Professional indemnity - new rules

Andrew Darby analyses the new rules for professional indemnity which are scheduled to be adopted in September

The Solicitors Indemnity Insurance Rules 2003 - to which are appended the minimum terms and conditions (MTC) of insurance - and the Solicitors Indemnity Rules 2003 both received the concurrence of the Master of the Rolls on 3 June 2003 and will come into effect on 1 September 2003.

The rules have been published on the Law Society's Web site at: www.indemnity.lawsociety.org.uk.

This is a summary of the principal changes to be introduced.

For full details of the changes, refer directly to the rules.

The renewal date is to change from 1 September to 1 October with effect from 1 October 2004.

To effect this change, the definition of 'indemnity period' has been amended to provide for a transitional 13-month indemnity period from 1 September 2003 to 30 September 2004.

Subsequent indemnity periods will commence on 1 October each year and will be of 12 months' duration.

The change has been introduced in response to feedback from practices concerned about the problems caused by having a renewal date which falls at the end of the main school/summer holiday period.

Other suggestions that were considered and rejected were introducing a rolling renewal date and moving the single renewal date to another month earlier in the year.

While moving to the rolling renewal date would have given firms the flexibility to arrange their indemnity year to suit their convenience, such a move would bring with it a number of significant drawbacks unless combined with a rolling practising year.

These include:

- Regulatory problems.

With a fixed practising certificate renewal date some firms would only have a month or so of cover left at the time they applied for their practising certificate.

- Administrative problems.

Each qualifying insurer's proportional share of the assigned risk pool is calculated by reference to the proportion of premium written for the compulsory layer by each qualifying insurer in the particular indemnity year.

Moving to a rolling renewal would complicate this process.

- Market effects.

Staggered renewal would not necessarily produce a more orderly market, leading to reduced costs because it is likely that there would at all times in the year be less competition for solicitors' business.

A single indemnity renewal date of 1 October was preferred to one earlier in the year as it avoids the main school holidays, but has the additional benefit of reducing the period between the indemnity renewal date and the practising certificate renewal date (1 November).

As there may be some multi-year policies which end on 31 August 2004, amendments have been made under rule 5 to place an obligation on firms and principals to ensure that they have in place qualifying insurance for September 2004, which will take them up to the start of the new indemnity period on 1 October 2004.

Policy default

Currently, it is a disciplinary offence for any firm or principal of any firm to be in 'policy default'.

Policy default means the failure by a firm to pay for more than three months after the same falls due, all or any part of any qualifying insurance premium, assigned risks pool premium or ARP default premium.

The period of three months will be reduced to two months with effect from 1 September 2003 to enable the Society to take swifter action against non-payers.

Scope of cover

In the 2002 rules the trigger for cover was enlarged to cover not only a situation in which a claim is made in respect of the civil liability, but also one in which a claim could be made because a solicitor discovers that he has made an error and has therefore incurred a liability.

Following discussions with the qualifying insurers, the trigger for cover has reverted to the wording in the 2001 MTC.

However, the definition of 'claim' has been expanded to cover a loss, which a firm incurs as a result of being obliged to remedy a breach of the Solicitors Accounts Rules.

This means that where a firm takes steps, as required under the Solicitors Accounts Rules to make good a shortfall on client account, it will be entitled to claim for the cost of doing so, subject to the exclusions set out in the MTC.

Asbestos-related exclusion

A new permitted exclusion has been introduced to allow qualifying insurers to exclude liability in relation to asbestos-related losses, on the same basis as they are permitted to do so in relation to war and terrorism risks.

The exclusion does not exclude or limit cover for liability arising from a failure to provide legal services.

ARP rating schedule

As the ARP policy for the indemnity period starting on 1 September 2003 will extend to 13 months, the rates for ARP premiums set out in appendix 2 to the rules have been scaled up accordingly.

However, the run-off premium will remain equal to the standard 12-month premium.

Solicitors Indemnity Rules 2003

This year the Solicitors Indemnity Rules serve three purposes:

- To provide cover for 'run-off' claims - that is, new claims made in 2003/2004 in respect of principals who had retired before 1 September 2000 with no successor practice;

- To provide cover for 'excess' claims - the Solicitors Indemnity Fund (SIF) indemnifies 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;

- To collect contributions as necessary to meet the cost of 'run-off' claims and to meet the cost of 'excess' claims.

SIF contribution requirement

There has been a positive development in the fund's financial position since 31 August 2002 and the unaudited accounts as at 28 February 2003 show a surplus of 34.3 million to cover unforeseen future adverse development in the fund's claims experience.

The Law Society Council agreed that the SIF contribution for 2003/2004 should be set at nil and that all contributions and contribution rates set out in the Solicitors Indemnity Rules 2003 should also be set at nil.

While the fund's current financial position is healthy, there remains volatility in the figures and additional collections in the future cannot be ruled out.

To keep open the option to collect contributions in the future, the requirement to deliver a gross fee certificate has been retained.

Renewal date

The SIF renewal date will be changed to 1 October with effect from 1 October 2004 to ensure that the definition of indemnity period keeps in step with the similar definition in the Solicitors Indemnity Insurance Rules.

For additional information or a copy of the rules, contact the Society's professional indemnity section, tel: 01527 504487.

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