Last month the Solicitors Regulatory Authority (SRA) issued a consultation paper on a range of reforms it proposes to make to the professional indemnity insurance requirements for solicitors. If adopted, these would affect the profession and the public alike and so we summarise and comment on them below.
Professional indemnity insurance
All solicitors in private practice are required to purchase professional indemnity insurance (PII). Amongst other liabilities, PII covers the financial loss for which a solicitor is found liable to another party, as a result of an actionable mistake made during the course of professional practice.
A more detailed account of what PII is, what benefits it provides to companies and individuals wishing to pursue a claim for professional negligence and how it operates in practice, can be found in our guide: Professional Indemnity Insurance: A Claimant’s Guide
The minimum terms and conditions (MTCs)
The MTCs are the terms by which each professional indemnity insurer authorised to provide mandatory cover for solicitors (often referred to as ‘primary layer’ insurance) must comply. The MTCs are determined by the SRA and dictate the minimum level of cover required by solicitors. They do not prevent solicitors purchasing additional cover (often referred to as ‘excess layer’ or ‘top up’ insurance) over and above the primary layer.
The MTCs were introduced on 1 September 2000, when the profession moved from a mutual insurer, in the form of the Solicitors Indemnity Fund (SIF), to the open market. They are supplemented by the SRA Indemnity Insurance Rules and the Participating Insurers Agreement.
Why are any reforms needed?
According to the SRA, its review of the MTCs is part of a wider push to modernise its approach to regulation, by making it simpler and more focussed. It also appears to be a response to the conclusion reached by the Competition and Markets Authority in its Legal services market study, that the profession needs to be more open and competitive in order to better serve the public.
As a precursor to the consultation, the SRA has undertaken an analysis of 10 years of insurance claims against law firms, covering the period 2004 to 2014. The results have been published in its report: Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historical claims data. Amongst other matters, and for the period in question, the report advises that:
- A total of approximately £1.6 billion in damages and costs was paid out to users of legal services by participating professional indemnity insurers;
- Approximately £0.6 billion was incurred defending claims;
- Of the payments made to users of legal services 51% arose from conveyancing work;
- Of all the claims giving rise to an indemnity payment 98% were settled for under £580,000;
- Of all claims against solicitors 24% were made between 3 – 6 years after the occurrence of an actionable event, while 10% were made between 6 – 15 years after an actionable event.
The proposed changes
The changes being proposed by the SRA are set out in detail in its 93-page consultation paper: Protecting the users of legal services: balancing cost and access to legal services.
In summary, the SRA is proposing to:
- Reduce the minimum level of insurance cover currently required for each claim, from £2 million for sole practitioners/partnerships and £3 million for LLPs, to £500,000;
- Establish a separate minimum level of cover of £1 million for each conveyancing related claim;
- Introduce a separate component in the insurance policy wording, without which firms would not be covered for conveyancing services;
- Exclude compulsory cover for financial losses suffered by financial institutions, as well as corporate and other large business clients;
- Afford greater flexibility around defence costs, such as the ability to apply a policy excess;
- Introduce a cap for the level of run-off cover required of £3 million for firms who have provided conveyancing services and £1.5 million for all others, aggregated over the existing 6-year mandatory run-off period.
While it is conceivable that the current MTCs may be hampering openness and competition within the solicitors’ profession, this is not readily apparent from the empirical evidence provided within the SRA’s consultation paper.
Moreover, and contrary to that suggestion, data published in The Law Society’s Annual Statistics Report, indicates that both the total number of solicitors practising and the total number of solicitors in private practice has grown significantly over the last 20 years, from 68,037 and 55,673 respectively in 1996, to 136,176 and 91,166 respectively in 2016.
That suggestion appears to be further undermined by data published on new firm authorisations. On 12 September 2016, The Law Society Gazette reported that official statistics suggested that more than 1,000 new firms would be created in 2016, a 30% increase on the prior two years. Meanwhile, the SRA’s Regulated population statistics report that over the 12-month period to the end of February 2018, 745 new firms have opened in England & Wales. It would seem, therefore, that for the duration of the MTCs supply and competition within the legal market has been strong.
Nevertheless, compared to many other professions, the insurance burden placed on solicitors is a heavy one and it seems right, therefore, to review it periodically. Almost 20 years on from the creation of the MTCs, now would certainly seem an appropriate juncture at which to consider whether they remain fit for purpose in their present form.
In doing so it might be observed that it is precisely because the mandatory insurance burden on solicitors is so onerous, that the financial protection afforded to the public is generally better than for any other profession. This, in turn, enables a considerable amount of trust to be placed in the hands of individual solicitors and, collectively, the profession at large.
Limits of indemnity
While the MTCs may seldom be a specific consideration for individual clients when purchasing legal services, there is a real risk that reducing the protection they provide, in particular by lowering minimum indemnity limits, could easily undermine that long-established trust placed in the profession. Certainly, in an information age where bad news travels fast and wide, it is not difficult to imagine how a few unfortunate incidents of under-insurance exposed in the national press and on social media, could result in considerable reputational damage. Far from encouraging members of the public to seek the legal help and support they require, it could deter them from doing so and, in turn, actually reduce supply and competition within the legal market.
It seems doubtful too that any premium savings made by firms as a result of reducing the minimum limits of indemnity would lead to a significant reduction in the cost of providing legal services. This is because policy premiums already recognise that most claims fall within the first £500,000 of cover. Therefore, the cost of the remaining cover currently required is likely to be much lower in comparison. Further, such premiums are individually quoted, taking into account the specific risk profile of the insured firm or practice. Accordingly, and with other overheads generally rising, it is also doubtful that this could or would allow any meaningful saving to be passed on to those purchasing legal services.
That said, and on the understanding that the original rationale for a higher limit of indemnity (£3 million for any one claim) for LLPs is not borne out by historic claims data, there may well be some logic in applying the existing limit of indemnity for sole practitioners and partnerships (£2 million for any one claim) uniformly, regardless of a practice’s legal structure.
The introduction of some flexibility around defence costs might also be beneficial for the public and the profession alike. For the public, it could certainly mean that lower value claims are settled more readily, as firms seek to avoid the direct cost of instructing defence solicitors. For the profession, this might result in a genuine premium saving, both as a direct result of re-apportioning risk and as an indirect result of incentivising improvements to risk management.
Providing for an additional and specific defence costs excess, rather than simply extending the current policy excess provisions to cover defence costs as well, is likely to be more effective in this regard. Of course, consideration would also then need to be given to the ancillary terms governing the payment of such an excess.
However, it is not in all cases that the instruction of defence solicitors creates a barrier or delay to the resolution of claims. In many cases, the involvement of specialist solicitors, who possess greater objectivity and often a much deeper understanding of the legal issues involved than an insured practice or its insurers, can expedite and facilitate, rather than stifle, the resolution of a claim.
It is encouraging that the SRA has not suggested that the run-off period be reduced from the mandatory 6 years currently required. This provides much needed protection for the public and the profession alike, in circumstances where mistakes can and do go undiscovered for some time after they are made. This is discussed in more detail in our article: Claims against closed professional firms and practices.
However, the introduction of a cap or tapering of cover might go some way to addressing the reported difficulties some solicitors face in closing their practices, while at the same time protecting the public from the adverse effects of a disorderly closure. The present requirement, that all practices maintain 6 years of run-off cover with a limit of indemnity of either £2 million or £3 million per claim dependent upon the practice structure, is expensive and, in some cases, it seems, unaffordable.
A reduction in the level of insurance cover after a practice has closed, rather than before, may well be more acceptable in the mind of the public. That said, there is at least some risk that it might also discourage purchasers of legal services from relying on new and potentially transient entrants to the market and so undermine future growth and competition. In any event, prior to implementation, a more thorough assessment of the associated benefits and specific arrangements would be required.
Balancing the clear benefits of the strong financial protection provided by the current MTCs against the concomitant burdens is no easy task and the prospect of reaching a universal agreement on how this should be achieved is likely to be extremely narrow.
It will be interesting to see what views the SRA receives from stakeholders and what conclusions it ultimately reaches. For our part, we consider that the SRA should be slow to erode the ‘gold standard’ protection currently provided to the public and should only seek to do so where it is satisfied that there is a clear and persuasive case.
The consultation closes on 15 June 2018 and those wishing to respond should complete the online consultation questionnaire available on the SRA’s website.