With the April PII renewal window now open, the leaders of small and medium sized legal practices once again face the challenge of obtaining acceptable insurance terms.
Using the recent October renewal as a reference point, a small number of insurers, concerned about the financial strength of SME law firms, required law firm leaders of small LLPs and incorporated businesses to provide a personal guarantee to secure insurance terms.
For some this presented an unacceptable risk which led them to seek alternative insurance terms, often at a higher premium. Where alternative terms were unavailable, law firm leaders had the simple choice, provide a personal guarantee or close the firm.
In this article, we consider what a Personal Guarantee (PG) is, what the recent market trends are and what alternatives are available to manage the risk.
What is a personal guarantee?
A Personal Guarantee is a written promise by the guarantor (usually the Director) to personally repay debts owed by the business. In the event the business is unable to meet repayment obligations, the lender/insurer has recourse to the Director to recover monies due.
A Personal Guarantee lifts the veil of incorporation afforded through a Limited Company or Limited Liability Partnership structure, placing personal assets at risk.
What are the recent market trends?
Within the solicitors Professional Indemnity Insurance (PII) market, the use of Personal Guarantees is a new concept which promises to become a growing trend. As more insurers adopt this approach, law firm leaders could find themselves with little alternative than to provide a Personal Guarantee.
If we look at the lending market as a compassion, it is it is estimated that 32% *1 business finance deals require Personal Guarantees. Furthermore, the introduction of the Crown Preference during insolvency, (from 1 December 2020), coupled with the aftermath of COVID-19 is likely to see lenders tighten credit criteria and request additional security by way of personal guarantees.
What are the alternatives?
There are business finance products available which do not require personal guarantees, but they can be expensive. You may also be able to negotiate out of a personal guarantee, particularly where the lender is able to take a debenture of fixed charge over physical assets although the level of funding provided may be limited.
One alternative solution is to consider Personal Guarantee Insurance.
Personal Guarantee Insurance or PGI offers protection against the risk of a personal guarantee being called by a lender/insurer and will offset any outstanding obligations called in under a Personal Guarantee following business failure.
The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure, and this is dependent on whether the corresponding finance facility is secured or unsecured. In essence, if the business does fail, up to 80% of the loan will be settled by the insurance rather than the business owner’s home, savings and other personal assets being called on to settle the debt.
"74% *2 of SMEs would be more likely to sign a personal guarantee knowing that they could insure against the risk of a call on the personal guarantee."
Is cover available retrospectively?
Cover is available for new or existing personal guarantees signed in support of a wide range of business finance facilities. This effectively means that business leaders who have provided a Personal Guarantee in the past can now take positive steps to protect their personal assets in the future.
Find out more
At Gemstone Legal, we specialise in law firm finance and risk management. Our mission is to help law firm leaders manage financial risk and we see Personal Guarantee Insurance (PGI) as a useful method of protecting the personal assets of an individual and their families.
To learn more about Personal Guarantee Insurance (PGI) and obtain a no obligation quotation please contact firstname.lastname@example.org
*1 1,400,000 UK small businesses utilise external finance BDRC. 32% of business finance deals require Personal Guarantees from the business director/owner according to a Survey of 500 SME Owners by Censuswide, commissioned by Purbeck Insurance, March 2019
*2 Survey of 500 SME Owners by Censuswide, commissioned by Purbeck Insurance, March 2019