In the spring of 1999 there was a ballot of the profession following a resolution at a special general meeting of the Law Society calling on the Society's Council to permit firms freedom of choice in their professional indemnity arrangements.Some 70% of respondents supported the resolution.

Following that, the Council decided in June 1999 to introduce arrangements providing for a choice of insurer to come into effect in September 2000.The main features of the arrangements are:-- Professional indemnity insurance will in future be provided through the commercial market, rather than through a statutory fund operating along the lines of a mutual scheme.-- Insurance will be available through qualified insurers who agree to provide policies on the prescribed minimum terms and to participate in an assigned risks pool.-- The Law Society is establishing a managing general agency (MGA), in a joint venture with St Paul International, as part of the arrangements.

The MGA will guarantee to offer cover to all sectors of the profession.-- Firms that cannot readily obtain cover on the commercial market will be covered, for a limited period, through an 'assigned risks pool'.

Premiums for the assigned risks pool will be high, and firms will be required to implement special measures to reduce the risks of claims.-- All qualified insurers, including the MGA, will be required to comply with minimum terms, which will be based closely on the terms currently applying to the Solicitors Indemnity Fund (SIF).-- Principals who retire before 1 September 2000 will continue to be provided with run-off cover at no additional charge.Qualified insurersThere will be no special requirements to become a qualified insurer.

In order to promote maximum competition, any insurer authorised to conduct business in the UK will be able to become a qualified insurer provided it agrees:-- to comply with the minimum terms for insurance policies;-- to participate in the assigned risks pool in proportion to their share of the compulsory market;-- to adopt any prescribed claims handling arrangements;-- to agree to arbitration arrangements for disputes between insurers.Individual qualified insurers will be free to target whichever sections of the profession they wish.

They will be under no obligation to offer terms to all firms, and there will be no influence from the Law Society in the terms they offer.Qualified insurers will be free to provide a single quotation covering both the minimum required level of indemnity cover and any top-up insurance which the firm concerned may wish to have.The managing general agencyThe Law Society Council was concerned that relying solely on individual qualified insurers for future professional indemnity arrangements might lead to difficulties for some sectors of the profession.

There was a risk that, particularly if the insurance market hardened, those sections of the profession whose business was less attractive to insurers might find it difficult to obtain cover at all.

Accordingly, the Council decided to establish -- as part of the arrangements -- a managing general agency.The MGA is a joint venture between the Law Society and a commercial insurer, St Paul International.

St Paul is a large US-based insurer, which is already actively involved in providing professional indemnity cover to doctors and dentists in the UK, and to lawyers in a number of other jurisdictions.

It was chosen by the task force after proposals from a number of leading insurers had been considered.

All the commercial underwriting risk from the insurance business transacted through the MGA will fall to St Paul.

The MGA will administer the insurance.

It will incorporate, and build on, the existing infrastructure and expertise of the SIF.St Paul has agreed, as part of the contractual arrangements for the establishment of the MGA, that the agency will offer cover to all sectors of the profession.

That does not mean that every individual firm will necessarily receive a quotation.

The MGA -- like any individual qualified insurer -- will be free to reject firms with unacceptable claims records.

But the MGA will exclude firms only if their individual record is unacceptable, not because of the type of firm they are or the type of work they do.Minimum termsThe current cover provided by the SIF is intended to provide what is necessary to ensure adequate consumer protection.

That cover has thus provided the starting point in developing minimum terms under the new arrangements.The minimum terms are based closely on the existing SIF cover.

They provide, for example, for a minimum cover of £1 million for each and every claim.

The main differences between the SIF cover and the minimum terms currently proposed are:-- Under the minimum terms, run-off cover for firms which close with no successor practice will last for six years, rather than indefinitely as with SIF.

The Law Society intends to make other arrangements to ensure that claims arising after six years are met without requiring retiring principals themselves to take out cover.-- Firms will need to report circumstances which may give rise to claims, rather than being able to wait until claims arise, as is possible with SIF.

Insurers will expect firms to notify them of such circumstances when seeking cover.

Practitioners are entitled to report any known circumstances which may give rise to claims to the SIF up to 31 August 2000.

If that is not done, the cost of th e claim may not be covered either by SIF or by the new arrangements, and would thus have to be met by the partners personally.-- There will no longer be a prescribed level for deductibles -- the amount of a claim which the firm must meet itself.

Firms which wish to have higher deductibles than the present SIF levels will be free to do so, provided their insurer is willing to offer cover on those terms.

Where a firm does not pay its deductible, insurers will have to meet the claim in full and recover the deductible from the firm later.The latest draft of the proposed minimum terms is on the Law Society's Web site at www.lawsociety.org.uk.

Copies are also available on request from the contact at the end of this article.The assigned risks poolSome firms may find it difficult to obtain cover from the commercial market, particularly if they have a poor claims record.

Following consultation with the profession, the Law Society Council has decided that an 'assigned risks pool' should be created to provide cover for a limited period to those firms.

Without such an arrangement, firms would be forced to close, perhaps as a result of short-term difficulties which had led to problems in obtaining insurance.

On the other hand, the Council considers it essential that firms should be covered by the assigned risks pool only for a limited period, because it would not be acceptable for those who cannot obtain cover on the commercial market to be covered by the pool indefinitely.It is envisaged that the assigned risks pool will work as follows:-- Firms will be allowed to stay in the pool for a maximum of two years.

If they cannot obtain cover on the commercial market after then, they will have to close.-- Premiums to the pool will be set according to a formula which will be designed to result in a level broadly equivalent to the maximum which firms with poor claims records might now pay to the SIF.

Firms which do not pay the required premiums will be liable to be excluded from the pool, and thus forced to close.-- There will be only a very limited power to grant waivers from the maximum period in the assigned risks pool, or from the premium required.-- Firms in the assigned risks pool will be required to implement any 'special measures' which may be prescribed.

These special measures will be determined following inspection of the firm, and will be designed to reduce the risk of claims arising in future.

The requirements are thus likely to relate to improving practice management, and ensuring that work is done and supervised by individuals who are competent to do so.-- Qualified insurers -- including the managing general agency -- will be required to participate in the assigned risks pool in proportion to their share of the market for mandatory insurance.

If the assigned risks pool makes losses, those will be borne by the qualified insurers.Although losses of the assigned risks pool will in the first instance be borne by qualified insurers, they are still nevertheless a matter of real concern to the profession.

Qualified insurers will treat losses from the assigned risks pool as part of their costs of participating in the market for solicitors' professional indemnity.Accordingly, they will inevitably take those costs into account in the premiums they offer to other firms.

The ultimate effect will be that any continued losses of the assigned risks pool will be borne by the profession as a whole, through higher indemnity insurance premiums.It is thus very much in the interests of the profession that the assigned risks pool is tigh tly managed.Run-off coverThe Law Society Council has already decided that principals who retire before 31 August 2000 with no 'successor practice' should continue to receive cover without additional charge in respect of any claims which might arise in respect of their former practice.

The Council expects to make the same arrangements for principals who retire after 1 September, although this is subject to confirmation by the Council in April.

If this is agreed, any claims arising beyond the six-year period of run-off cover will be met by the profession collectively.

Funds will need to be collected from the profession to meet the costs involved.Additional informationThe Law Society's indemnity task force will ensure that information about the future arrangements for professional indemnity cover is provided to the profession as it becomes available.

The task force welcomes comments on the proposals.

The comments should be sent to Andrew Darby at the Law Society, Ipsley Court, Berrington Close, Redditch, Worcestershire, B98 0TD, as soon as possible, and in any event by 17 March.