Death by insurance

As the profession faces the indemnity insurance renewal round, Michael Simmons argues that the Solicitors Indemnity Fund should be revived

There was once a happy time when lawyers were generally not sued for their mistakes.

The prudent among us covered ourselves by insurance.

Premiums were cheap and few claims were made.

As the consumer lobby grew stronger, the Law Society decreed that all solicitors must carry professional indemnity insurance.

It created the Solicitors Indemnity Fund (SIF) - an unwieldy but relatively benign mutual.

The policy adopted was of one size fits all.

All solicitors contributed premiums, and all claims were met.

The complaint was raised that the efficient were subsidising the negligent.

The large commercial firms were characterised by few, but catastrophic, claims.

High street firms had a multitude, but most were settled for small amounts.

Managing partners who previously would have lost sleep at the thought of one claim learnt to pass on multiple report sheets to the SIF.

As the claims mounted, the Society listened to the voices of those who considered that they were paying larger premiums to subsidise the less efficient.

Open season was declared, and the insurance market was given our professional indemnity work to divide among itself.

In the first year, there were any number of entrants, and plenty of capacity.

In such a soft market, rates were low - lower, in fact, than the SIF generally charged.

However, the insurance industry had underestimated the claims and, when the time came to insure for the second year, the number of insurers had reduced, as had capacity.

Rates soared.

Those with large or multiple claims found that they were basically uninsurable.

The Society was faced with the prospect of a substantial proportion of the profession not being able to get cover, and therefore having to close.

The assigned risk pool was created to provide a shelter of last resort.

The rates were prohibitive.

A firm could only be in the pool for two years.

After that, if the market still avoided the firm, it had to close.

The pool was contributed to by the insurers remaining in the market, which meant cross-subsidisation by the rest of the profession.

Firms, already running on thin margins, found they were continuing to exist for the benefit of their insurers.

But this year rates have eased somewhat.

The noose has been loosened a little.

In a softer market, solicitors may be allowed to keep a little more by way of profit - but what next?

It is worthy of note that other professions and industries have been similarly squeezed.

The remedy for some has been to form captive insurers.

The Society did this with the formation of the SIF.

As we walk away, others, perhaps better informed, are moving in.

What hope is there for the future? Solicitors will continue to be negligent, and claims will increase exponentially.

The uninsurable weak will be forced out of business.

The SIF umbrella no longer exists.

It is a harsh economic world.

On ceasing practice, the compulsory run-off provisions are penal.

On the basis that you closed your practice because the money had dried up, who is going to pay those premiums? The retiring principal may be unable to do so, and may well purchase a one-way ticket for Spain, with the rest of us picking up the pieces.

The legal profession is now in a complete mess over professional indemnity insurance.

We need to go back, and revive the SIF to act in tandem with the market.

This will at least extend capacity, and choice for solicitors.

The stronger firms can secure better terms in the market, leaving the weaker firms covered by the SIF.

The weakest will be refused cover.

Think back to those halcyon days, when indemnity insurance was just a small cloud on the horizon.

Little did we know that we were about to face gale-force winds.

See feature, page 20 (see [2003] Gazette, 26 June)

Michael Simmons is a consultant at London law firm Finers Stephens Innocent