In brief
- Premium finance spreads the cost of a professional indemnity policy over monthly instalments instead of one payment at renewal.
- It is usually arranged through the insurance broker with a premium finance provider, and the agreement sets out the charges and what happens if payments are missed.
- Missed instalments are serious: for many professions they can lead to cover being cancelled, and for solicitors they create financial and regulatory difficulty.
- SRA research based on a sample of firms found premiums typically between 3% and 9% of turnover, with a median of 5%.
- Preparing early, with clean claims history, clear risk management and a forecast of renewal cash flow, improves both insurance and funding options.
Why PII renewal is a cash flow event
Professional indemnity insurance is a regulatory requirement or practical necessity for most professional firms: solicitors, accountants, architects, surveyors, engineers, financial advisers, and many consultancies and healthcare practices. For solicitors, the SRA Indemnity Insurance Rules require firms to hold qualifying insurance that meets the SRA’s minimum terms and conditions. For chartered accountants, ICAEW states that PII is compulsory for all members who hold a practising certificate and engage in public practice. Other professional bodies set their own requirements.
The premium is typically one of the largest single overheads after staff and premises, and it usually falls due in one go at renewal. For a firm whose cash is already tied up in lock-up, or whose renewal coincides with tax or VAT payments, finding the full amount at once can put real pressure on working capital. Premium finance exists to smooth that cost across the year.
How premium finance works
Premium finance is a credit arrangement under which a premium finance provider pays the insurance premium on the firm’s behalf, and the firm repays the provider in instalments, usually monthly, over the policy year or a similar period. The provider charges for the credit, either as interest or as a flat charge built into the instalments.
It is most commonly arranged through the firm’s insurance broker, who has relationships with one or more premium finance providers and can offer the facility alongside the renewal quote. Some insurers also offer instalment payment directly. Firms can also arrange funding independently, for example through a professional indemnity finance facility sourced through a finance broker, which can be useful when the firm wants to compare terms or fund the premium alongside other annual costs.
The typical sequence is straightforward:
- The firm agrees its renewal terms with its insurance broker and insurer.
- The firm applies for premium finance, and the provider carries out its checks.
- A credit agreement is signed, often with a deposit or first instalment payable at the outset.
- The provider pays the premium to the insurer or broker so cover can start.
- The firm pays the instalments, usually by direct debit, over the agreed period.
All finance is subject to status, lender criteria and approval. Where the borrower is a sole trader or small partnership, finance of £25,000 or less can be regulated consumer credit, and we will say at the outset if that applies.
What to check in the agreement
Premium finance agreements are usually short, but they contain terms that matter. Before signing, check:
- Total cost. The total amount repayable compared with the premium itself, and any arrangement or administration fees.
- Deposit and instalment schedule. How much is due upfront, the number of instalments and the payment dates, and whether they fit your monthly cash flow.
- Default provisions. What happens if an instalment is missed, including charges, how quickly the provider can act and what notice it must give.
- Cancellation rights. Whether the agreement gives the provider rights in relation to the policy if payments stop, and how any refund of premium is applied.
- Guarantees. Whether principals are asked to guarantee the firm’s obligations personally.
- Mid-term changes. How additional premiums, for example after a change in fee income or work type, are handled.
Your insurance broker can explain how the arrangement interacts with the policy, and your solicitor can advise on the legal terms if you have concerns.
What happens if payments are missed
Missing premium finance instalments is one of the more serious cash flow mistakes a professional firm can make. In many premium finance arrangements for professional and commercial insurance, the provider has the right to ask the insurer to cancel the policy if payments are not made, and to apply any returned premium to the outstanding debt. For a firm that is required to hold PII, losing cover can mean being unable to practise.
The position for solicitors is different in an important respect. The SRA minimum terms and conditions restrict the circumstances in which a qualifying policy can be cancelled, which means a solicitor’s cover does not simply lapse because a finance instalment is missed. That does not make missing payments any less serious. The firm still owes the debt, the provider can pursue it, and payment problems can affect the firm’s relationship with insurers at the next renewal. Where a firm cannot obtain renewal cover at all, the SRA explains that it enters an Extended Policy Period, during which the last insurer provides cover for a further 90 days. After the first 30 days the firm cannot take on new business, and it must draw up parallel plans to close in an orderly manner if it does not obtain cover.
The practical lesson for every profession is the same: if cash flow is tight, speak to the premium finance provider and your broker early. Options are usually better before a payment is missed than after.
Solicitors: minimum terms, renewal dates and what firms pay
Solicitors’ PII must meet the SRA’s minimum terms and conditions, which set the scope of cover that every qualifying policy must provide. Many firms still share a common renewal date. The Law Society explains that until 2014 all law firms had to renew their PII on 1 October each year and that, although the SRA abandoned that rule, most firms still renew on that date. Firms with a 1 October renewal will often be negotiating terms and arranging funding in late summer, at the same time as many other firms.
On cost, the SRA’s research into the professional indemnity insurance market for law firms, based on a sample of nearly 300 firms together with SRA and Legal Services Board data, found that premiums were typically between 3% and 9% of annual turnover, with a median of 5%. The same research found that smaller firms tend to pay a higher proportion of turnover than larger ones, and that premiums vary by practice area. Those figures come from a sample, so your own premium will depend on your firm’s size, work mix, claims history and risk management.
For many law firms, PII is paid alongside practising certificate fees and ongoing WIP and disbursement funding, so it makes sense to plan all three together.
Run-off cover on closure, merger or sale
When a firm closes, merges or sells without a successor practice taking on its liabilities, run-off cover becomes a significant issue. For solicitors, the SRA minimum terms provide for run-off cover extending the period of insurance for six years after the firm ceases practice, so that claims arising from past work can still be met. Other professions have their own run-off requirements, set by their regulator or professional body and by the terms of the policy.
The run-off premium is typically payable at the point the firm ceases, when fee income is falling and exit costs are rising. For partners planning retirement or a sale, it should be factored into succession plans well in advance. Whether a successor practice will take on the liabilities, and therefore whether run-off is needed, is a matter for your insurance broker and legal adviser. Our guides to partner retirement and succession funding and buying a professional practice cover the wider transaction, and funding for run-off premiums can be considered alongside succession finance.
Preparing for renewal
A well-prepared renewal tends to produce better insurance terms and makes funding straightforward. Start early, particularly if your firm renews on a common date when insurers and brokers are busiest.
- Review your proposal form. Fee income by work type, changes in the business, and any new services should be accurately described.
- Document risk management. Supervision, file reviews, cyber security, anti-money laundering procedures and complaints handling all matter to insurers.
- Address claims and circumstances. Be clear about any notified claims or circumstances and what has been done to prevent recurrence.
- Forecast the cash flow. Estimate the premium, decide whether you will pay in full or in instalments, and model the effect on monthly cash flow alongside tax, VAT and other annual costs.
- Line up funding before you need it. Arranging premium finance or a facility in advance avoids a last-minute scramble if the renewal quote is higher than expected.
Our guide to funding corporation tax and VAT covers the other large annual liabilities that often coincide with renewal.
If you are considering funding, gather the information a lender or premium finance provider is likely to ask for at the same time as your insurance proposal: recent accounts or management accounts, a current cash flow position, the renewal quote and details of any existing borrowing. Firms that approach funding with this ready, and with a clear view of how the monthly repayments fit alongside payroll, rent and tax, tend to find the process quicker and the options wider. Our guide to preparing a practice finance application covers this in more detail.
Alternatives to premium finance
Premium finance through the insurance broker is convenient, but it is not the only option, and it is worth comparing.
- Term loan. A short-term business loan repaid in instalments can fund the premium, and sometimes other annual costs at the same time, with the policy paid in full at renewal.
- Working capital facility. An overdraft or revolving facility can absorb the premium alongside other seasonal peaks, drawn and repaid as fee income arrives. See practice working capital.
- Paying from reserves. Where cash allows, paying in full avoids credit charges, though it reduces the firm’s buffer.
- Combined annual cost funding. Some firms fund PII, practising certificates and tax liabilities together under one arrangement to simplify repayments.
The right choice depends on cost, flexibility, the security and guarantees each option requires, and how the repayments fit the firm’s cash flow. Because the policy is paid in full under a separate loan, the default consequences differ from premium finance, so compare the terms carefully.
How we can help
We are a whole-of-market commercial finance broker with access to 300+ lenders, including premium finance providers, specialist professions lenders and high-street and challenger banks. We can compare premium finance with alternative structures, source funding for PII alongside other annual costs, and present your case to suitable lenders, managing the process so funding is in place before renewal.
Read more about professional indemnity finance, see how it works, explore our work with solicitors, accountants, architects and financial advisory firms, or make an enquiry.
Common questions
What is PII premium finance?
Premium finance is a credit arrangement under which a provider pays your professional indemnity premium and you repay it in instalments, usually monthly. It is typically arranged through your insurance broker, although funding can also be sourced independently. See professional indemnity finance.
Can I pay my professional indemnity insurance monthly?
Often, yes. Many insurance brokers offer premium finance so the premium is spread over the policy year. There is usually a charge for the credit, and finance is subject to status, lender criteria and approval.
What happens if I miss a premium finance payment?
It depends on the agreement and your profession. In many arrangements the provider can ask the insurer to cancel the policy. For solicitors, the SRA minimum terms restrict cancellation, but the debt remains and missed payments can cause serious difficulty. Speak to your provider and broker as early as possible.
How much do law firms pay for PII?
SRA research based on a sample of nearly 300 firms found premiums were typically between 3% and 9% of turnover, with a median of 5%, and that smaller firms tend to pay a higher proportion. See the SRA research. Your premium will depend on your own firm’s profile.
When do solicitors renew PII?
Firms can renew at any point in the year, but the Law Society notes that most firms still renew on 1 October, the date that applied to all firms until 2014. Check your own policy schedule for your renewal date.
Do I need run-off cover if my firm closes?
For solicitors, the SRA minimum terms provide for six years of run-off cover when a firm ceases without a successor practice. Other professions have their own requirements. Your insurance broker and legal adviser can confirm what applies to you.
Official sources
This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.