Solicitors closing their business could be offered financial help to pay insurance run-off costs if they pass a ‘hardship test’, the Solicitors Regulation Authority has suggested.
In a consultation paper published yesterday, the regulator said it was aware that the need to pay for run-off indemnity cover can be a ‘significant’ issue for sole practitioners who cannot find a successor to their practice.
Insurers are currently obliged to cover firms for six years after they close even if they are unable to collect any premium.
The default rate on run-off premium is around 50%, meaning the cost of providing run-off cover is factored into general insurance rates – particularly for smaller firms more likely to close.
The SRA's consultation says: ‘We have been told of cases where sole practitioners (who are, for example, unwell and in order to avoid financial failure) have been forced to keep their businesses going because they cannot afford the run-off premium.’
One option to mitigate this problem may be to create a centralised fund, paid for by contributions from the profession, that firms could apply to for help with payment.
The issue of a hardship fund is just one of several points raised in the wide-ranging consultation, which asks 23 separate questions on the future of professional indemnity insurance.
The length of run-off cover is up for discussion, with the consultation stating that the SRA is analysing claims data to decide whether to reduce the time from six to three years.
After failing to persuade the Legal Services Board to reduce the minimum limit from £2m to £500,000 last year, the SRA says one option might be to have no minimum limit at all.
The consultation states that this would ‘maximise the opportunities for firms to negotiate limits most appropriate to their business activities’.
The SRA said there is ‘clear advice’ from some insurers that cutting the minimum limit would reduce insurance premiums, and there was even some evidence of this in the weeks before the plan was halted by the LSB.
Other issues being consulted upon include the removal of the extended policy period, which obliges insurers to cover firms for three months after they have failed to secure insurance on the open market.
The SRA also wants another look at what circumstances could allow insurers to avoid paying out. Currently insurers can refuse to pay out only if a firm has been fraudulent or otherwise dishonest.
The consultation asks if the exceptions can be widened and whether insurers should still cover firms where at least one partner has been fraudulent. Currently, as long as there is at least one principal who was not involved in the fraud or dishonesty, then any related claim will be dealt with under the firm’s policy.
The consultation added: ‘Some insurers have stated that they want these restrictions removed and that removal might mean fewer claims are met and premiums may reduce. Removal might incentivise better risk management, but the effect would be that clients with valid claims could be delayed receiving, or even denied, a remedy.’