MTC consultation: Nothing to see here
Jane Williams and David Rees Smith discuss the SRA's proposals to change the minimum terms and conditions of PII for solicitors, in light of the Insurance Act 2015
On 12 February 2016, the Solicitors Regulation Authority (SRA) released a consultation document proposing changes to the minimum terms and conditions (MTC) of professional indemnity insurance (PII) contained in
its 2013 Indemnity Insurance Rules. The purpose of those proposed changes was to update the MTC in order
to ensure consistency with
the Insurance Act 2015,
which comes into force on
12 August 2016.
The consultation has now closed, although no formal conclusions have yet been published. Among the responses received was a suggestion by the Law Society that the SRA 'prior to implementing the proposed changes, explains the meaning of, and reasons for, the proposed MTC wording changes'.
While, as discussed here, these changes appear relatively straightforward and benign, the Law Society expressed concern following 'recent confusion in the trade press about the implications of the change in wording' and suggested that guidance would be helpful to the profession as a whole.
Fair presentation of risk
The amendments proposed by the consultation focus on the reimbursement and disclosure sections of the MTC. Under the Insurance Act, the test to discern whether there has been 'non-disclosure' by an insured at the proposal stage will be different for consumer and non-consumer contracts.
Unsurprisingly, the SRA's proposed approach adopts the non-consumer test. This means that firms seeking cover will be required to make a 'fair presentation of risk'. However, while the impact of this is potentially significant across the PII market (as a reckless or deliberate failure to make a fair presentation will allow insurers to avoid the policy), it is unlikely to affect the solicitors' market.
The MTC (both in their current form and based on the proposed amendments put forward in the consultation) are extremely restrictive in terms of insurers' rights to avoid a policy or repudiate a claim, primarily in the interests of public protection. The proposed changes simply:
- Confirm in specific terms that any breach of the duty to give fair presentation of the risk will not entitle an insurer to avoid or repudiate the policy; and
Extend the basis upon which insurers may seek reimbursement from an insured to include 'any breach of the duty to make a fair presentation of the risk', rather than simply for 'non-disclosure'.
As such, insurers will be alive to the fact that the outcome of the consultation is unlikely to represent a significant shift from the status quo. That said, the Insurance Act does provide helpful examples of good practice for solicitors in the identification and management of risk.
Part of the principle of policyholders giving a 'fair presentation of risk' is that they disclose not only risks of which they are aware, but also those that they could reasonably be expected to be aware of, or to have discovered after making reasonable enquiries. This will include information known (or which ought to be known) by the policyholder's senior management.
This puts the onus firmly on the policyholder to take responsibility for properly investigating and understanding all the risks in the business.
Adhering to the approach prescribed by the Insurance Act, while not a prerequisite to indemnity, will invariably find favour with insurers at renewal time as they can be more confident in the firm's risk management procedures and that any potential issues have been identified and addressed at an early stage.
Many firms already have detailed policies and procedures in place to address this and dedicated staff to investigate and handle any issues emerging, as well as to educate staff on risk management.
Most insurers operating in this market require their insureds to declare in their proposal forms that reasonable enquiries have been made. Insurance brokers with experience of the solicitors' PII market can be a valuable resource for guidance on the scope of the duty to disclose and the processes necessary both to comply with that duty and to protect a firm's business more generally.
Adopting a more thorough and considered approach of the kind encouraged by the Insurance Act (which admittedly is already standard practice with many firms) is also likely to have a favourable impact in terms of premiums charged, particularly in the case of smaller firms without dedicated risk management staff.
As such, while the SRA's consultation is unlikely to have any practical effect on the scope of the MTC, policyholders should not miss the opportunity it affords to review and assess their own internal risk and compliance procedures. SJ
Jane Williams, pictured, is a partner and David Rees Smith an associate at Bond Dickinson