Taking cover: how to protect from historic negligence claims
Michael Young warns of the implications for firms and retired solicitors after the Solicitors Indemnity Fund closes
Since 1987, the Solicitors Indemnity Fund (SIF) has proven to be a stalwart life ring protecting solicitors from taking a personal financial hit from professional negligence claims.
The news that the SIF is due to close in September 2021 is certain to send shivers down the spines of many practitioners. For some time, this has been a safety net for retired solicitors where claims dated back the standard six-year limitation timeframe, allowing them to cruise through their retirement – without the prospect of an unexpected historic negligence claim taking a hefty chunk out of their pension fund.
After a law firm closes, run-off cover must be purchased to provide protection if a claim arises because of negligence. The SIF protects against historical claims made against retired solicitors.
No alternative cover
“As things currently stand, after the closure of SIF, if a firm ceased trading without a successor practice and its run-off cover has expired, and the former principals haven’t made alternative arrangements, then any new claims will be uninsured,” Law Society of England and Wales president Stephanie Boyce has been quoted as saying.
The issue is that no viable product has been made available for firms and solicitors to purchase supplementary cover.
In fact, what has also been raising eyebrows is the £22.48m in net assets which the fund has, according to its most recent accounts from 31 October 2020. It comes as no surprise that retired solicitors are unsettled at the prospect of having to pay for additional professional indemnity insurance (PII), when assets exist in some form for the same purposes.
Practitioners in areas such as conveyancing, wills and trusts, personal injury settlements or matrimonial property commonly see claims made outside the six-year standard time frame.
Indeed, in theory a claim can be brought in negligence three years from the date of knowledge, subject to a 15-year longstop. Therefore, most areas of practice can be seen as vulnerable.
The Law Society advises that firms that closed without successor practices after 31 August 2000 should consider their exposure and investigate the possibility of alternative cover. However, cover is likely to be costly and/or difficult to come by in the present climate.
It has said that: “The Law Society is aware of these difficulties, and making every effort to find a workable alternative. However, the problems are serious, complicated, and difficult to overcome, especially because – as the representative body for the solicitor profession – we have no powers with regard to matters of indemnification. Members and former members should ready themselves for the possibility that no broad solution can be found”.
As suggested above, the most common types of legal work threatened by historical claims are conveyancing, wills and trusts and personal injury.
Broadly, this is because issues around such work can more commonly be found a considerable time after the event – for instance, one might live in a house for a decade and then come to sell; and only then discover conveyancing negligence with their previous purchase.
Similarly, wills may be drafted and years may then pass before death and probate of the estate.
In the personal injury sector, in particular personal injury involving children, it may take years before there is a realisation that mistakes have been made. Equally, there may be what at first are small cases which may give rise to larger professional negligence claims on occasion.
While these areas of work are singled out as commonly giving rise to negligence claims, any legal work where there was a delay could give rise to potential negligence.
The SIF cover
For more than 20 years, the SIF has provided supplementary run-off cover for firms that have closed, ensuring ongoing protection for clients, partners and staff once the firm’s mandatory six-year run-off period has come to an end.
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.
This is a cheaper method of insurance than the ‘claims arising’ type of insurance, in 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 where late claims aren’t covered by an insurance policy, or the insurers are reluctant to meet the claim.
In reality, that means potential exposure where cover is not in place or disputed for the solicitor or firm – which means they may have to pay out on a claim themselves if no insurance covers it. [MY1] This is, of course, unwelcome.
In 2000, most firms had no problems in securing succession either through new partners or through a successor practice. It was common to sell the goodwill in a practice.
But in recent years, as traditional firms and markets have been disrupted, it has been far more difficult for firms to either attract younger solicitors willing to assume the burden and risk of partnership or to find firms willing to become successors.
It is noted that the Law Society sought advice to see if it could take over SIF or set up a similar scheme. However, it found that such a scheme had to be voluntary; and only the Solicitors Regulation Authority (SRA) has the necessary power to levy the profession for such purposes.
Discussions with insurers and brokers to try to generate interest in providing a policy may mean firms who are yet to close may be able to negotiate an enhanced run-off cover package. But there is no standalone premium for those who have already closed.
For those who are about to close their firm or who have closed recently, it would therefore seem 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 the firm closed, it would be salient to locate as much information as possible about the firm’s claim history and practice.
You should also approach a broker who specialises in the solicitors’ insurance market to ensure you are ready and waiting if coverage becomes available; or if a specialist package could in fact be agreed.
Existing firms will be left without protection once their run-off cover expires. However, there are still precautionary measures that firms can take to reduce their long-term exposure.
Principals of existing sole practices or partnerships should consider taking advice on incorporating as a limited liability company. This could have advantages in reducing personal exposure to claims arising from work carried out subsequent to incorporation.
Improvement in risk management systems should be considered to protect long-term exposure.
While it goes without saying that records of any such work done previously, or work done in the future, should be kept in order to defend claims that may arise, principals should also think about their potential need for supplementary run-off cover absent the SIF.
They might consider setting aside funds now or start to implement plans to help pay for mandatory and supplementary run-off cover in the future.
Planning and risk management would appear to be key in the current position and climate – the SIF being removed means no safety net like before, so it is even more important to avoid potential claims in the first place.
The current ‘work from home’ climate in the covid-19 pandemic means supervision is more difficult, leading to a greater potential for mistakes and, therefore, more claims.
Some have even considered dropping vulnerable work streams such as those highlighted above if they are not fundamental parts of their practice and likely create too high a risk profile in future.
Surge in premiums
The next few months will certainly be a hectic time for many sole practitioners and former lawyers seeking to protect themselves and their retirement funds from historic claims of negligence.
We have seen PII insurance premiums surge as a result of new negligence claims arising from solicitors home-working during the pandemic. With less supervision and more fragmented working, the greater the chance of errors is.
All types of professional negligence claims are arising, but we’re likely to see these grow generally because of the difficulties of the pandemic. That said, cases will take time to filter through.
It’s no surprise that retired lawyers are left feeling uneasy, alongside the many existing firms facing these new claims whose protection disappears after their run-off cover expires.
As for the cool £22m sitting in the SIF right now, we’ll have to wait and see if and how this surplus is invested back into the profession from September 2021.
Until then, the Law Society’s refusal to comment on how this will be used is deafening for many lawyers desperately having to seek alternative financial protections for historic claims.
Top tips to reducing your exposure
- Consider incorporation where applicable
- Check risk management systems and policies and procedures are up-to-date and being adhered to
- Keep filing records in good order
- Look to supplementary run-off cover now
- Consider risk/reward of work streams
Michael Young is a legal director at Lime Solicitors limesolicitors.co.uk