It has been open to solicitors for two years now to depart from the 1 October annual PII renewal and take out policies of other than 12 months’ duration. The bulk of firms still renew on 1 October on a 12-month policy basis. Last year, the number of firms that had moved away from this traditional model had increased to 20% – and we expect this trend to continue.
It is pleasing to report that the preliminary indications for this year’s renewal are that it will be similar to last year’s, when very few firms found themselves involuntarily entering into the extended indemnity period, in circumstances where they had been unable to find affordable cover.
Perhaps just as pleasingly, in contrast to the previous year when relations between the constituents which comprise this market – the profession, brokers, underwriters and the SRA – could have been described as dysfunctional, this year has seen a far greater degree of cooperation and consultation, facilitated in part by the Law Society. The SRA has said that rather than issue another batch of proposals to change the minimum terms and conditions this October, it will instead issue a discussion document, which will inform proposals to be made at a later date.
One regulatory change in the PII market is still unclear – the SRA’s requirement that firms ensure they carry adequate levels of professional indemnity cover. With effect from 1 April 2015, at the commencement, renewal, replacement or agreed extension of the policy period of any qualifying insurance, firms will be required to demonstrate that they have assessed and purchased the level of cover appropriate for current and past practice, taking into account potential levels of claim by clients and others.
For this year’s renewal, the minimum level of cover for each and every claim remains at £2m for a firm and £3m for an LLP or equivalent. This historical minimum level of cover has not been reviewed for many years. Anecdotally, each level was fixed by reference to the potential value of a catastrophic head injury claim – and on that yardstick, one would have to say that these days it looks inadequate. Suffice to say, in this renewal there will be an incumbent duty on each practice to ensure that it carries the appropriate level of cover. In making that assessment, firms should not forget to include and make provision for the costs of a claim, nor that in view of the ‘claims-made’ basis of PII, past work needs to be taken into account each subsequent year and carried over into run-off cover.
The PII committee is looking at what other recent legislative changes might need to be reflected in guidance on self-assessment of PII requirements by firms. For example, at one end of the spectrum changes relating to capital allowances legislation affecting property transactions mean that this is no longer just a taxation matter but a key process in commercial property transactions. At the other end, in relation to the award of the duty provider contracts in September in respect of criminal work, a firm might fail to win a duty contract and might as a result switch to, or increase other, more contentious areas of work, at a time when it should have put in a proposal form, or have already renewed its PII cover to meet the 30 September renewal deadline.
Unfortunately, there is no reliable data that gives us the big picture on types of claims and causes of claims. Anecdotally, and from very broad-brush figures provided by some insurers, it seems that, still, 50% (by amount) and 70% (by value of claims) arise from solicitors dealing in property matters. That picture really has not changed since the demise of the Solicitors Indemnity Fund (SIF).
What we did see more of in the year, however, were PII claims to make good shortfalls on client accounts caused by bank scams and/or impersonation fraudsters diverting payments from solicitors. The Law Society has updated its advice on guarding against falling for scams and is producing a practice note on how to deal with their aftermath. The PII committee has seen reports of discrepancies in the responses of one or two insurers – and some banks – to losses caused to firms by these frauds. Most firms, it has to be said, are highly appreciative of the speed and quality of their insurers’ and banks’ responses, but some report very different experiences.
The cost of closure remains a thorny issue. When a firm closes without a successor practice, insurers typically demand payment of two-and-a-half or three years’ premium. The cost of run-off cover at that level of expenditure is for many firms, already winding down their business, a disincentive and barrier to closure. At the Law Society we have begun to explore with the SRA and insurers a number of other approaches to run-off cover which we will take forward. One such approach might be whether it is feasible to provide run-off cover on a pay-as-you-go basis, as happens in other professions. Regrettably, however, we have to face the fact that the nature of a solicitor’s business means that claims very often follow on years after work done. The requirement for run-off cover is part of the profession’s covenant of trust – the guarantee that the public will not be worse off as a result of the negligence of a solicitor.
Finally, the profession has been fortunate over the last 20 years to enjoy the legacy of SIF, which has had enough residual funds to pay out for claims arising against retired principals, which have arisen after expiry of their six-year run-off cover. As we always knew, however, the SIF surplus will run out at some point and SIF will close to all new claims on a projected date of 1 October 2020. Any practitioner contemplating closure needs to be aware of this. A large part of the work of the Law Society over the next year will concern the question of how and in what circumstances there should be protection for solicitors in their retirement for such claims, and, once that question has been determined, how it is going to be paid for.
Alan Radford is chair of the Law Society’s PII committee