS, only the legal activity undertaken will be regulated by the SRA. Insurers and brokers need to bring these aspects together in a cohesive way, and to ensure that the PII cover provided suits the new models and disciplines which arise from the new structure. The primary aim is to avoid any later disputes.

Law firms must obtain insurance which is compliant with the Minimum Terms & Conditions (MTC). Becoming an ABS does not change that. The MTC is a powerful piece of consumer protection and offers a wide level of protection (as it currently stands). In view of the growing number of ABSs, this represents an opportunity for insurers to provide a bespoke arrangement. The difficulty however for underwriters will be to overcome the inherent tension between the MTC and operating an ABS.

Insurers will need to ensure that their policies provide the MTC only for those aspects of the ABS which are regulated by the SRA. The change to an ABS may also improve (or worsen) the firm’s risk profile. It is therefore critical for insurers and brokers to ask as many questions as necessary to fully understand their insured’s business and ensure they have comprehensive information on the activities/services provided. Who are its owners and managers? Does it have the right management checks in place (which is particularly important where they operate as an MDP)? Do the non-lawyers understand the regulatory obligations? Perhaps most critical, how many of the staff providing legal services are, in fact, qualified lawyers?

There needs to be clarity around the policy definition of the insured’s business and what aspects will benefit from the MTC. If unqualified, there is a risk that the other services provided by the ABS are given the expansive cover that is afforded to law firms.

Insurers have a number of options and much will depend upon each set of circumstances. A hybrid policy might be appropriate, but the problem with this could be that it soon becomes obsolete. Perhaps the better approach is going to be something akin to a Commercial Combined policy, where each area of the business carries separate policy terms, with different arrangements as to excess, aggregation, level of cover, and exclusions. Where there is more than one "policy", insurers will have to ensure that they work harmoniously together in order to avoid overlap.

As more ABS firms emerge into the market, it is vital for both insurers and brokers to know their clients and understand their business to ensure that the right policy is put in place at the outset. The broker will place an increasingly important role in this process and a more bespoke policy is going to be required in the legal services market place.