Market triumphs in first year

The first year of the new open market scheme for compulsory indemnity insurance was a success.No type of firm had difficulty obtaining cover.

Most firms paid substantially less for their insurance than they had paid in contributions to the Solicitors Indemnity Fund (SIF) in its last year.

In fairness to the SIF, those contributions were larger than normal because of the potential threat of Y2K computer glitches and because the SIF had to provide for increased claims notifications in its last year.

The SIF contributions also covered the cost of 'free' run-off cover.

Even so, the profession as a whole paid less for its insurance in the open market than it would have contributed to the SIF in a normal year.The few firms that found it impossible to obtain insurance from a qualifying insurer were insured by the assigned risks pool (ARP), underwritten by all the qualifying insurers collectively.The paramount objective of compulsory indemnity insurance is the protection of clients.

Therefore, the Law Society has taken steps this year to improve client protection.

Its council has passed a rule requiring solicitors to tell claimants of the identity of the solicitor's insurers; if a solicitor does not comply, the Society may give a claimant the information it holds.

Rules have also been established making clear that so-called freelance agents - solicitors who act as advocates on the instructions of other solicitors, in the same way as barristers - must have insurance.The Society has also improved its agreement with the qualifying insurers to ensure that if there is a dispute between insurers over which is on cover for a particular claim, the claim is dealt with; and, if the solicitor is liable, the claimant is compensated without the process being held up by the dispute between the insurers.What of the current year, which began on 1 September? Most firms will find that premiums have increased a little.

This is because insurance is a highly cyclical business; last year, premiums were at a low point.

Over the past five years the industry has not made profits.

As a result, some insurers have withdrawn from commercial business, and a few have become insolvent, such as the Independent in the UK and the HIH Group in Australia.

This means there are fewer sellers to satisfy the demand, and so prices rise.

But the total cost to the profession will still be less than recent contributions to the SIF.Some firms will find that their insurers have declined to renew their policies.

Anecdotal evidence indicates that among such firms are those who have not played fair with their insurers - they have not been truthful in their proposal forms, or they have not paid the premium, or sometimes both.

In those circumstances, they can hardly expect their insurers to carry on taking the risk for no reward, bearing in mind that in the interests of client protection, the insurer must pay the claims, regardless of truthful disclosure, or of payment of the premium.Those firms may go into the ARP, where they pay 25% of their gross fees as premiums, are visited by the Office for the Supervision of Solicitors and are subject to special measures.

These are all powerful incentives to deal properly with a commercial insurer.For the future, the Society's indemnity insurance committee intends to see that stronger measures are taken against solicitors who do not pay premiums, whether to the ARP or to individual insurers, as every unpaid premium increases the potential losses of insurers, and therefore all solicitors' future premiums.The limit of 1 million per claim was fixed over 10 years ago, and we intend to consider and consult on whether the time has come to increase it.

We intend also to investigate the possibility of placing some insurance so as to cap the liabilities of the SIF.Peter Farthing is chairman of the Law Society's indemnity insurance committee and a partner with City-based Clyde & Co