Professional indemnity - new rules

Andrew Darby explains the purpose and procedure behind the new indemnity rules

In April, the Law Society Council made the Solicitors' Indemnity Insurance Rules 2000 which put into the place the new compulsory professional indemnity arrangements based on qualifying insurers and an assigned risks pool.

Additional rules were needed to deal with the running off of the Solicitors' Indemnity Fund (SIF).

The Solicitors' Indemnity Rules 2000 received the concurrence of the Master of the Rolls on 20 July 2000 and will come into effect on 1 September 2000.

This year, the rules serve two limited purposes:

l to provide cover for 'run-off' claims - that is, new claims made in the 2000/01 indemnity year in respect of principals who have retired before 1 September 2000 with no successor practice as defined in the Solicitors' Indemnity Insurance Rules 2000; and

l to collect contributions towards the shortfall of the fund in respect of earlier indemnity years and to meet the cost of the run-off claims.

It is intended that contribution notices will be sent to practices on 18 August.Scope of cover

The principal change this year is the limitation of the scope of cover of the SIF to new claims made on or after 1 September 2000 against any member of a previous practice which ceased to exist before that date without there being a successor practice.

The wording of the rules dovetails with the wording of the minimum terms and conditions under the Solicitors' Indemnity Insurance Rules 2000 to ensure that a claim will not be dealt with by the SIF where cover is provided by a qualifying insurer or the assigned risks pool.

The run-off cover under the rules will be provided on a similar basis to the cover provided by the SIF to date.

Retired principals are not required to pay any part of any deductible.

New claims made on or after 1 September 2000 against any member of a previous practice which is the subject of a succession before that date will be dealt with under the cover provided to the successor practice by a qualifying insurer or the assigned risks pool, as the case may be.

If a practice closes after 1 September 2000 with no successor practice then the minimum terms and conditions provide that the qualifying insurer or the assigned risks pool, as the case may be, will provide run-off cover for six years from the date of expiry of the policy.

It is proposed that the Law Society should make other arrangements to ensure that claims arising after the six-year run-off period are met without requiring retired principals to take out cover, although the position regarding deductibles will still have to be considered.

Collection of the contribution requirement

The Law Society Council began to collect the shortfall in the 1998/99 indemnity year.

The intention at that time was to collect the shortfall over seven years.

A total of 72 million was collected in 1998/99, being a seventh of the then projected level of the shortfall.

In the 1999/2000 indemnity year, the Council decided to continue to collect on the basis of a seven-year period.

The sum collected in the current year has been 67.1 million.

The reduction from the previous year's figure arose because the then current projection for the shortfall was lower than had previously been estimated.

The latest estimate of what the shortfall will be as at 31 August 2000 is 176.5 million, following receipt of the first two instalments.

The shortfall contributions are collected on the basis of the method of calculation which applied to indemnity contributions before risk banding was introduced.

The Council took this approach because it considered it fairer to adopt the method of calculation at the time the shortfall arose, rather than applying risk banding both to the shortfall and to the current year's contribution.

Discounts from the shortfall contribution were given to firms with good claims records, but loadings were not applied to those records.

In assessing whether a firm qualifies for discount, to date reserves as well as paid claims have been taken into account.The Council agreed that the SIF contribution for 2000/01 should be set at the same level as last year's shortfall contribution, namely 67.1 million to cover both collection towards the shortfall and claims arising in 2000/01 from principals who retire before 1 September 2000 with no successor practice.

The Council also agreed that the method of calculation of contributions, and the firms which sums are required, should be the same for both elements of the 2000/01 contribution.

The contribution will be assessed in the same way as the current year, in other words without using risk banding and with low claims discounts up to 30% but no claims loading, subject to modifications as follows:

l Reserved claims will no longer be taken into account in determining a practice's eligibility for discounts;

l The introduction of a minimum contribution of 100 per practice;

l Practices consisting entirely of principals who had not been principals prior to 1 September 2000 will not be subject to the 2000/01 contribution requirement; and

l The stepped rating table has been amended and the rates which have been put to each gross fees band are set out in the table.

Gross fees certificate

The date for the return for gross fees certificates has been moved from 31 October to 30 November.

For additional information, contact the Law Society's professional indemnity section, tel: 020 7320 5871.

Queries regarding the calculation of contributions for an individual practice should be directed to the Solicitors Indemnity Fund's practice department, tel: 020 7566 6000

All of the indemnity rules may be viewed on the Law Society's Web site at www.indemnity.

lawsociety.org.uk and a copy of the rules may be obtained from the Law Society's Professional Indemnity Section, tel 020 7320 5871.

Andrew Darby is head of the Law Society's professional indemnity section

Gross fees % of gross fees Over Up to 70,000 2.69 70,000 250,000 2.09 250,000 500,000 1.83 500,000 750,000 1.47 750,000 1,500,000 1.12 1,500,000 2,500,000 0.97 2,500,000 5,000,000 0.58 5,000,000 15,000,000 0.52 15,000,000 60,000,000 0.37 60,000,000 100,000,000 0.29 100,000,000 125,000,000 0.23 125,000,000 150,000,000 0.20 150,000,000 0.16