When contemplating a claim for professional negligence, it is not uncommon to discover that the firm or practice at fault is no longer trading and may have been dissolved. In this article we examine the reasons for this and the support available to claimants seeking compensation.
Defunct firms and practices
There are many reasons why a professional firm or practice may have ceased to trade. While mismanagement is certainly one of them, the cause is not always fault based and can be the result of retirement, ill health or difficult trading conditions. In the latter case, it is notable that 10 years after the start of the Great Recession, economic conditions in the UK remain relatively subdued, while world financial markets are still widely considered to be in a state of fragility.
It is also notable that the UK professional services sector, like many other commercial sectors of the economy, has become much more attuned and responsive to consumer demand. As a result, there are many more examples of professional practices being operated on a temporary basis, in response to specific market trends and opportunities.
Unlike cases of personal injury or medical malpractice where the occurrence of negligence is soon, if not immediately, apparent, in professional negligence the mistake made can remain undiscovered for many years. This means that it can be a long time between a mistake occurring and an enforceable order for compensation being obtained, with the potential that, in the meantime, the professional practice concerned may cease to exist.
This latency was recently confirmed by a study conducted by the Solicitors Regulation Authority entitled Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historical claims data. Here it was found that 24% of all claims against solicitors were made between 3 – 6 years after the occurrence of an actionable event, while 10% were made between 6 – 15 years after the actionable event and 1% were made more than 15 years after the actionable event.
When negligence is discovered, particularly many years after the event, it is advisable for claimants to act swiftly. Not only can doing so help to preserve valuable evidence, it can also prevent any claim from becoming time-barred. This is a serious risk, which is explained in more detail in our introductory guide: Time limits for professional negligence claims – FAQs
Support for professional negligence claims
Whether, and if so how, to pursue a professional negligence claim against a closed firm or practice can depend upon a range of factors. However, chief amongst these is often the prospect of actually recovering any compensation that is ultimately awarded against it.
Below we consider a number of mechanisms at hand that can substantially improve the prospects for claimants in this regard. As will be seen, not all of these mechanisms are universally applicable and how appropriate they are in each case can depend on the professional discipline concerned, the nature and extent of the loss in question and the corporate structure of the closed practice.
1. Run off insurance
As a pre-condition to trading, and to protect both themselves and their clients against any financial loss caused by professional negligence, most regulated professionals are required to obtain and maintain professional indemnity insurance (PII) cover. The scope and amount of PII cover required varies from one profession to another and may depend in part on the size and structure of the firm or practice concerned.
Unlike most first party insurance policies (such as home contents or medical insurance, for example) where the applicable policy is that which is in place at the time that the insured event occurs, PII policies operate on a ‘claims made’ basis. As a result, the applicable PII policy is that which is in force at the time when a claim is made against the professional, rather than when any negligence occurs.
For claimants, this means that even though there was a PII policy in effect at the time that the professional was instructed, where a claim is made after a firm or practice has subsequently closed, there may be no PII cover in place to meet the claim.
Fortunately, and to afford some protection to claimants from such a scenario, many regulated professionals are also required to maintain PII cover for a set period of time after their firm or practice has closed. This is commonly referred to as ‘run off’ cover.
In the table below, we set out the regulatory requirements to maintain run off cover across a range of different professions:
|Source of Regulation
Mandatory Run-off Period
Advisory Run-off Period
|Professional Indemnity Insurance Regulations and Guidance
|Architects Code – Standards of Conduct and Practice
|Terms of Cover
|SRA Indemnity Insurance Rules
|Code of Conduct
As run off cover for solicitors is effective irrespective of whether or not the PII policy premium has been paid by the insured firm or practice, it is often very likely that PII cover will be in place for a period of at least 6 years following the closure of a firm or practice. However, in the case of other professions, where run off cover is often dependent upon payment of the policy premium, protection can be less assured. If such practices close as a result of insolvency, run off cover is much less likely to be maintained.
Further, and in the case of solicitors, the Solicitors Indemnity Fund provides supplementary run off cover for claims made more than 6 years after the firm or practice has closed, thereby extending the total period of run off cover to 12 years. Currently, however, this facility will itself cease to accept new claims after 30 September 2020.
It is worth noting that the requirements to maintain run off cover imposed on firms and practices by their respective regulators represent the minimum standards expected. They do not impose a ceiling on cover and it is possible for those professional firms and practices contemplating closure to arrange run off cover which exceeds both the indemnity limits and periods stipulated by regulators. Indeed, with the potential for professional negligence claims to be pursued up to 15 years after an actionable mistake, it will often be prudent to do so.
2. Third Party (Rights Against Insurers) Act 2010
The Third Party (Rights Against Insurers) Act 2010 (the 2010 Act) came into force on 1 August 2016. Its purpose is to assist claimants in recovering compensation where an insured firm or practice has become insolvent.
Under the provisions of the 2010 Act and in summary:
- Upon the occurrence of an insolvency event, the rights of the insured firm or practice under its PII policy transfer to, and become directly enforceable by, a third party claimant;
- A claimant then has a right to request certain details of any PII cover obtained by the firm or practice, which right it is entitled to exercise before embarking on any claim;
- A claimant may bring proceedings against an insurer to enforce the rights transferred to it, without first having to establish liability on the part of the professional firm or practice;
- A claimant may pursue a claim against a firm’s or practice’s insurer only, without needing to involve or resurrect the insured firm or practice itself;
- A claimant may issue proceedings against both the professional firm or practice and its insurer, for the purposes of establishing liability against both;
- The insurer is prohibited from relying on any failure by the professional firm or practice to notify the claim as grounds for declining cover under its PII policy.
The 2010 Act is a significant improvement on its predecessor (Third Party (Rights Against Insurers) Act 1930), which required a claimant to incur the cost and expense of establishing liability against a professional firm or practice before it could ascertain and enforce the policy rights transferred to it.
Under the 2010 Act, claimants now have an efficient mechanism through which to investigate and determine the prospects of recovering compensation under a professional firm’s or practice’s PII policy, before committing themselves to incurring the cost and expense of seeking to establish liability for negligence or breach of retainer.
3. Successor practices
Where the closed professional firm or practice against whom a claim is contemplated operated as solicitors, it is possible that compensation is recoverable from a related firm and its insurers.
Under the Minimum Terms and Conditions (MTCs), which are found within the SRA Indemnity Insurance Rules, liability can arise on the part of another practice in circumstances where that other practice is deemed to be a successor of the closed practice, pursuant to the MTCs.
While the successor practice provisions can be complicated and should be considered on a case by case basis, typically liability can be transferred where the principal(s) of a closed practice sets up, or joins, a new practice and/or where the new practice holds itself out as a successor.
For claimants this means that even where run off insurance is not available to cover a professional negligence claim, it may nevertheless be possible to recover compensation from the professional indemnity insurers of another firm or practice.
4. Financial Services Compensation Scheme
Where the closed firm or practice operated either as financial advisers or insurance brokers authorised or regulated by the Financial Conduct Authority or the Prudential Regulations Authority, it may be possible to recover compensation from the Financial Services Compensation Scheme (FSCS).
Funded by the financial services industry, and effectively operating as an insurer of last resort, the FSCS provides a recovery opportunity predominantly for private individuals and small businesses who are unable to secure compensation from their advisers or the PII providers to their advisers.
There are, however, limits to the amount of compensation that the FSCS will provide and so depending on the amount of compensation being sought, this facility may offer claimants only a partial solution for the recovery of their losses.
5. Claims against individuals personally
Regardless of the nature of the professional services in question, if the negligent professional engaged operated as either a sole practitioner or within a traditional partnership, each principal is likely to remain personally liable for any negligence committed prior to the dissolution of the practice. This means that, even if no run off insurance cover is in place to meet a claim, compensation should still be recoverable personally from an individual, or a number of individuals, where negligence has been established.
Even if the professional services in question were provided by either a private limited company or a limited liability partnership that has since been dissolved, if run off cover is not in place it may nevertheless be possible to pursue a claim against, and recover compensation from, a negligent employee. While such claims are often considered as a last resort, they can sometimes be the only resort and there are a number of good reasons why they are likely to become increasingly common. This is explained in more detail in our article: Personal liability of employees: An emerging issue
While the potential to recover any compensation awarded against a relatively junior professional may well be limited, as a result of the dramatic increase in property values over the last 20 years and the significant value of many personal pension plans, the prospects of recovering compensation from established professionals can be very good.
While the closure of a professional firm or practice may introduce additional complexity, legal hurdles and uncertainty in relation to a potential professional negligence claim, it does not by itself mean that no claim can be pursued. Nor does it mean that any claim that is successful is bound to go unsatisfied. On the contrary. Claims made after a firm or practice has closed are not uncommon and, for this very reason, there are a number of different mechanisms potentially available to claimants to increase the chances of any claim being satisfied if successful.
Further legal assistance
As professional negligence solicitors, we act for clients nationwide to resolve claims against a wide range of professionals.
If you would like to arrange an initial consultation with us, free of charge or commitment, please do not hesitate to contact us on 0800 195 4983 or by email at email@example.com.
At PNC Legal there is much more than just the fact that we specialise exclusively in resolving claims for professional negligence that sets us apart from most other solicitors.