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WHAT TO DO ABOUT YOUR EARLY RENEWAL OFFER

13th July 2016

JLT's Solicitors Professional Indemnity team has put together the following guide to make it easier for you to understand your early renewal offer (ERO) and whether it is in your best interests to take it.

1. Offer Certainty - How certain is your ERO?

Essentially there are two different types of ERO generally available in the market. Firstly, an offer that keeps your existing renewal date (say 1st October) and asks you to commit to renewing early (usually in June or July) subject to any material changes in your risk (as defined) between acceptance and the actual renewal date. This type of offer may mean that the terms change or are withdrawn if you declare material changes.

The second type of ERO is a cancel and replace offer where your current policy is cancelled early (at an agreed date) and replaced with a new policy from the exact same date. This type of offer usually means the terms are certain from the date the cancel and replace occurs.

2. Contract Certainty - Do you have the offer of a binding contract that can be executed with clear documented terms?

Again we are seeing some quite different approaches in the market this year. The cancel and replace offers tend to offer contract certain terms that can be quickly and clearly documented.

However, we have seen ERO's where the offer is being made by an underwriting agent on behalf of underwriters who have not yet signed a contract with the underwriting agent. It is not clear in these circumstances what would happen if the agreement is not subsequently signed, and indeed whether the terms of any such offer could then be changed or withdrawn.

3. Insurer Security - Do you have clear sight of your insurer(s) and their security rating?

Once again, the cancel and replace options are generally with signed up insurers offering certainty of security.

However, as referred to in (2) above we have seen an example where there remains the potential for an underwriting agent to change the participating insurers within their offer (where the contract is yet to be signed). In such circumstances there is no guarantee who the participating insurers will be and it is therefore impossible to check whether the security of the carriers is rated or 'unrated'.

4. Claims or Circumstances - What acceptance criteria is your ERO subject to regarding claims and circumstances?

Generally speaking, the cancel and replace options we are seeing take the claims experience as it stands at the date the cancel and replace occurs, so there is no intervening period where a change to the claims or circumstances could take place, much like a typical renewal offer.

However, for the ERO's where there is a significant intervening period (say from July to October), we have seen a number of different approaches. In some cases we have seen exclusion criteria for claims or circumstances already declared or for subsequent claims or circumstances where any single claim or circumstance deteriorates or is intimated with a reserve by more than a specified value, or a specified percentage of the previous year's annual premium, whichever is the greater. Often these thresholds and the language used to describe the exclusion criteria benefit the insurer rather than the insured.

This type of approach is often referred to as a 'claims amnesty', but ironically does not typically allow for a reduced premium within the ERO where there is an improvement in the claims experience during the same intervening period.

5. Material Changes - What is the acceptance criteria in respect of changes to your risk?

Once again, the conditions and criteria vary where we have a significant intervening period between acceptance of the ERO and the inception date of the policy. The position is similar to that described in (4) above and can be specific to the ERO - for example increased partner numbers, fee growth or work type percentage changes and mergers or acquisitions - or it can be more generally applied where the insurer has determined there was a misstatement of, or failure to disclose, material information.

A cautious approach may be prudent here, particularly following the recent changes to the Insurance Act, where there is now generally more onus put on the insured to provide underwriters with comprehensive risk information. Completing short form proposals over an extended period can exacerbate this position and potentially increase the risks of non-disclosure.

6. Value for Money - Does my ERO offer value for money in the current market conditions?

This is a difficult question to answer as there are a large number of factors to consider not least whether your current premium terms, upon which the ERO will be based, are already competitively priced.

Here are a number of elements you may like to consider:

  • Does the offer allow for relatively significant fee growth with a flat premium, say up to 10%?
  • Is there the ability to extend the policy period at a discounted rate, some early renewal offers provide for this and allow you to 'lock in' to the lower rating for a longer period of time?
  • What if my annual fees have reduced? Can I still take the ERO but with a reduced premium to reflect the reduction in annual fees?

In summary, you will need to understand whether the offer is a good deal for you, whether it represents a fair offer and strikes a good balance between you and the insurer in terms of the conditions and criteria that need to be satisfied.

We hope this guide has given you the ability to make a more informed decision and would be delighted to hear from you if you would like to discuss any of the points referenced in greater detail.

WHAT TO DO ABOUT YOUR EARLY RENEWAL OFFER

13th July 2016

JLT's Solicitors Professional Indemnity team has put together the following guide to make it easier for you to understand your early renewal offer (ERO) and whether it is in your best interests to take it.

1. Offer Certainty - How certain is your ERO?

Essentially there are two different types of ERO generally available in the market. Firstly, an offer that keeps your existing renewal date (say 1st October) and asks you to commit to renewing early (usually in June or July) subject to any material changes in your risk (as defined) between acceptance and the actual renewal date. This type of offer may mean that the terms change or are withdrawn if you declare material changes.

The second type of ERO is a cancel and replace offer where your current policy is cancelled early (at an agreed date) and replaced with a new policy from the exact same date. This type of offer usually means the terms are certain from the date the cancel and replace occurs.

2. Contract Certainty - Do you have the offer of a binding contract that can be executed with clear documented terms?

Again we are seeing some quite different approaches in the market this year. The cancel and replace offers tend to offer contract certain terms that can be quickly and clearly documented.

However, we have seen ERO's where the offer is being made by an underwriting agent on behalf of underwriters who have not yet signed a contract with the underwriting agent. It is not clear in these circumstances what would happen if the agreement is not subsequently signed, and indeed whether the terms of any such offer could then be changed or withdrawn.

3. Insurer Security - Do you have clear sight of your insurer(s) and their security rating?

Once again, the cancel and replace options are generally with signed up insurers offering certainty of security.

However, as referred to in (2) above we have seen an example where there remains the potential for an underwriting agent to change the participating insurers within their offer (where the contract is yet to be signed). In such circumstances there is no guarantee who the participating insurers will be and it is therefore impossible to check whether the security of the carriers is rated or 'unrated'.

4. Claims or Circumstances - What acceptance criteria is your ERO subject to regarding claims and circumstances?

Generally speaking, the cancel and replace options we are seeing take the claims experience as it stands at the date the cancel and replace occurs, so there is no intervening period where a change to the claims or circumstances could take place, much like a typical renewal offer.

However, for the ERO's where there is a significant intervening period (say from July to October), we have seen a number of different approaches. In some cases we have seen exclusion criteria for claims or circumstances already declared or for subsequent claims or circumstances where any single claim or circumstance deteriorates or is intimated with a reserve by more than a specified value, or a specified percentage of the previous year's annual premium, whichever is the greater. Often these thresholds and the language used to describe the exclusion criteria benefit the insurer rather than the insured.

This type of approach is often referred to as a 'claims amnesty', but ironically does not typically allow for a reduced premium within the ERO where there is an improvement in the claims experience during the same intervening period.

5. Material Changes - What is the acceptance criteria in respect of changes to your risk?

Once again, the conditions and criteria vary where we have a significant intervening period between acceptance of the ERO and the inception date of the policy. The position is similar to that described in (4) above and can be specific to the ERO - for example increased partner numbers, fee growth or work type percentage changes and mergers or acquisitions - or it can be more generally applied where the insurer has determined there was a misstatement of, or failure to disclose, material information.

A cautious approach may be prudent here, particularly following the recent changes to the Insurance Act, where there is now generally more onus put on the insured to provide underwriters with comprehensive risk information. Completing short form proposals over an extended period can exacerbate this position and potentially increase the risks of non-disclosure.

6. Value for Money - Does my ERO offer value for money in the current market conditions?

This is a difficult question to answer as there are a large number of factors to consider not least whether your current premium terms, upon which the ERO will be based, are already competitively priced.

Here are a number of elements you may like to consider:

  • Does the offer allow for relatively significant fee growth with a flat premium, say up to 10%?
  • Is there the ability to extend the policy period at a discounted rate, some early renewal offers provide for this and allow you to 'lock in' to the lower rating for a longer period of time?
  • What if my annual fees have reduced? Can I still take the ERO but with a reduced premium to reflect the reduction in annual fees?

In summary, you will need to understand whether the offer is a good deal for you, whether it represents a fair offer and strikes a good balance between you and the insurer in terms of the conditions and criteria that need to be satisfied.

We hope this guide has given you the ability to make a more informed decision and would be delighted to hear from you if you would like to discuss any of the points referenced in greater detail.

KENT LAWYERS TO FIGHT THE GOOD FIGHT FOR ANOTHER 200 YEARS

Nick Paterno, Managing Partner, McBrides Chartered Accountants

As the Kent Law Society celebrates its bicentennial this year, it's worth a look back at what life was like in 1818 to understand just how far the Kent legal profession has come.

Back then, George III reigned, the Old Vic theatre was founded (albeit as the Royal Coburg Theatre) and the first human blood transfusion happened. The writers of the day were Jane Austen, John Keats and Percy Bysshe Shelley and Mary Shelley's Frankenstein was published - albeit anonymously - the perfect reflection of a society intrigued by the wonders and horrors of modern science.

The Kent Law Society started up as the first law society in England and its founders were certainly trailblazers. Not only did the society bring together a strong voice for the profession in Kent - which it continues to do today - but it also prompted the formation of the London Law Society just five years later, which subsequently became The Law Society as we know it today.

Recent publications from McBrides

Inpractice Newsletter for Law Firms Issue 7

Inpractice Newsletter for Law Firms Issue 6

Inpractice Newsletter for Law Firms Issue 5

Today's legal world certainly would seem alien to the solicitors of 1818. There is no way they could have anticipated the significant challenges facing the profession today and the rapid change of technology within the past 10 to 20 years. The rise of online dispute resolution and the increasing use of artificial intelligence (AI) used to read contracts and help resolve basic personal injury cases begs the question what will lawyers be doing 200 years from now as AI continues to learn and take on tasks that for some have been the bread and butter of their career development.

The rising demands of a customer-led service environment means there is increasingly more pressure to deliver cost-effective, quick, accurate and quality advice to clients on time, while adding value where possible to that client's individual case or transaction. The bottom line is that if you fail on one of these aspects, then you potentially could lose that client to someone elsewhere who is delivering this service.

Equally, fixed fees for some services - particularly those services that can be industrialised - have been demanded for some years but there are still firms who oppose them. For some, there is a need to demonstrate that quality and service comes at a price but when markets dictate that services can be commoditised then there are some quick decisions to be made. Indeed, for non-complex, high volume type work, using AI and applying fixed fees makes sense.

Some would argue that this enables lawyers to focus on more complex cases that demand a thorough knowledge of the law or need an expert to find a workable interpretation to ensure justice is served. Indeed, there have been experts who have known the law and as a result called for significant changes that have been for the greater good.

These include the repeal of the double jeopardy law, which resulted in two of Stephen Lawrence's murderers being convicted in January 2012, almost 19 years after the A Level student was killed. Dogged determination by barristers and lawyers resulted in the re-opening of the Hillsborough inquests which contributed to significant milestones in the field of law and the reversing of one of Britain's most notable miscarriages of justice when the inquest results were given to families in 2016. And there have been countless incidents of great work by human rights lawyers, which have resulted in innocent people being set free having been incarcerated in jail for crimes they were proven not to have committed.

No doubt many Kent Law Society members have been involved in these ground-breaking cases - and we are sure there will be many more instances over the next 200 years. From all at McBrides, we wish you well.

http://www.kentlawsociety.com/sponsors-mcbrides.html


SIPP ROUND-UPAND CASE STUDY

There are many benefits to holding property within a SIPP primarily due to the capital gains tax and income tax exemptions that they enjoy. This means that there is no tax on any rental income received from the property and no tax to be paid on the growth in value of the property when it is sold.

In the main, most bespoke SIPPs run by providers with property experience will allow the pension to purchase freehold or leasehold commercial property and land. This includes offices, factories, warehouses and shops as well as farmland and development land. SIPPs may also be able to purchase non-residential properties such as equestrian land, woodland, lakes, land used for storage for commercial purposes, car parks, caravan parks, pubs, deconsecrated churches and golf courses to name a few. A SIPP cannot be used to purchase residential property or ground rents (even if the property is to be converted to commercial use and planning permission for such a conversion has been obtained). The only exceptions to this rule are where the residential property forms part of a commercial property and where it is occupied by an unconnected employee as a condition of his or her employment, such as a farm manager?s cottage or a pub manager?s flat, or where it is occupied by an unconnected person who operates the business from the premises. Commercial properties with a residential aspect, such as hotels, nursing homes, hospitals and prisons may be permitted in certain circumstances.

Purchasing a property outright from pension monies isn?t always possible. It is becoming far more common to see commercial property purchases done on a joint basis or indeed on a staged basis.

When looking to fund a property purchase it is possible that the SIPP can borrow to help fund the purchase and / or the development of the property. There are a number of borrowing rules that it is important to observe. The maximum amount that can be borrowed is 50% of the net asset value of the pension arrangement (not 50% of the purchase price of the property). When calculating this limit, all existing borrowing must be taken into account.

The SIPP can also borrow to cover the VAT on the purchase of a property and this will normally be repaid when the VAT is reclaimed from HMRC. You should note however that the borrowing for VAT is included in the 50% limit, even though it is normally only a short-term loan.

Borrowing will usually be from a bank on a secured basis. However a SIPP can borrow from any party including those connected to the scheme provided that the loan is on commercial terms and there is no specific requirement for the loan to be secured.

A SIPP can purchase property on the open market or from a connected party such as the SIPP member, their business or a connected party. If the property is purchased from a connected party then the purchase price must be the open market price supported by a professional independent valuation by a RICS chartered surveyor. Once purchased, the property can be leased to a third party, or to the business itself. If the property is leased then this must be granted on commercial terms at an open market rent. Again, if the lease is to a connected party the rent must be supported by an independent valuation by a RICS chartered surveyor.

A commercial property purchase can be undertaken jointly with other parties, including other pension schemes as well as with an individual, a company or third parties. The property will be held on trust with each participant being entitled to a percentage of the rental income and property value on sale. This percentage is determined by how much each participant contributed towards the gross purchase costs.

If the property is subject to VAT then the SIPP (together with any co-owners) will be registered for VAT, enabling the SIPP administrator to reclaim the VAT paid on the purchase price and distribute this among the owners relative to their percentage share in the property. It will also mean that all rent charged on the property and the ultimate sale of the property will be subject to VAT.

The SIPP can develop any land or property that it holds for commercial (but not for residential) use, but the cost of the development must be met by the scheme. If the client opts to tax the property for VAT purposes then the VAT paid on contractor?s invoices can be reclaimed.

If a property is owned by a business and the business needs funds, the pension scheme can purchase the property from the business, which will provide cash to the company, and lease it back to the business.

Case Study 1

Bricks & Mortar Ltd own the property that they operate their business from, which they have outgrown and would like to extend by developing but don?t have the funds to do so. The company directors have sufficient funds in their pension plans that they can transfer to SIPPs and use to jointly buy the property from the company. On completion of the purchase a lease will be put in place from the SIPPs to the company and the SIPPs will receive rental income at a proper market rate. The directors also have sufficient funds in their pension pots to fund the costs of developing the property and here they have a choice. On the one hand the SIPPs could fund the development costs and once the development is complete will uplift the rent level payable to reflect the market rent for the property as developed. Alternatively, the company (who now has the sale proceeds) can fund the development works and in return can chose to either lease the property at the pre-development rent level for the duration of the lease or to take a substantial rent-free period or rent reduction in compensation for the funds they have spent on the property.

As a variation of this, a SIPP could be used to simply buy a share of the property with the company and the SIPP then jointly funding development costs. The SIPP would then receive its proportionate share of rental income from the company.

Case study 2

Drawn Dreams is a firm based in the Midlands, consisting of 13 architects who need to move premises due to expansion and have an opportunity to be part of a new development where they would purchase a leasehold interest in the ground floor of a newbuild property and would be able to have a say in how their floor was designed which was very important to them.

The 13 members are all different ages and have various pots of pension monies which are all held in personal pension plans. The total cost of the property build, solicitor costs and stamp duty etc. came to just over 2,000,000. Each member was in a position to put 160,000 into their SIPP, some had more funds, but the idea was only to put in what was needed and keep the rest of their funds in their personal pensions.

The main issue for these individuals was that they only wanted to put funds into their SIPPs as and when it was needed, they didn?t want money sitting in the SIPP uninvested. The programme of the build was very clear as to when the payments would be required and also the build would have to be signed off as to the work completed, before further funds were released. While the client was happy to keep a small balance in the SIPPs, they did not want to have all the funds sitting there out of the market. The build was going to take over 18 months and they felt this was unnecessary.

It is possible to undertake a staggered property purchase, as long as all the plans, council approval and requirements are in place and have been seen by the SIPP Provider. The plans also need to contain contingencies for the fact that costs may be slightly more than originally quoted. Based on all these numbers and the funds held in the existing personal pension plans and agreement should be reached and the purchase can proceed and more importantly for the members, the funds can then come into the SIPPs as they are needed.


Sponsors
 D A Phillips & Co Ltd  an independent pensioneer trustee company that administered  SIPPs and SSASs - Proud sponsor of Kent Law Society