SIF closure leaves law firms exposed to claims
Client-funded insurance scheme mooted as indemnity fund replacement
The escalating cost of run-off cover combined with the forthcoming closure of the solicitors’ indemnity fund is causing rising concern the Solicitors Regulation Authority is yet to address, solicitors in smaller firms are warning.
SIF, the original profession-backed insurer since 1987, currently acts as the insurance fund of last resort for solicitors and firms outside their post-closure six-year run-off period. It was put in wind-down in 2000 when professional indemnity insurance was opened to the commercial market.
The fund will close to new claims on 30 September 2020 and, as reported in Solicitors Journal last week, it has just reduced its law firm panel from 11 to four in anticipation of a decline in claims in its twilight years.
As a result, says former sole practitioner Fiona Swann, firms could be left facing claims after their run-off cover expires. ‘Nobody thought about this particular issue when the decision was made in 2000 that the profession couldn’t afford to fund the cradle-to-grave cover of solicitors,’ she says. ‘The view was that it would be cheaper to go to market, have a think about SIF, and replace it in due course.’
The Sole Practitioners Group has acknowledged the potential risk and told Solicitors Journal that it has been discussing the issue with insurers. Honorary secretary Clive Sutton said the group has encouraged brokers to obtain additional cover for members concerned about insurance at the end of the run-off period but said the open-ended nature of such policies was unlikely to make it an attractive product for insurers.
But with no plan for the replacement of SIF as the long-tail insurer, and with the SRA mulling over reducing minimum indemnity requirements, more solicitors worry both that professional indemnity rules will not provide adequate protection and that run-off cover will become altogether unaffordable.
In a letter circulated to former colleagues within the SPG, Swann argues that failure to address the situation will result in the creation of two classes of client: one where clients instruct a firm which does not close and therefore are protected by insurance, and another where clients instruct a firm which subsequently closes and doesn’t have post-closure long-term insurance.
One solution, Swann suggests, is the setting up of a long-term insurance payment scheme, funded not by the profession but by clients. Under her proposal, clients would pay a small disbursement added to their bill. ‘Clients already pay for the cost of PII, but that’s a hidden cost,’ Swann said. ‘With this scheme, the cost of long-term protection is shared equally between closing firms and clients in an open manner.’
The amount payable would be calculated by reference to the total bill and levels could be adjusted every year – or more often – in line with the rise and fall in claims. The funds would be paid to insurers and administered under the supervision of the SRA.
Swann also addresses the question of firms that close down without run-off cover and is urging the SRA to take a more active role in tackling the issue. ‘Under the current system, the entire profession pays for these delinquent firms via higher premiums. These firms are possibly the ones where there are most likely to be claims and it is important that those clients are not excluded from this protection.’
Run-off and succession
Already, sole practitioners and solicitors in small two-to-four partner firms are struggling to meet the cost of run-off cover. The idea that firms make enough profit through the years that they can write out a big cheque on closing down hasn’t kept up with modern practice.
‘The key underline is that it’s a front-loaded cost, and usually the profession can’t afford it. I certainly can’t. The last time I asked for a quote it would have been £300,000 to shut down my firm,’ says Nick Fluck, a partner at Stapleton & Son. ‘Run-off is not liked by insurers, who think it’s all about elderly solicitors who should have already retired and who tend to be nailed with high professional indemnity costs anyway.’
Difficulty in securing affordable run-off cover has been the impetus behind many mergers but, these days, this once popular exit route is proving more challenging. ‘The current model for small firms who want to close down and find a successor doesn’t work; there’s no appropriate exit model,’ says the former Law Society president. ‘If you’re trying to sell your practice, it’s now very common for the prospective buyer to say they will not provide successor cover and that you should purchase your own run-off.’
No level playing field
The trouble, according to Fluck, is that solicitors aren’t competing on a level playing field. ‘The SRA isn’t really focusing on solicitors; it’s looking at all providers. For them, access to justice used to mean knowing a lawyer – an honest bloke who didn’t have his fingers in any dirty pies and who wasn’t driving a flash car.’
Will writers, he says, don’t have to comply with the same stringent insurance requirements. ‘I can produce a better will but if I truly factor in my regulatory costs, my charges would be many thousands of pounds more for a will that is broadly the same.’
Ensuring access to affordable services was a laudable aim, the Lincolnshire solicitor suggests, but this doesn’t just equate with cheap service at the point of purchase – and there is a cost to consumer protection. ‘The SRA will need to get to grips with the fallacy in many of its arguments – the consumer does want cheap, but the regulator may have to use its skill, experience, and knowledge of the market place to say what consumers need most is quality advice with future assurance.’ At the moment, there is ‘no direction from the SRA’ in this regard, he says
Sukhjit Ahluwalia, principal at Avery Emerson, agrees: ‘There shouldn’t be a two-tier approach,’ says the past chair of the SPG. ‘The majority of clients don’t understand the difference between law firms and unregulated businesses. But maybe I’m saying this because I’m an old-fashioned solicitor.’
Would reducing minimum cover help? Perhaps to an extent. At present, smaller firms pay the most in professional indemnity insurance as a proportion of turnover: 7 per cent for sole practitioners and 5.5 per cent for small firms.
‘The SRA is looking at this as an access to justice issue, and one of the ways in which this can be preserved is by bringing down the cost of regulation, says Ahluwalia. ‘If the cost of compliance is reduced, the cost to customer should be reduced. Issues surrounding succession and run-off cover are built into this.’
But much as the numbers would look better, ‘reducing price isn’t the same as reducing regulatory burden,’ Fluck comments. Under current rules, firms must insure for £2m (£3m for ABSs), but almost all firms buy top-up cover in line with their average transaction.
For law firms to compete with unregulated providers, a variation on Swann’s idea could be workable, he adds. ‘Clients could opt for lower fees by agreeing they will have no claims against the solicitor other than any covered by an indemnity they pay for. You could caveat that by excluding professional negligence or misconduct if the insurance is invalidated by the wrong-doing of the solicitor.’
In addition, Fluck says, there could be an absolute regulatory limitation on negligence claims to six years. This would balance out the expectation that clients are ‘owed the cheapest possible legal service in the interest of their consumer status’.
Ahluwalia also believes a small levy on clients would minimise the cost to the profession while still ensuring protection. It would be more acceptable, he says, if it takes the form of a regulatory requirement. However, this option could be hard to administer. ‘Would firms have to account annually to insurers?’ the former SPG chair asks. ‘And how would that be calculated: based on the costs of individual files, or just an overall number? This could vary widely depending on the value of the work.’
Philosophically, there could be objections too. ‘From an access to justice point of view, that could be another barrier in some cases. You’d effectively be saying that if you’ve not got the money you’ve not got the protection.’
The SRA proposed reducing minimum terms and conditions last autumn. The Legal Services Board, while content in principle with the SRA’s proposal, asked the regulator to undertake further research to support its plans. A consultation is expected later this year.
In the meantime, some solicitors looking for a third way out have carried on practising but have reduced their workload to a minimum, just enough that they would still have PII cover. It’s not especially palatable, but both Fluck and Ahluwalia report that this is what many around them are doing.
Jean-Yves Gilg is editor in chief at Solicitors Journal