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Law Society guidance on the changes brought into effect by the Solicitors Indemnity Insurance Rules 2005 and the Solicitors Indemnity Rules 2005
The Solicitors Indemnity Insurance Rules 2005 (to which are appended the minimum terms and conditions of insurance) and the Solicitors Indemnity Rules 2005 will come into effect on 1 October 2005.
The rules are published on the Law Society's Web site at: www.indemnity.lawsociety.org.uk. This is a summary of the principal changes to be introduced. For the full details of the changes, refer directly to the new rules.
Solicitors Indemnity Insurance Rules 2005 and the Minimum Terms and Conditions (MTC)
Minimum sum insured
The minimum sum insured for any one claim (exclusive of defence costs) has been increased to £3 million for 'relevant recognised bodies', that is for limited liability partnerships (LLPs) and companies (other than unlimited companies and certain nominee companies).
This replaces the requirement for such recognised bodies to effect additional insurance of either £500,000 on an each and every claim basis, or £2 million per annum on an aggregate basis, on top of the current compulsory minimum sum insured of £1 million.
For all other practices, the minimum sum insured for any one claim (exclusive of defence costs) has been doubled to £2 million.
Aggregation clause
The definition of 'one claim' has been reworded following the House of Lords decision in the case of Lloyds TSB General Insurance Holdings Ltd and others v Lloyds Bank Group Insurance Co Ltd [2003] UK HL 48. Additional details were given earlier this year (see [2005] Gazette, 27 January, 34).
Multiple insurers
The minimum terms and conditions have been amended to make it clear that more than one insurer can underwrite a policy of qualifying insurance - a situation that may arise more often with the increase in the minimum sum insured.
Qualifying insurance can be arranged on a co-insurance basis (with each insurer taking a fixed percentage share of every claim) or on a layered basis (with each insurer providing cover for a specific layer of £1 million or £2 million).
Suspended practice
Under the current MTC, if a sole practitioner's practising certificate is suspended and there are no arrangements for a caretaker principal to run the practice during the period of suspension, the practice will cease for indemnity insurance purposes, thus triggering run-off cover.
It is usual for a run-off premium to become payable of between two and three times the annual premium. If the suspension is lifted after a short period of, say, six months and the sole practitioner resumes the practice, the old practice remains in run-off and separate cover has to be taken out for the new practice.
A new clause 5.4 has been introduced to permit (but not require) qualifying insurers to cancel run-off cover and reinstate primary cover where a firm's practice restarts.
Solicitors Indemnity Rules 2005
This year the Solicitors Indemnity Rules serve four main purposes:
Return of contributions
The main change to the rules is the introduction of a rule to enable a refund of contributions to be made, as agreed in principle by the Law Society Council.
This takes the form of a new rule 11A, which provides for a refund of contributions for the 2002/2003 and 2001/2002 indemnity years (amounting to approximately £50 million) to practices that had made contributions in respect of those indemnity years.
The refunds can only be triggered by a direction from the Law Society's Council to the SIF. Any outstanding contributions or deductibles due from a practice can be deducted from any refund.
The emphasis is on payment in the first instance to the practice that made the original contributions. Only if that is not possible will the SIF look to make payments directly to the individual principals who made the payment. The arbitration provisions in rule 20 have been expanded to provide a resolution mechanism for disputes arising from rule 11A.
Post six-year run-off cover
Under the current compulsory professional indemnity insurance scheme, the minimum terms and conditions of cover provide that if a firm's practice ceases with no successor practice, then the qualifying insurance in place at the time is extended for an additional six years to provide run-off cover.
When setting up the current compulsory professional indemnity insurance scheme in 1999, the Law Society Council agreed 'that arrangements should be made for the profession collectively to fund run-off cover under the new arrangements to the extent that it is not provided through the minimum terms'.
The council acknowledged that something would have to be done at the appropriate time to plug the gap between the run-off cover provided by the SIF without time limit and the six years of cover provided by qualifying insurers under the MTC. The first date that such post six-year run-off cover will be required is 1 September 2007.
With the endorsement of the Law Society, the board of Solicitors Indemnity Fund Limited has put in place an insurance programme in respect of the SIF, which includes post six-year run-off cover from 1 September 2007 to 30 September 2017. The cost of the cover is being met out of the SIF surplus. New rules have been added at rules 13.5 and 13.6 to provide for this post six-year run-off cover through the SIF.
l For additional information or a copy of the rules, contact the Law Society's professional indemnity section, tel: 01527 504487.
Andrew Darby is head of the Law Society's professional indemnity section
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