Professional indemnity - new rules

New rules on indemnity insurance for solicitors come into effect on 1 SeptemberThe Solicitors Indemnity Insurance Rules 2001 (to which are appended the minimum terms and conditions (MTC) of insurance) and the Solicitors Indemnity Rules 2001 both received the concurrence of the Master of the Rolls on 20 June 2001 and will come into effect on 1 September 2001.

The Solicitors Indemnity (Amendment) Rule 2001, which amends the Solicitors Indemnity Rules 2000, also received concurrence and came into effect on 20 June 2001.The rules have been published on the Law Society's Web site at www.indemnity.lawsociety.org.ukA summary of the principal changes to be introduced is given here.

Refer directly to the new rules for the full details of the changes.

Solicitors Indemnity Insurance Rules 2001 and the minimum terms and conditions: agentsThe effect of the changes is that solicitors practising on their own whose practice consists of acting as an agent or advocate for a variety of other practices will in future be required to effect a policy of qualifying insurance, as they will be carrying on a practice in their own right and will not come under the cover effected by the practices who make use of their services.The definition of 'employee' in section 8.6 of the MTC has been amended to make it clear that the meaning for the purposes of the MTC may include people who are not, legally speaking, employees, but who are nevertheless involved directly in the provision of the professional services of the firm.For the avoidance of doubt, the definition now includes reference to an 'agent' as there appears to have been a difference of view as to whether so-called 'freelance agents' or freelance advocates came within the definition of an employee of the practice for which they are working from time to time.

The definition makes it clear that an employee does not include a person who is required to have separate professional indemnity insurance, either under the Solicitors Indemnity Insurance Rules 2001 (SIIR 2001) or under the rules of another professional body.Rule 4 of the SIIR has been amended to tie in with the definition of employee in the MTC, so as to make it clear that someone cannot both be an employee yet also be required to take out insurance in their own right in respect of the same work they are carrying out as an employee.

Disclosure of a firm's qualifying insurerIn future, a firm will be required to provide details of its qualifying insurer to a person who asserts a claim against the firm.

The firm is then required to provide basic details as to the name and address of the qualifying insurer together with the policy number (rule 46, SIIR 2001).The rules have been amended to allow the Law Society, where it considers it appropriate to do so, to reveal the identity of a firm's qualifying insurer to any person asserting a claim against that firm.

It is envisaged that this right will be exercised only where a firm had failed to comply with its obligations under rule 46.

Time limits for waiver applicationsTime limits have been introduced for the making of waiver applications under the SIIR 2001 and for appealing against any decision.

Waiver applications have to be made by 30 November 2001 or three calendar months from the date the obligation arose, whichever is the later.For waiver applications under the SIIR 2000, there is a cut-off date of 28 February 2002.

Appeals against any decision made by the Society in respect of a waiver application must be made in writing within 21 days from the date of the decision.

Reimbursement right of insurerA proviso has been added to the insurer's right of reimbursement set out in paragraph 7.2 of the MTC.

This reflects the concern expressed by some practices that there might be a conflict between their professional obligations to clients and their duties to their qualifying insurer.

The amendments are intended to make it clear that an insured will not trigger the right of reimbursement simply because a firm complies with rules or codes laid down by the Law Society or set out in the Law Society's publication Keeping clients - client care guide for solicitors.

However, firms should still, where appropriate, notify their insurers as soon as possible of a potential claim.Backdating coverA clause has been added to the qualifying insurer's agreement that limits the extent to which a qualifying insurer may enter into a contract of insurance with retrospective effect.

In future, contracts may be backdated by no more than 30 days.

Solicitors Indemnity (Amendment) Rule 2001The Solicitors Indemnity Rules 2000 have been amended to provide that the Solicitors Indemnity Fund (SIF) may provide indemnity up to the due proportion of the standard deductible that the SIF would have disregarded under the Solicitors Indemnity Rules 1999 in respect of principals who retired before 1 September 2000 leaving a successor practice and who meet certain criteria as follows:l They ceased to be principals in private practice before 1 September 2000;l They are not and have never been principals of the successor practice; andl They are not, at the time the claim is made or circumstances are reported, a principal in private practice or otherwise required to effect insurance under the SIIR 2000.An example serves to illustrate how the rule would apply in practice.

Firm X with four partners A, B, C and D ceased practising in May 2000.

A retired while B, C and D all became partners in firm Y in May 2000.

Therefore, firm Y is a successor to firm X.

A claim is made in November 2000 in respect of the negligence of firm X and is paid by firm Y's qualifying insurer pursuant to firm Y's indemnity cover.

The relevant excess would be that applying to firm Y under its policy.

The partners of firm Y must meet the uninsured element, but may then seek to recover their loss from each of A, B, C and D on the basis of an express indemnity given by the partners of firm X to the partners of firm Y in May 2000.

Had the claim been made on 31 August 2000, it would have been dealt with under the Solicitors Indemnity Rules 1999 and the deductible applicable to the claim would have been that Continued on page 44Continued from page 43relating to a four-partner practice (as A, B, C and D are the liable principals) which is 6,000.

A's share of this deductible is 1,500, which the SIF would have disregarded under the 1999 Rules.

Therefore, the SIF will be able to provide A with indemnity up to 1,500 in respect of a claim by firm Y for recovery of its uninsured losses.

Solicitors Indemnity Rules 2001This year the Solicitors Indemnity Rules serve three purposes:l To provide cover for 'run-off' claims - that is, new claims made in 2001/02 in respect of principals who had retired before 1 September 2000 with no successor practice;l To provide cover for 'excess claims' - the SIF will indemnify eligible principals who had retired before 1 September 2000 with a successor practice to the extent of the part of any deductible (excluding any penalty deductible) which would have been paid by the SIF on their behalf under the Solicitors Indemnity Rules 1999 (as referred to above); andl To collect contributions towards the shortfall in the fund in respect of earlier indemnity years, to meet the cost of 'run-off' claims and to meet the cost of 'excess' claims.It is intended that contribution notices will be sent to practices at the end of July.

Collection of the SIF contribution requirementThe unaudited accounts for the Solicitors Indemnity Fund for the half year ended 28 February 2001 showed a deficit or shortfall of 27 million after taking account of contributions receivable in 2000/01.

In arriving at this figure full allowance has been made in respect of estimated ultimate claims liabilities arising from the 'run-off' claims.

In addition, provision has to be made to meet the liabilities for 'excess' claims referred to above.

The cost over time for this new category of claims is expected to reach 16.5 million.

This has the effect of increasing the estimated shortfall to 43.5 million.The Law Society council agreed that the SIF contribution for 2001/02 should be set at 25 million to cover collection towards the shortfall, claims arising in 2001/02 from principals who retired before 1 September 2000 with no successor practice, and payments in respect of claims for principals who had retired before 1 September 2000 with a successor practice to the extent of the part of any deductible which would have been paid by the SIF on their behalf under the Solicitors Indemnity Rules 1999.The council also agreed that the method of calculating contributions, and the practices from which the sums are required, should be the same for all elements of the 2001/2002 contribution.The contribution will be assessed in the same way as the current year, without using risk banding and with low claims discounts up to 30%, but no claims loading, subject to modifications as follows:For the purposes of calculating any low claims discount, the claims taken into account will be claims payments (excluding defence costs) in the five-year period ending on 31 August 1999 (rather than the five-year period ending on 31 August 1998 as under the current rules); andl 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 below.

Time limits for waiver applicationsThe Solicitors Indemnity Rules have always given the Law Society the power to waive any obligation on a solicitor under those rules.Most applications are to reduce the applicant's SIF contribution assessment.

Such applications are decided by senior members of the Law Society staff in the first instance with a right of appeal to the professional standards appeals sub-committee.

Waivers are only granted in exceptional circumstances.

Time limits have been introduced under the Solicitors Indemnity Rules 2001 both on the making of a waiver application and the lodging of any appeal against the decision at first instance.

The time limits are:l Waiver applications for the 2001/02 indemnity period must be made within three months from the date when the relevant obligation has effect or the date on which the applicant is notified thereof by the SIF, whichever is the earlier;l Waiver applications in respect of earlier indemnity periods must be made by 28 February 2002 at the latest; andl Any appeal against any decision by the Law Society in respect of a waiver application must be made in writing within 21 days from the date of the decision.

Cover for 'excess' claims Rule 13 has been amended to extend indemnity cover to principals who had retired before 1 September 2000 with a successor practice, subject to the following:l Cover is limited to the lesser of the part of any deductible (excluding any penalty deductible) which would have been disregarded by the SIF in relation to the claim had it been made under the Solicitors Indemnity Rules 1999; and such amount, if any, which the successor practice seeks to recover from the retired principal in relation to the claim;l The retired principal has not at any time been a principal of the successor practice; andl At the time the claim is made, the retired principal is not a principal in private practice.For additional information or a copy of the rules, 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 SIF's practice department, tel: 020 7566 6000.

Andrew Darby is head of the Law Society's professional indemnity sectionwww.indemnity.lawsociety.org.uk