Closure of the Solicitors Indemnity Fund-how will this affect you?

Partners in firms that have closed since 2000 and some employees of such firms may face claims for negligence after 30 September 2020 and may not have the benefit of professional indemnity insurance cover (PII).  Many of them are unaware of the risk they face if the firm closed without a successor practice regulated by the Solicitors Regulation Authority (SRA).

 

The History of Solicitors Professional Indemnity Insurance (PII)

 

Up until 31 August 2000, the profession self-insured through the Solicitors Indemnity Fund (SIF). SIF provided firms with the compulsory level of cover and if firms closed before September 2000 then run off cover protection was provided without time limitation.

 

Back in 1999, after the large number of claims in the 1990’s it was recognised that the mutual fund had been an expensive means of providing cover for the profession and that the open market could provide a cheaper alternative for the majority of firms. The Council of the Law Society  did not favour the open market solution as it recognised that the 1990s recession had been a difficult time and that the open market may not be a comfortable place when markets hardened. However, the profession was balloted and as a result, it was decided that firms would go to the open market.

 

The Law Society negotiated minimum terms and conditions (MTC) with insurers, providing far better protection than is normally available in the open commercial market. Insurers in the open market accepted these terms and there have been, despite fluctuating numbers, sufficient numbers of insurers to make the scheme viable. The terms of cover have broadly been maintained by the SRA.  Generally speaking, over time many firms have paid less for their insurance than they would have done if SIF had been retained.

 

The cover for solicitors’ negligence claims is provided on a ‘claims made’ basis, which means that insurance needs to be in place at the time when a claim is made and notified. This is a cheaper method of insurance than the ‘claims arising’ type of insurance which means that all of the work done during the lifetime of a policy is covered whenever a claim is made. That type of cover has caused problems in industry where late claims have not ‘found‘ a policy or the insurers are reluctant to meet the claim.

 

After the profession moved to the open market, it became a requirement that firms closing without a successor practice must purchase run-off cover for claims made in the six years following closure.  SIF was to provide run -off cover for claims arising in the post 6 year period until 2007, the position beyond that date was not fully decided.

 

Decision to close the Solicitors Indemnity Fund (SIF)

 

The SRA extended the SIF scheme initially to 2017. However, the funds in SIF were reducing and the SRA  would either have to call on the profession as a whole to top up SIF funds (to enable claims to be met on a self-insuring basis) or close the scheme and put SIF into run off. Rather than call on the profession, the SRA decided SIF should be closed in 2017. It consulted, but did not ballot the profession. Representations by the Law Society succeeded in persuading the SRA to delay the date of closure from 2017 to 2020, but the SRA remained adamant that the scheme would close to new claims from 30 September 2020.

 

This decision will not affect  firms which closed before 1 September 2000 as the promise made to those firms is to be honoured and any claims against such firms will be met.

 

Impact of the decision to close the Solicitors Indemnity Fund (SIF)

 

In 2000, the majority of firms had little difficulty in securing succession either through incoming partners or through a successor practice and it was common to sell the goodwill in a practice. In recent years, as traditional firms and markets have been disrupted it has been increasingly difficult for firms to either attract younger solicitors willing to assume the burden and risk of partnership or to find firms willing to become a successor practice. There has not been any risk assessment by the SRA as to how many firms would be affected. It has not produced figures demonstrating the numbers of firms which closed without a successor practice in place.

 

The SRA appeared to make its decision to close SIF based on assumptions that very few claims would be made beyond the  6-year period and that a 10-year longstop limitation period was applicable. This ignored longer limitation periods applying under the Limitation Act under sections 14B, 15, 20, 32 and 33 in respect of actions for land and postponement of limitation in case of fraud, concealment or mistake or where the action is on behalf of injury to an infant.

 

It is widely recognised in the profession that a small number of claims do not arise until long after the 6-year run off period has elapsed and these are not predictable. This leaves  partners in closed firms at risk and where those firms or their partners do not have assets or insurance cover then employees whose work gave rise to a negligence claim may be at risk. (Merrett v Babb 2001 EWCA Civ 214).

 

After the SRA made its decision to close SIF, it considered further reforms to PII.  In 2016, as part of that process, it produced an analysis of professional indemnity insurance data  which showed that around 61% of claims are made within 3 years, another 30% within 6 years and 9% within 15 years, with a very small amount of claims in the up to 25 years range. Even after this evidence was made public, the SRA has not reconsidered its decision to close SIF.

 

What should you do if you may be at risk?

 

The Law Society sought advice if it could take over SIF or set up a similar scheme but the difficulty was that such a scheme had to be voluntary and only the SRA has the necessary power to levy the profession for such purposes. Discussions have been taking place with insurers and brokers to try to generate interest in providing a policy and it seems possible that firms who have yet to close may be able to negotiate an enhanced run-off cover package but as yet, there is no stand alone premium for those who have already closed.

 

For those who are about to close their firm or who have closed recently, it would be sensible to approach their brokers to see what options are available to them now or are likely to be available to them from September 2020. If it has been many years since their firm closed, it would be prudent to locate as much information as possible about the firm’s claim history and practice and approach a broker who specialises in the solicitor’s PII market to register interest and be ready for when a product becomes available.

 

Linda Lee

 

linda-lee Linda Lee has been Council Member for Leicestershire, Northamptonshire and Rutland since 2003. She is a past President of the Law Society of England and Wales and is the current Chair of the Regulatory Processes Committee and a member of the Policy and Regulatory Affairs Committee and Access to Justice Committee. She is current Chair of the Solicitors Assistance Scheme. Linda is an experienced litigation solicitor and is a Consultant at RadcliffesLeBrasseur where she specialises in solicitors’ disciplinary, compliance and regulatory work. She can be contacted by email at: lindakhlee@aol.com

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