The question on litigators' lips

Will the civil litigation reforms of this April provide a breeding ground for professional negligence claims brought against solicitors? This is the question on many litigators' lips as we settle into the new regime, but a similar concern is also raising its head in parallel to this - will these solicitors have sufficient professional indemnity insurance (PII) cover to insure against the worst case scenario?

Some suggest that the strict enforcement of court procedures by judges in this new era leaves solicitors exposed to negligence claims from disgruntled clients if they make a mistake that they then cannot row back from, and that a failure to properly guide clients through the new costs budgeting system accompanying court cases will likewise land a professional negligence claim against them.

Against this backdrop, the debate that rages on around compulsory PII and whether unrated insurers should be allowed to offer PII to law firms holds added weight. The catalyst was the '¨collapse of a third unrated PI insurer: Balva, the Latvian provider following in the footsteps of Quinn and Lemma. After a decision by the Financial and Capital Markets Commission (FCMC), the Latvian financial services regulator, to prohibit Balva from writing any new business in '¨the UK (effective 1 March 2013), the insurer's licences were ultimately withdrawn and it was ordered to appoint '¨a liquidator after the FCMC declared that it was incapable of satisfying the regulatory requirements relating to capital adequacy and service provisions. Understandably, news of the failure caused panic to ripple through the profession, but particularly the 1,300 or so firms whose policy was held through Balva.

Increasing pressure

The SRA's response is perhaps best described as 'knee-jerk'. Following March's prohibition on Balva underwriting new business, the SRA attempted to reassure all of Balva's insured firms that their current policies would be unaffected because the insurer would still be obliged to provide run-off cover in the unfortunate event that the insurer was wound-up or if fresh terms could not be agreed at the end of the term.

One concession made by the SRA was that as those insurers who offer terms are defined as 'Qualifying Insurers', an inference could be made that the insurer has met certain criteria prescribed by the regulator. The SRA Board therefore decided in April to change the definition to 'participating insurer'.

However, by the time Balva's licences were withdrawn, the SRA was under increasing pressure to stipulate a financial rating as a pre-requisite to providing qualifying insurance. And after initially arguing that it was entitled to rely on the decision of the FCA and/or the PRA to authorise an insurer, the regulator announced at the end of June that it '¨would be reviewing the risks posed to clients by the existing client protection rules. An assessment of the implications '¨of introducing financial rating criteria '¨will be included in the review which '¨should be completed in time for the start '¨of the indemnity period beginning '¨1 October 2014.

Another interesting point in this debate is the role of the Law Society. On the one hand the representative body has been issuing press releases questioning the increasing use of unrated insurers and warning firms that their PII is useless if the insurer is financially unstable, yet at the same time Lucy Scott-Moncrieff, former president of the representative body, recently questioned the sustainability of compulsory PII. The Law Society has recognised that the profession is operating in an excruciatingly hostile environment, yet its only solution to date seems to be offering up conflicting viewpoints and questioning the SRA's handling of the situation.

Time to act

Regardless of whether it is the Law '¨Society or the SRA that takes the lead, now is the time to act. The government's civil justice reforms will no doubt make their impact felt over the coming months - and if this means a steep rise in professional negligence claims against solicitors then these solicitors' focus will be firmly on '¨their PII.

Finally, with the closure of the assigned risks pool this autumn, it is also predicted that many unrated new entrants will enter the fold. Given that there is now no safety net for solicitors, those who are struggling to secure cover will almost certainly be inclined to opt for an unrated insurer over an 'orderly wind-down'. The Law Society is working extremely hard to support members of the profession, but presenting a cohesive and united front and providing clarity on this issue is essential to prevent an epidemic of law firm closures and consequential injustices.