Top-up cover (excess layer) for professional indemnity insurance

While you must take out primary PII layer (MTC) cover, you should also consider whether additional levels of cover (often referred to as ‘top-up cover’, ‘excess layer’ or ‘excess of loss’ cover) are required over and above the primary limit of indemnity.

This additional cover should be purchased to protect the firm and, depending on its structure, its individual principals and the overall exposure to risk from liability in the event of a large claim that could exceed the indemnity limits of the MTC policy.

All firms should undertake and keep under ongoing review a risk assessment to determine their appropriate level of cover, to protect the firm (and principals where necessary) and to be able to meet the regulatory requirements.

You need to assess carefully and purchase the level of PII cover that is appropriate and adequate for current and past work.

If you have inadequate cover and a shortfall arises in relation to a claim, depending on the size of the shortfall, this could lead to an insolvency situation and regulatory action by the SRA.

How much cover do I need?

You should seek advice from your broker and/or insurer to ensure you have a sufficient level of cover based on your assessment of your firm’s work.

Your PII proposal form might be a good place to start your assessment.

However, you need to bear in mind that its purpose is to assess the appropriate premium for your firm’s work for the compulsory MTCs cover.

For regulatory reasons, your broker will not be able to advise you on the sufficiency of cover appropriate for your firm.

However, your broker will be able to review the information you provide in your own assessment of the nature of your firm’s business and the associated risk profile.

The broker should be able to advise, on the basis of that information:

• whether you have considered you have sufficient cover
• the limits of your indemnity, and
• whether it is appropriate for your firm’s exposure

It may be useful to begin by thinking in terms of how confident you are in being able to defend future claims based on a past and current business review.

This should take into account quantifying your firm’s risk profile and ensuring that there will be adequate cover for liabilities which your firm may incur to its clients or other parties to whom it may owe duties when performing legal services.

Producing a checklist to use as the basis of regular documented reviews that can be shown to your broker or insurer might be helpful for this.

A checklist will also demonstrate whether your self-assessment of cover appropriate to your firm has been carried out on a reasonable and rational basis.

If it has, it could provide a degree of comfort in demonstrating that the correct level of indemnity has been purchased.

You should bear in mind that a checklist is a good framework to use, but assessment of cover is not just a box-ticking exercise but more of an art:

Conduct a risk assessment

Given the potential situations where the minimum level of cover may not be sufficient, each firm should form an assessment of the likely risk and magnitude of uninsured client loss.

At a minimum, an assessment of the adequacy of the firm’s indemnity limits should be undertaken before each PII renewal.

However, good practice would be to form an assessment prior to accepting any retainer that may expose the firm to a risk that is greater than its current indemnity limits. Excess layer cover can be purchased at any time (but will usually align the next renewal date to coincide with your MTCs policy).

For example, you should conduct a risk assessment before accepting new clients, or new work from existing clients.

As part of this assessment, you will have considered the possibility of being sued should anything go wrong and the possible amount of such a claim, having regard to whether the work is ongoing or one-off.

You should assess the maximum potential exposure of the client and other interested parties, such as shareholders and creditors. Some clients – such as lenders and local authorities – may ask for higher limits on certain transactions.

Larger contracts involving sums greater than the primary cover’s indemnity limits need to be carefully reviewed.

If you decide that work done for any client creates a potentially higher than average risk, additional premium for excess layer insurance needs to be factored into your decision about whether to accept the retainer.

Due to the ‘claims made’ nature of PII, this is not simply a one-off purchase. The extra cost of top-up cover will extend to future years to maintain the increased level of cover.

You should evaluate your ability to mitigate the risk (for example, initiate a review by another principal to ensure quality control).

After taking any limiting action, you must then assess the remaining risk before deciding upon the level of PII required.

What level of cover is needed?

Having carried out an initial risk assessment of procedures when deciding whether to accept clients or matters, as part of your annual PII review, you should decide the level of cover required.

This assessment will largely depend on the risk appetite of your firm and its principals.

Consider your options

If the risk is due to a particular transaction, consider whether the cost of additional insurance outweighs the benefit of accepting the retainer.

You may also have to consider the impact of any existing client relationship if you decide to turn down the retainer that you consider has an unacceptable level of risk of resulting in uninsured loss.

Some lenders, for instance, will insist on practices having insurance cover to the value of the loan.

How to buy excess layer or top-up cover

If you need cover above the compulsory level, this cover is not subject to the requirement to purchase it from an SRA participating insurer.

It is not necessary to buy all of your cover from one insurer. This means you can obtain it from any insurer and on different terms and conditions to the MTCs.

You are also not tied to purchasing it at the same time you renew your MTCs PII – you can purchase it at any time when the need arises: for example, if you are planning to take on additional work.

For some transactions, the cost of top-up cover or excess layer is generally cheaper than the premium paid for the primary layer. This is because the cover only applies when the indemnity limit of the primary policy has been breached.

You should bear in mind that excess layer insurance will not be subject to the comprehensiveness of the MTCs cover.

It therefore might not benefit from the same level of protection as MTCs cover and might contain exclusions that place risks on the firm.

It is important to familiarise yourself with precisely what is and what is not covered by the excess layer insurance, as well as the precise level of indemnity that it would provide, so you can compare this with the primary level of cover and consider whether it is sufficient for the firm’s potential exposure to additional risk.

For example, it is common for excess layer policies to exclude cyber-related third-party losses that are covered under the primary layer MTCs.

The excess on the excess layer policy will be to the value of the primary policy (or underlying policies if more than one excess layer policy is purchased to achieve a desired indemnity limit).

Other types of insurance not concerned with professional liability

SIIR 3.1 only refers to PII. The MTCs are only concerned with that type of liability.

Whether and on what terms to seek to insure against wider exposure to different risks is a commercial judgement.

You will wish to ensure you are appropriately protected against losses incurred in respect of other types of liability (such as loss of business continuity or cyber insurance).

Case examples: where the minimum level of cover may not be sufficient

A single claim exceeding the indemnity limit

If a single claim is for an amount over the indemnity limit of your policy (for example, £4 million) then your primary layer insurer is only required to pay out a sum up to the indemnity limit less any policy excess.

The insured will be liable for the remaining amount, unless excess layer insurance has been purchased.

Example one

Firm A is an unincorporated partnership that has purchased the £2 million minimum level of cover required under the SIIRs.

A claimant successfully sues the firm for £2.5 million in damages for professional negligence. The firm’s insurer pays the first £2 million in accordance with the terms of the PII policy.

The partners of Firm A are jointly and severally liable to meet losses that arise from wrongful acts or omissions arising from the ordinary course of business of the firm. This includes the uninsured component of the claim.

This means the partners are jointly and severally liable to meet the outstanding £500,000.

Firm A should have purchased top-up cover to meet any claim that exceeded £2 million.

Aggregation

The mandatory limits apply to each and every claim, meaning any number of separate claims arising from separate matters can have the full limit of cover applied to each.

Any one claim that exceeds the limit of indemnity, if successful, would mean a shortfall in cover, leaving the uninsured liable for the uninsured loss.

Insurers are able to aggregate claims in accordance with MTCs clause 2.5, which allows the following to be regarded as ‘one claim’:

• all claims against any one or more insured arising from:
  • one act or omission
  • one series of related acts or omissions
  • the same act or omission in a series of related matters or transactions
  • similar acts in a series of related matters or transactions, and
• all claims against one or more insured arising from one matter or transaction

This could be, for example, a series of accounting losses over 10 years.

Example two

A number of claims arise from a series of related acts or omissions.

The individual claim values are £200,000, £1.3 million and £600,000 respectively (equating to £2.1 million in total).

The firm is an unincorporated partnership with primary layer cover (£2 million for each and every claim).

The insurer is entitled to aggregate the claims in accordance with the policy terms and pays out £2 million. The firm is liable for the £100,000 shortfall.

The structure of the firm means that if the firm itself is unable to meet this obligation, the firm’s partners are jointly and severally liable for this amount.

The firm should have purchased top-up cover.

For example, provided the aggregated claims did not exceed the level of top-up cover purchased, the top-up cover insurer (instead of the firm and its partners) would have been liable after the primary limit had been reached and would have paid the additional £100,000.

Example three

A medium-sized firm purchased £2 million in primary layer cover from Insurers A, £8 million excess layer cover from Insurer B and £1 million in excess layer cover from Insurer C.

The wording of the aggregation clause between the primary and excess layer policies was different.

The primary layer cover contains the aggregation clause as required by the MTCs outlined above. The excess layer cover contained the following aggregation clause:

“Any one claim shall mean all claims against any one or more insured arising from the same act or omission or from one series of related acts or omissions.”

Unlike the primary layer cover, the excess layer cover did not permit ‘similar acts and omissions in a series of related matters or transactions’ from being aggregated as one claim.

The firm received 10 claims, each £1 million in value, caused by similar acts and omissions in a series of related matters or transactions.

The primary layer insurer aggregated the claims and paid out a total of £2 million.

The first excess layer insurer, Insurer B, refused to pay out for any of the claims because, according to its policy wording, the claims could not be aggregated and therefore each individual claim was worth £1 million, which did not exceed the £2 million indemnity limit of primary cover.

As neither the total nor the individual claims exceed £10 million in cover, Insurer C was not liable.

The firm was liable for the uninsured loss: £8 million. The firm was unable to meet this cost and was placed into liquidation.

To avoid costly litigation over policy wording and the severe consequence of uninsured loss, firms should check carefully whether different policy wording between excess and primary layers will create a gap in cover.

The safest course will always be to purchase excess layer cover on the same terms as the primary cover.

If that is impractical, then understand any differences and how that will affect your cover.

Frequently asked questions

What is top-up insurance?

Top-up (or excess layer or excess of loss) insurance is insurance cover above or in excess of the primary layer of insurance.

For example, if the primary coverage is £2 million and the excess insurance is £8 million, there is a total of £10 million of cover, because after the losses exceed £2 million, the excess insurance will pay for the losses up to a total of £8 million.

Excess layer insurance should not be confused with a policy excess, that is, the amount payable by the firm under an insurance policy in the event of a claim.

How much top-up cover should I purchase?

Factors to help you determine the level of top-up cover required are outlined in the section on risk assessment above.

Our trends in PII for law firms research looks at purchasing trends among firms and the amount paid for top-up.

The findings do not tell us whether firms are correctly assessing their appropriate level of cover.

According to the 2023 findings, just 20% of firms reported purchasing top-up cover.

Larger firms were more likely to do so, with 92% of 11-25 partner firms reporting doing so, compared with 24% of 2-4 partner firms and just 4% of sole practitioners.

On the value of top-up cover purchased, 44% of firms that purchased cover chose £2 million to £3 million pounds, bringing them up to an indemnity limit of £5 million.

The median cost of premiums was £16,155.

Find out more about trends in top-up cover

When can I buy top-up cover?

Top-up cover can be purchased at any time. However, once bought, it will usually align with the next renewal date to coincide with your MTCs policy.

How will the SRA check and decide on sufficiency of cover?

The SRA has not said how it will go about checking compliance with the adequacy requirement.

It has stated that when assessing compliance, it may take into account a range of factors including evidence that the firm has made a reasonable and rational assessment of the appropriate level of PII cover.

If a firm is able to demonstrate to the SRA’s satisfaction that it has done so, the SRA states it is very unlikely it would challenge that decision.

For how long should top-up cover be maintained?

It is not simply a matter of topping up cover for a single transaction or for a single indemnity year.

The ‘claims made’ nature of the PII system means it is important to maintain that level of cover whilst a claim can still be brought in relation to that work.

To be protected, your firm may face higher premiums for several years.

Six years after the completion of work undertaken is usually the minimum amount of time that excess layer cover is kept in place. For some transactions, that period should be longer.

This is a factor to consider when accepting retainers for high-risk work.

How much will top-up cover cost?

While excess layer insurance is less exposed to the frequency of claims experienced by the primary layer cover, severity of claims reaching into higher limits can impact on pricing generally.

Excess layer premiums, although less volatile than primary cover premiums, may still fluctuate and the cost today may not be the same cost in five years’ time.

A lack of competition in the market for excess layer cover has been a cause for concern in recent years.

This cost should be considered when negotiating a fee on a new large contract requiring increased levels of cover, although it may be cheaper to sort out higher layers of cover at renewal rather than midway through a policy period.

Your broker or insurer will provide you with further information about the cost of top-up cover.

Do I need to purchase top-up cover from an SRA participating insurer?

No. The SRA only requires that primary layer cover be purchased from a participating insurer (an insurer that has signed the SRA’s agreement to provide the MTCs).

While some participating insurers give firms the option of buying excess layer insurance, it is not a requirement that your top-up cover be placed with the same insurer as your primary layer or, indeed, even with a participating insurer.

You are free to seek quotes from any insurer prepared to write excess layer cover.

However, you should consider the stability of any insurer. Use of rated insurers may provide a degree of assurance in this regard.

Your broker should be able to provide you with further information on this process.

Are the terms and conditions of top-up cover identical to MTCs cover?

It is important to carefully read the terms and conditions of any excess layer insurance.

The excess layer policy will not always exactly match the primary layer cover provided within the MTCs.

It is important you understand what is and is not included in the excess layer cover and the effect this will have on any claims made.

You will also want to make sure the policy provides protection for:

• all of your firm’s current staff
• all of your firm’s activities, and
• past and new principals and prior practices

For example, it is likely the excess layer policy will allow insurers to avoid coverage in the event of non-disclosure or misrepresentation by the policyholder. This is not possible within the primary layer cover in the MTCs.

You should also check to see if the cover offered includes legal costs in addition to, instead of within, the limit of indemnity.

Defence costs are in addition to the indemnity limits in the MTCs, but this may not always be the case with excess layer insurance.

As it is possible to arrange excess layer insurance with a number of different insurers, it may be that there are different wordings applied to each level of cover, with some providing lesser cover than the primary layer.

Gaps in cover can then occur, again leaving the potential for the firm or individual partner to be directly exposed to the risk of uninsured loss (see consequences below).

Your broker should be able to advise you on the insurer options available, including the cost, level of cover available and whether the excess layer cover follows the MTCs wording.

Professional obligations relating to purchasing PII

You should also consider the professional obligations relating to purchasing PII, the scope of the MTCs and your obligations to inform clients contained in our practice note on PII.