Special Focus: PII
Appallingly most solicitors are indifferent to or ignorant of the demise of SIF in 2020 thinking that as the firm in which they are partners will always continue or, failing that, that will merge with a successor practice there will be no effect on them. This is not a sensible approach to adopt. Who can now be certain that their firm will continue? Would you being willing to bet your child’s life that your firm will be in existence 10 years from now? Are you sure that you are protected by the successor practice rules? I cannot answer the first two questions but the answer to the third is: almost certainly not.
I will deal with the potentially disastrous effects on small firms, sole practitioners and the profession generally later but a brief explanation of the context in which SIF operates SIF is worthwhile. I say this as a retired sole practitioner who paid very little attention to PII apart from being glad that it was there. For a long time I was under the impression that if a mistake by me came to light some years after I made it, the insurer at the time of the mistake would handle the claim. I don’t think that I was alone in that because we are all of us too busy to think about what might never happen. I was wrong. The insurer at the time of the claim handles it. What if there is no insurer because the firm has closed and its 6 year compulsory run off cover has expired? The partners in the ex-firm are personally liable (unless they have incorporated of course). However, until 2020 the partners are protected by SIF which picks up the claim. After 2020 there is no SIF, the partners or sole practitioners are on the hook to the total extent of their assets. Bankruptcy looms. The comfortable retirement for which you had saved for 40 years is at risk, so is your home .
I am sure that some of my readers are thinking that this is nonsense as the contractual liability period is 6 years and so compulsory run off cover will suffice. That is not correct. The Limitation Act as amended by the Latent Damage Act provides (in brief) that, for hidden negligence, the time limit for commencing a claim run from the date of the negligence becoming known with an ultimate cut off date of 15 years from the negligent act. If you acted for a buyer of a house many years may pass until they want to sell and it is often on a sale that a mistake comes to light. It is even worse if you have been involved in will drafting. Here the time limits run from the date of death of the testator. If you drafted a will for a client and that client doesn’t die until 10 years after your firm closes, the period in which you can be sued will end 15 years after the date of death (25 years after closure).
These are not impossible scenarios. Look at Alan Radford’s excellent piece entitled “Seeking Closure” published in the Gazette of 3 July 2017. He gives some frightening figures.
If you are one of those retired solicitors who think that none of this concerns you because you transferred your practice to a successor, please wake up. The successor practice rules do not apply to your ex-clients whose remedy remains against you. Are you certain that your successor will remain in business for the full 15 years (possibly for the foreseeable future if you drafted wills)? What if it closes say 5 years after transfer? Their run off cover will get you to 11 years but for the final 4 you will be relying on an indemnity from the partners. Could you be sure that that indemnity will be worth the paper it is written on? After all, you will be competing with claimants against that firm for what few assets there may be. Remember also, that the SRA had plans to reduce compulsory run off cover to 3 years only. That proposal could well be made again.
I hope that I have now made plain the dire dangers to existing and future retired solicitors. Let me now turn to the dangers to those remaining in practice. This issue does not affect the really big boys, they can afford extremely comprehensive cover or will simply merge and merge again. As for the nationwide chains, well we have seen those go down. My main concern, however, is sole practitioners and the traditional 2/3 partner high street firms. According to SRA figures these make up 85% of firms. There are many circumstances in which small firms have to close down. Here are a few.
They are vulnerable to increased competition (think something like ‘Uber-Law’), after all the profit margins on residential conveyancing (when done properly) are pitifully small. If you plan on coping with competition by employing unqualified staff to handle that work are you confident that they will never make a mistake or that a mistake will be picked up in time by supervision?
You might have a serious disagreement with your partners which can only be resolved by dissolving the partnership and starting again.
You or your partners could be seriously ill and unable to carry on. This is of particular concern to sole practitioners.
I am sure that everyone can think of plenty more examples.
Any sole practitioner or partner in a small firm is vulnerable to the risks outlined above - any firm can close.
Let me turn now to the effects of a failure to replace SIF on those continuing in the profession. Most new clients are drawn to a firm by reason of recommendation or price. The public doesn’t really like us and use us only because they have to. However, they have come to expect gold plated protection from dishonest or negligent solicitors and we have, quite rightly, emphasised that protection in our marketing of ourselves. At the time of instruction, we point out to our clients that we are fully insured. Does the SRA seriously think that clients understand the claims made basis of PII? It is absurd to think that they do.
Therefore, the profession is making a serious misrepresentation to the public when it says that, if things go wrong, our insurance will look after them. It will not do so if the firm has closed and there is no SIF. Imagine the public outcry when, at some point in the early 2020s, a client finds that they have a genuine claim in negligence, perhaps amounting to hundreds of thousands of pounds, but the firm has closed, the run off cover has expired and the partners have already been cleaned out by a previous successful claim.
The reputational damage to the profession will be huge. But, in my opinion, it will not stop there. We are perceived as being expensive and when the public discovers that they are not always getting the protection they were promised, there will be no reason for them to stay away from our rivals ie ‘Uber-Law’, will writers, licensed conveyancers and all the other alternative suppliers of legal services that are lurking on the horizon.
Further, put yourself in the public’s shoes. Would you instruct a sole practitioner or small firm if you knew that there was a risk that you would not be protected against negligence? Of course not. Particularly when there are plenty of long established large firms who are unlikely to close and plenty of other providers out there who offer the same level of protection for a lower price.
So, to get to the question in the headline: could your high street practice survive a potential loss of business caused by this catastrophic failure in client protection?
These are difficult times and likely to get more so as our regulator encourages innovation in an attempt to increase competitiveness in the market which it believes will drive down costs and increase access to justice. I believe that this will backfire when the effects of the absence of SIF become felt, the public begins to suffer uninsured losses and sole practitioners and small firms go out of business as a result. As a profession we must find ways of protecting ourselves against this disaster to our reputation and thus our fee income. Sole practitioners and small firms should look seriously at their PII so that they can, hand on heart, say to a potential client “don’t worry, if anything happens to me or my firm my insurance will still be in place”.
With the SRA’s consultation on wider PII reform recently having closed, I worry that the demise of SIF will be lost in the noise. As I incline to the common, cynical view is that consultations are a waste of time, the consultor dismissing any opinions with which it does not agree, that may not matter. If the SRA regards PII as an important client protection, why does it think it is acceptable to create two classes of client, one protected by insurance and the other having no protection? The purpose of this letter is not, however, public protection – that is the SRA’s job and I suggest that we let them take the flak when all this goes wrong. Rather, the purpose is to alert the profession to the dangers that are just around the corner. The Law Society together with some leading brokers is working on insurance solutions to this mess. I suggest that all of us who are looking forward to a peaceful, worry free retirement look seriously at the options that will become available and take advantage of them.
Fiona Swann is a retired solicitor.