Don't be caught out by the MTC changes
Mickaela Fox and Deborah Sullivan discuss how firms should prepare for the proposed increase of solicitors' disclosure obligations to their professional indemnity insurers
In February 2016, the Solicitors Regulation Authority (SRA) launched a consultation seeking feedback on its proposed amendments to the minimum terms and conditions (MTC) of professional indemnity insurance (PII) in light of the Insurance Act 2015. The MTC govern the minimum standard of cover that must be provided by solicitors' PII providers in respect of all civil liability arising from private legal practice. Permitted exclusions are limited.
The SRA's consultation period was unusually short - it ended on 24 March 2016 - because of the need for any changes to the MTC to coincide with the coming into force of the Act on 12 August 2016. However, the 'blink and you'll miss it' consultation period and the profession's tendency to only focus on insurance at renewal time could well create the perfect storm.
The Act will make changes to the law on non-disclosure and misrepresentation, in particular in relation to commercial insurance contracts. While the expected standard of disclosure has been lowered for consumer contracts (placing a duty on the insured to take reasonable care not to make misrepresentations to the insurer), it will be raised for non-consumer contracts.
The SRA is proposing that the MTC should adopt the 'non-consumer' standard, which will increase the standard of disclosure for firms compared with the existing requirements.
For non-consumer contracts, the Act requires that insureds make a 'fair presentation of the risk' to insurers. If, as is likely, the SRA's proposal is adopted, this new duty will involve giving insurers 'information which would influence the judgement of a prudent insurer in determining whether (or on what terms) to accept the risk or which would put a prudent insurer on notice that it must make further enquiries concerning the risk', according to the SRA consultation paper.
The Act defines what is meant by 'information', and also in what circumstances an insured knows the information or ought to know the information. It is the latter that introduces an obligation to carry out a reasonable search.
Law firms will need to be alive to the increased obligations, both when considering whether to notify a matter to insurers and when completing their proposal form for renewal. Certainly, those firms that adopt a more laissez-faire approach to notifying circumstances will need to adjust their practice or risk finding themselves in breach of the new Act and, assuming the changes to the MTC are adopted, at the wrong end of a claim by insurers for reimbursement or an increase
Currently, it is common practice among some firms to send periodic 'round-robin' e-mails asking case handlers to declare and provide details of any claims or circumstances. Positive results are notified to insurers, and at renewal time the relevant partner confidently ticks (or so he or she believes) the box on the proposal form to confirm that the firm has disclosed all known matters.
Some may question whether that practice was sufficient to discharge an insured's duty before the Act. It will not be enough once the Act comes
Time will be short between the changes coming into effect in August and what is still, for a large number of firms, the renewal date of 1 October, and partners tasked with completing proposal forms need to turn their minds to the new test now. Cupboards will need to be gone through if, for instance, it is known that a case handler has made the same mistake on more than one file, to ascertain the extent of the problem so that the firm can fairly present the risk to insurers. A colleague's drink problem might well become a matter that insurers need to know about. More lateral thinking about what the firm looks like as a risk will be imperative.
What will the penalties be for firms that do not get their act together in time?
If the proposed changes to the MTC are implemented, PII providers will still not be able to avoid or repudiate the insurance on any grounds whatsoever. However, insurers will have the right to seek reimbursement against firms that have not complied with their increased disclosure obligations. Outside the sphere of PII, the Act will enable other insurers to avoid policies or retrospectively levy higher premiums if insureds have failed to present risks fairly. PII providers will be able to point to those cases to
justify decisions to seek reimbursement within their sphere of contracts covered by the MTC. Could your firm weather the unbudgeted expense of having to reimburse insurers for a substantial payout?
Adopting a 'wait and see' approach to whether the MTC will be amended as proposed is likely to end in tears. Practitioners need to prepare for the probable changes now.