The Law Society Council last week approved the new arrangements for provision of professional indemnity cover and approved the new indemnity insurance rules.The main changes have already been outlined in previous articles.

In summary they are:-- The mandatory tier of professional indemnity insurance will be provided through the commercial market rather than through a mandatory mutual fund.

This means that ultimate underwriting risk will be transferred outside the profession.-- Firms will be able to obtain cover from a choice of qualifying insurers.

The insurers will have to offer policies on set minimum terms and to meet a number of other conditions.-- There will be a managing general agency which will be obliged to offer cover to all sectors of the profession.

This is a joint venture between the Law Society and St Paul International.-- Firms that cannot easily get cover on the commercial market can apply to be covered, for a limited period, through an 'assigned risks pool'.

Premiums for the assigned risks pool will be high, and firms in the pool will be required to implement special measures to reduce the risk of claims.The arrangements will come into effect on 1 September 2000.

They are in response to the profession's wish to have freedom of choice in making arrangements for indemnity cover.

However, while firms will have a choice on how they obtain their cover, the compulsory obligation to have professional indemnity cover to certain minimum standards remains.-- Minimum terms The Council also approved the Solicitors' Indemnity Insurance Rules 2000, which set out the minimum terms of cover that firms must obtain.

Qualifying insurers will be free to offer cover which exceeds these minimum terms, but must offer firms the option to purchase a minimum cover pa ckage only.The minimum terms of cover are based closely on the existing cover provided by the Solicitors Indemnity Fund (SIF).

That is to say:-- minimum cover of £1 million for each and every claim;-- insurer to meet the excess wherever the solicitor fails to do so;-- no ability for the insurer to avoid the policy, except where all the principals in a firm were dishonest.The main changes are:-- Insurers can require firms to disclose 'circumstances' known to them which might give rise to claims, and to recover the cost of meeting claims where the circumstances are not reported.

This applies from the start of the new arrangements.

Firms can, of course, report such claims to the SIF, but they must do so on or before 31 August 20000 if the claim is to be covered by the fund.-- The level of excesses will be for negotiation between firms and insurers, rather than set according to a prescribed formula -- except in the assigned risks pool, where they will be based on the penalty deductibles which are currently used by the SIF.-- Run-off cover for principals who retire with no successor practice will last for six years, rather than indefinitely.

Retired principals may be required to pay the excess on run-off claims.

The Society's Council will make arrangements to deal with claims arising outside the six-year period without additional charge to the principals concerned.-- What should solicitors' firms do to prepare?Most firms have consented to have their claims data passed from the SIF to the managing general agency.

Firms are also free to pass the data to any qualifying insurer from whom they wish to obtain a quote, or to an insurance broker.

A list of qualifying insurers will be published in May 2000 and on the Law Society's Web site (www.indemnity.lawsociety.org.uk), as well as in the legal press.

The Society will continue to circulate information regularly to the profession.

A copy of the Solicitors Indemnity Rules 2000 will be sent to every firm once they are finalised.Now is the time for firms to review their risk management procedures, as being able to demonstrate effective risk management can only help to secure the best quotation for cover.

Firms which have not already done so might wish to seek accreditation to the LEXCEL standard, which is the practice management quality standard specially tailored to the needs of solicitors.AFTER THE SOLICITORS INDEMNITY FUND, BY ZAHID NAQVIThe legal profession will be only too aware that the Solicitors Indemnity Fund (SIF) will no longer exist in its current form from September.

As well as being a good opportunity for well-run law firms and insurers, it is also something of a leap into the unknown for both, writes Zahid Naqvi.The SIF has carried forward a deficit of nearly £260 million in the 1999 year.

During the periods between 1987 to 1993, when clear figures on the incurred loss ratios were provided by the SIF, no single year incurred a loss ratio below 150% after 36 months.

The challenge for the commercial insurance market will be to provide coverage at stable, sustainable prices, while retaining the kind of service that the profession has become accustomed to.

There will be a temptation for insurers to win business through unfeasible prices with no thought on how to handle the volume and complexity of circumstances that will follow.There lies a significant responsibility for both the insurers and solicitors.

Insurers have a responsibility to consider service, coverage and claims handling.

They also have a responsibility to provide sensible and sustainable price s that do not radically fluctuate each year, or create resentful loss ratios.

Solicitors will need to look beyond price and ensure that their losses will be handled effectively and be mitigated rather than escalated by an insurer's involvement.

The issues are simple, obvious factors that could easily become lost in a price-driven environment.Perhaps less obvious but increasingly important issues that will affect the profession are the 'new liabilities'.Employment practices are currently a topical issue.

Considerable changes in the law which have increased the impact of such cases include:-- maximum unfair dismissal awards issued by industrial tribunals have been raised from £12,000 to £50,000; and-- the minimum period of employment to qualify for unfair dismissal has dropped from two years to one year.Another key development is that increasing numbers of law firms are undertaking more of their business through the Internet and e-mail.

This activity has opened a range of exposures that firms will need to address.

Not only does this include the need for cover against Web site hacking, but also cover for what might appear to be harmless communication between colleagues and clients, which can result in legal action.Perhaps the best known example of this was when Western Provident and Norwich Union reached a £450,000 out-of-court settlement after a Norwich Union employee sent an internal e-mail which was defamatory of Western Provident and was false.

It was held that a company can be regarded as the publisher of a defamatory e-mail written by its staff.It is difficult for companies and law firms alike to maintain strict enough rules over employees to prevent this type of communication happening.

People use e-mail as freely as they use the telephone, but often do not appreciate the consequences of what would appear to them as innocent chat.

The commercial environment is changing so quickly that it is a constant challenge for organisations to remain aware of the full extent of their liabilities.The break-up of the Solicitors Indemnity Fund should present a positive opportunity for all parties concerned in the long-term.

But for this to be fully realised, serviceable relationships of mutual understanding need to be created that go much further than a simple premium agreement.Zahid Naqvi is a senior underwriter at the Hiscox Insurance Company