Professional indemnity - the new rules

PRACTICE POINTS

On 1 September 2002, the Solicitors' Indemnity Insurance Rules 2002 and the Solicitors' Indemnity Rules 2002 come into effect.

Andrew Darby takes a look at the principal changes to be introduced and the implications for solicitors

The Solicitors' Indemnity Insurance Rules 2002 (to which are appended the minimum terms and conditions of insurance) and the Solicitors' Indemnity Rules 2002 both received the concurrence of the Master of the Rolls on 22 May 2002 and will come into effect on 1 September 2002.

Freelance solicitors

The concept has been introduced in the definitions and rule 4 of an 'appointed person'.

This is a person, sometimes known as a 'freelance solicitor' or 'freelance agent' engaged by firms, for example, to provide criminal defence services to clients funded by the Legal Services Commission.

Such persons may be covered by a firm's policy of qualifying insurance in respect of any work done while directly engaged in the practice of that firm, provided they meet the definition of an 'appointed person', which is defined as follows: 'appointed person' means any person who is designated as a fee-earner in accordance with any arrangements made from time to time between the firm and the Legal Services Commission pursuant to the provisions of the Access to Justice Act 1999, regardless of whether the services performed for the firm by that person in accordance with rule 4 are performed pursuant to such arrangements or otherwise, and who is engaged by the firm under a contract for services in the course of the private practice of the firm.

Backdating cover

From 1 September 2002, qualifying Insurers will not be permitted to backdate future contracts by more than 60

days during the first two months of the indemnity period (September and October),

and by more than 30 days thereafter.

A firm which fails to take out cover effective from

1 September 2002 will be insured through the assigned risks pool by default and so liable to the assigned risks pool default premium for the period it is so insured.

Scope of cover

Formerly, the trigger for cover has been the making of a claim.

A solicitor who discovered an error and who could correct it without receiving a claim would not have had cover under the previous minimum terms and conditions, and might not have been able to recover expenses reasonably incurred in correcting the error.

Therefore, the trigger for cover has been enlarged to cover not only a situation in which a claim is made in respect of a 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.

War and terrorism exclusion

A permitted exclusion has been introduced to exclude war and terrorism liabilities, although the exclusion does not exclude cover for liability for failure to provide legal services.

However, the loss of property entrusted to a firm would not normally be covered by qualifying insurance, and firms are advised to ensure they have adequate separate property cover which covers such losses caused by terrorist acts.

Assigned risks pool - run-off cover

With effect from 1 September 2002, firms within the assigned risks pool will be required to pay an additional premium in the event that run-off cover is triggered by the closure of

the firm without a successor practice.

The additional premium will be equal to the premium payable by the firm in respect of the last indemnity period in which it was insured through the assigned risks pool.

Time limits for waiver applications

Waiver applications of the Solicitors' Indemnity Insurance Rules 2002 have to be made in writing to the Law Society by 30 November 2002 or three calendar months from the date the obligation arose, but in any event no later than 30 November 2003.

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

Solicitors' Indemnity Rules 2002

This year the Solicitors' Indemnity Rules serve three purposes:

l To provide cover for 'run-off' claims - that is, new claims made in 2002/03 in respect of principals who had retired before 1 September 2000 with no successor practice;

l To provide cover for 'excess claims' - the Solicitors Indemnity Fund 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 Solicitors Indemnity Fund on their behalf under the Solicitors' Indemnity Rules 1999;

l To collect contributions to meet the cost of run-off claims and to meet the cost of excess claims.

It is intended that the contribution notices will be sent to practices during the first week of August.

Collection of the Solicitors Indemnity Fund contribution requirement

There has been no adverse development in the fund's financial position since last year, but the fund still has residual liabilities of 35 million which are attributable to cover for run-off claims.

The Law Society Council agreed that the Solicitors Indemnity Fund contribution for 2002/03 should again be set at 25 million.

The council also agreed that the method of calculation of contributions, and the practices from which the sums are required, should be the same for all elements of the 2002/03 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:

l 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 31 August 2000 (rather than the five-year period ending 31 August 1999 as under the current rules).

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 above.

Time limits for waiver applications

The majority of applications are for a reduction in the applicant's Solicitors Indemnity Fund 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 panel.

Waivers are granted only in exceptional circumstances.

The time limits both on the making of a waiver application and the lodging of any appeal against the decision at first instance are as follows:

l Waiver applications for the 2002/03 indemnity period must be made to the Law Society in writing no later than three months from the date when the relevant obligation has effect, or the date on which the applicant is notified thereof by the Solicitors Indemnity Fund, whichever is the earlier;

l 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.

This article gives a summary of the principal changes to be introduced.

For the full details of the changes, refer to the new rules which have been published on the Law Society's Web site at: www.indemnity.lawsociety.org.uk

For additional information or a copy of the rules, contact the Law Society's Professional Indemnity Section, tel: 01527 504487.

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.

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