Solicitors Indemnity Fund: The end of the line with the insurance industry?
Roger Flaxman explores the decline of the Solicitors Indemnity Fund and whether it will be sustained.
In 2006, the Law Society deemed it would provide the Solicitors Indemnity Fund (SIF) with extra protection until 2017. The SIF extension is now until 30 September 2022, but will there be anything to replace it thereafter?
Is it needed, proportionately, according to the risk? In light of nearly 50 years of the best statistics available to any single profession, other than doctors, is it now a good time for the solicitors’ profession to review the entire insurance and insurability process for solicitors against the experience history has provided?
The origins of mandatory PI
When the Law Society was first required in the 1970s to introduce mandatory insurance of solicitors, the world was a more peaceful place, and the insurance industry was just emerging from the wake of post-World War II economics.
Insurance was still an industry where good faith and diligent insurance practice provided a reliable contract with its insuring public. The first Law Society scheme was underwritten at Lloyd’s and supported by, among others, the Sun Alliance and Guardian Royal Exchange, names long lost to the ensuing market disruption by overseas capital.
In each successive year, from the start of the ‘scheme,’ the volume of claims doubled and the premiums had to rise to match them. This caused more than just a stir in the profession, along with much consternation in the insurance market. The public had quickly caught on to the fact there was money to be made from solicitors whose services didn’t meet client expectations; and they were claiming it.
Claims experience multiplied exponentially year-on-year, and so did premiums, causing a competitive market amongst those insurers willing to underwrite new risks. But insurers knew there was a guaranteed income each year from which to derive both revenue and potential profit.
Within ten years, the volcanic eruptions in the financial services industry, caused by the deregulation of financial markets in the mid-1980s, transformed the insurance market beyond recognition. Overseas capital flooded into the London market, driving prices down and displacing the underwriters’ potential for capitalising on the claims experience built up over the early years of the scheme.
The market dove into what was euphemistically described at the time as 'just a numbers game', and the Law Society's decision to take over the reins from the insurance industry in insuring its own members occurred right in the middle of that storm.
SIF was intended to capture the maximum power and control of the profession’s risk profile and eliminate the insurer’s profit gap and so slow the inexorable rise in premiums.
Breadth and depth
One of the features of the mandatory insurance was its breadth and depth of cover. It was designed by the Law Society to be very close to a blanket guarantee with minimal conditions or exclusions as would ordinarily appear in a professional indemnity (PI) insurance; and which still do in other professions’ policies.
Indeed, there were two primary objectives. The first was to ensure that no member of the public would be harmed by the negligence or wrongdoing of a solicitor or firm. The second was that it would give the profession, the firm and the individual solicitor the comfort of not having to put its hand in its pocket where insurance did not pay out.
Around the same time solicitors were required to have mandatory insurance, the government decreed auditors and valuers should also be required to carry insurance compulsorily, for the sake of public protection.
Interestingly, while the Law Society could enforce mandatory insurance by reason of an act of parliament, the accounting and surveying professions had no equivalent statute, and had to persuade their members to accept compulsory insurance by way of vote. Their compulsory cover was then, and remains, nowhere near as broad and deep as the Law Society’s cover.
The rationale for mandatory insurance of the professions were broadly identical, but the method applied by the Law Society was fundamentally different and has undoubtedly brought with it problems of underwriting, claims management, cost and availability that the other professions have not suffered.
Referring to the quest for extended run off cover, Frank Maher, a partner at Legal Risk LLP, said "extensive efforts to find commercial insurance available for purchase on an individual basis have failed, not surprisingly for many reasons".
Maher does not describe those reasons, but clearly recognises the breadth and depth of insurance required of solicitors is significantly beyond the obligations of any other professional – except doctors and dentists – and has put a strain on the concept of insurance which is clear to see after nearly 50 years of experience.
Unlimited supply
The Law Society and the Solicitors Regulation Authority (SRA) have for many years expected the insurance market to come up trumps with an 'all-singing, all-dancing' insurance programme simply because the annual premium fund is guaranteed by its mandatory nature. They have relied upon the prospect of there always being someone in the insurance industry who will see the opportunity of taking the risk and making a profit.
The Law Society, via its SIF experience, knows better than any other professional body that making an underwriting profit out of the insurance required under the minimum terms and conditions has eluded two generations of commercial market and the SIF. This, surely, sends a message which should not be ignored.
The Law Society and the SRA now have between them almost 50 years' experience of torrid claims against solicitors. The removal of mandatory insurance has given the profession every opportunity to see inside the workings and the pros and cons of commercial insurance against private mutual protection.
These show, among other things, that providing a virtual guarantee of protection including claims for dishonesty and fraud, inevitably creates a heavy burden on the cost and viability of any scheme or arrangement that has to pay for it. In a mandatory scheme where the good the average and the bad are, by the very nature of the insurance concept, all in one pot, the innocent end up paying heavily for the guilty.
Even the insurance open market for solicitors is one pot. This is because the same risks circulate among the same group of insurers, year after year. Furthermore, the only occasional glimmer of light for the firms is the new entrant of often unregulated capacity, which typically goes out of business within a few years, leaving devastation for those that were tempted by it.
The fundamental questions
There are at least two fundamental questions. How much protection should be given to the public and under what circumstances? The second question is, for how long should that protection be available?
The protection afforded to the public from other professions, in the world of contract and negligence, is well tried and tested and continually massaged and managed by the legal profession to keep in line with trends and developments in commerce, industry and the real world.
Should the public’s protection from solicitors, solely by reason of insurance protection, be significantly different from the protection from surveyors and valuers, auditors or accountants, for example? If so, why?
The second question concerns ‘limitation’; and it gets to the heart of the issue raised by the extension of run-off protection. Everyone in the legal profession and the insurance industry is fully aware of the principles of limitation and there are hundreds, if not thousands, of potential litigants who find, every year, that their otherwise valid and justifiable claim against another party is statute-barred; and there you have it. Life is not fair, perhaps, but neither the legal profession nor parliament has seen fit to extend limitation ad nauseam, to infinity.
This raises a third question; what protection is needed by a solicitor in run off that is not needed by any other professional? There have been countless claims against other professionals long after dissolution of a practice and/or post retirement that are not satisfied – either because there is no prospect of success in proving liability or any prospect of getting paid by a party with insufficient assets – and is that fair?
While individual professionals may like to avail themselves of infinite cover in their retirement and for their estate, there has not been an appetite to demand it and pay for it; despite propositions being put forward on more than one occasion in the last 30 years to achieve that objective.
The SRA objective
The SRA wrote in its news release on 15 June 2021:
"We have decided to extend the Solicitors Indemnity Fund by a further year in order to allow consultation on the future of post-six-year run-off cover. The extension is subject to an affordability test because the fund is, in economic terms, now deemed beyond the time when a conventional insurance company would have taken steps to bring its operation to a close.
“In the past there has been shared recognition that the future viability of the Fund to provide post-six-year run-off cover was coming to an end. Consideration was being given to the purchase of a master insurance product to manage any remaining liabilities in a cost-effective way (and it is hoped this work will continue) and the use of residual funds. It is clear that the insurance market has hardened (in the meantime) and as a result the Law Society has expressed reservations about its ability to run a discretionary hardship fund using residual funds and is instead calling for post-six-year run-off cover to be maintained in the long term.”
Run-off insurance is expensive and has always been hard to obtain even in the best of times. From an underwriting perspective, it is generally a very unattractive risk because it is often a ‘can of worms waiting to escape’.
“There are two additional complications with an insurance solution”, continues Maher. “First, it would be difficult to garner the information required for a proposal. Second, there is a risk which in practical terms would be uninsurable because SIF’s position is that claims made after 30 September 2022 arising from circumstances notified to SIF prior to closure, are not covered: policies invariably exclude cover for claims arising from circumstances known prior to inception.”
Maher is spot on. The risk is only insurable if it is woven into the fabric of the ongoing insurance of practitioners during their working life. Therein lies a question of demand and need versus proportionality of probability and chance; and cost benefit.
There was a potential solution to the protection of individual professionals against the risk of losing their home, their pension and their family, in retirement, following the dissolution of a practice. It was carefully investigated in the early 2000s following some cases of individual solicitors being held responsible as 'the last man standing', but the conclusion was that the problem was not big enough to matter.
Therefore, the SRA, the Law Society and perhaps parliament, have several burning concerns. These are to re-evaluate the objectives, measure the relevant differences from the demand at that time against the demands and needs today.
They could also reassess a proportionate level of requirement for solicitors to protect the public and themselves. This is indeed crucial, in light of the voluminous statistics, experience and professional knowledge over the last 50 years which has demonstrated, without question, the enormous cost to the profession of unfettered indemnity.
If anything has been learnt in the last 50 years of industry and commerce it is that, if it can happen, it is a question of when and how much it will cost. The insurance industry is as strong as it has ever been and is open for business to propositions to which it can say 'yes' to. The role and responsibility of the SRA and the Law Society is now to create a proposition to which the insurance industry can say 'yes'.
Roger Flaxman is the chairman of Flaxmans flaxmanpartners.co.uk
