Law Society guidance on aggregation and the minimum sum insured
The Law Society Council has agreed a rewording of the definition of 'one claim' (otherwise known as the aggregation clause) in the minimum terms and conditions of professional indemnity insurance, and also an increase in the minimum sum insured. The council has decided that the minimum sum insured for any one claim should be increased from £1 million to £2 million. These changes require the agreement of the Master of the Rolls and, subject to his approval, will come into effect from 1 October 2005.
From 1 September 1989 up until the switch to the commercial market on 1 September 2000, the compulsory level of cover provided by the Solicitors Indemnity Fund (SIF) was £1 million each and every claim (including claimants' costs). This minimum level of cover is replicated in the minimum terms and conditions, which are set out at appendix 1 to the Solicitors' Indemnity Insurance Rules. Clause 2.1 provides that: 'The sum insured for any one claim (exclusive of defence costs) must be at least £1 million.'
The move to the commercial market saw a change in the definition of 'one claim'. Under the Solicitors' Indemnity Rules, which set out the cover afforded by the SIF, rule 17.2 provided that: 'All claims arising from the same act or omission (whether or not made or intimated or rising out of circumstances notified during the same indemnity period and whether or not involving the same or any number of different practices and/or members of such practices) shall be regarded as one claim.'
Under the minimum terms and conditions, which relate to the cover afforded by qualifying insurers from 1 September 2000 onwards, clause 2.5 provides that: 'The insurance may provide that all claims against any one or more insured arising from the same act or omission or from one series of related acts or omissions will be regarded as one claim for the purposes of the limits contemplated by clauses 2.1 and 2.3.'
Clause 2.5 follows the standard commercial market wording and was settled as part of the negotiations with the commercial insurers when drawing up the minimum terms and conditions. The principal difference between the SIF wording and the minimum terms and conditions wording is the introduction of the words 'or from a series of related acts'. The qualifying insurers had assumed that the wording of clause 2.5 would enable them to treat as one claim multiple claims arising not only from a series of related acts but also form a series of similar acts. The House of Lords' decision in the case of Lloyds TSB General Insurance Holdings Ltd and others v Lloyds Bank Group Insurance Co Ltd  UK HL 48 ('the Lloyds TSB case') has established that the qualifying insurers' assumption was wrong.
The House of Lords decision has given clarity to the phrase a 'related series of acts or omissions', which is found in many aggregation clauses. The qualifying insurers are seriously concerned that the decision in the Lloyds TSB case has narrowed the effect of the aggregation clause in the minimum terms and conditions (clause 2.5) to an unacceptable extent. They sought an amendment of clause 2.5 to put them back in the position they thought they were in before the Lloyds TSB case. The qualifying insurers maintain that if some action is not taken to mitigate their exposure, there will inevitably be some disruption in the marketplace in relation to firms' ability to obtain insurance at an affordable cost.
The reworded definition of one claim agreed by the Law Society Council is as follows:
The insurance may provide that:
(a) all claims against any one or more insured arising from:
(i) one act or omission;
(ii) one series of related acts or omissions;
(iii) the same act or omission in a series of related matters or transactions;
(iv) similar acts or omissions in a series of related matters or transactions;
(b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.
The new wording ostensibly provides greater scope for aggregation of claims. In agreeing the change, the council took into account advice from the Law Society's indemnity insurance committee and the Law Society's external indemnity insurance advisers, Marsh, that this issue was of sufficient concern to qualifying insurers that there was a risk that a number of insurers would withdraw from the market for solicitors' compulsory indemnity insurance precipitating an increase in premium rates.
Any wording that gives greater potential for the aggregation of claims will make it more likely that the current minimum limit of £1million will be exhausted. The council has, therefore, reviewed the adequacy of this minimum sum and determined that it should be increased to £2 million any one claim.
It is now 15 years since the current minimum sum insured was increased from £500,000 to £1 million. Based on simple indexing, the equivalent of £1 million in 1989 would be around £1.7 million today. Although indexing is a useful indicator, it does not necessarily reflect the development in claims settlements since 1989. The index contains elements that are not relevant to claims against solicitors and omits relevant elements, such as the value of property and the level of personal injury claims. Property values generally have more than doubled since 1989 and, ignoring the impact of structured settlements, maximum personal injury awards now exceed £3 million.
By not increasing the minimum sum insured under its compulsory professional indemnity scheme since 1989, the Law Society has fallen behind other regulators of legal services in the UK. Under the Law Society of Scotland and the Law Society of Northern Ireland schemes, the minimum sums insured are £1.25 million and £2 million respectively.
The effect on premium levels for individual firms will be dependant on the state of the market at renewal and the firm's current level of cover. For firms that already carry cover of £2 million or more, the change will have little or no effect. For firms that are insured for only the minimum sum, insurers would like to be able to raise premium rates by around 20% to cover the increased exposure. However, in the current soft market such rises are unlikely to be achieved.
The increase in the minimum sum insured will not affect policies that expire or enter into run-off cover before 1 October 2005. Similarly, the level of run-off cover provided by the SIF to practices that ceased with no successor practice prior to 1 September 2000 will be unaffected.
The Law Society Council believes that the agreed changes strike the right balance between ensuring adequate consumer protection, on the one hand, and the additional cost to the profession of providing such protection coupled with the ability and willingness of the market to provide it, on the other.
For additional information, contact the Law Society's professional indemnity section, tel: 01527 504487