In Ireland, solicitors are subject to a mandatory system of professional indemnity insurance (PII) based on the same ‘freedom of choice’ model that applies in England and Wales.
In 2009 a combination of the insurance industry’s losses in investment markets and a very substantial increase in the number and size of negligence claims relating to property transactions – including failures to comply with undertakings following the collapse of the overvalued property market – produced unsustainable losses for all insurers in the Irish market. The insurers told the Law Society that there was very likely to be reduced availability of insurance – and potentially huge increases in premiums – in the renewals for the next year.
The Society decided that changes should be made to the minimum terms and conditions of PII to help reduce the very substantial increase in premiums inevitably on the way. These changes made some reductions in the protection of clients and of solicitors, but increased the likelihood that a competitive market would exist for PII renewals. Among the changes were:
- A reduction in the minimum cover from €2.5m to €1.5m.
- Exclusion of cover for certain undertakings given to financial institutions in commercial conveyancing work.
- Exclusion of cover for claims by financial institutions for material misrepresentation or non-disclosure in placing the insurance.
The amount insured for each and every claim (exclusive of defence costs) was reduced from €2.5m to €1.5m. Firms were advised by the Society to consider whether the new reduced amount insured would be adequate, given the value and nature of the work carried out by the firm and, if appropriate, to seek top-up cover.
Due to the ‘claims made’ basis of insurance cover, it was recommended that any top-up cover should be renewed for at least six years after the most recent relevant transaction. Firms were told that if they did not obtain top-up cover, claims in excess of €1.5m would be at the firm’s own risk, but they could limit by contract their liability to clients to the minimum amount insured which, going forward, would be €1.5m.
Cover for claims arising as a result of provision of certain common types of commercial conveyancing undertakings to financial institutions (which for this purpose included residential ‘buy-to-let’ transactions) was reduced so that both (1) undertakings provided before 1 December 2009 where the claim was by a financial institution and to the extent that liability arose from wrongful acts or omissions; and (2) undertakings provided on or after 1 December 2009 would not be covered.
From 1 December 2010, the giving of such undertakings was prohibited and commercial undertakings have reduced considerably in importance as an issue.
Under the minimum terms and conditions in the event of misrepresentation or non-disclosure in placing the insurance, cover for claimants cannot normally be avoided by the insurer, but the firm may have to indemnify the insurer for all claims. However, under the changes, claims by financial institutions can now be declined by the insurer if there is any material misrepresentation or non-disclosure (other than innocent misrepresentation or non-disclosure) in placing the insurance. The Law Society reminded firms that proposal forms must be completed correctly in all respects and all relevant information provided to the insurer.
To my knowledge, the Society has not received any complaints about claims not being covered due to the reduction in the minimum cover or the exclusion of cover for certain claims by financial institutions. Overall, the PII market has stabilised and premium levels have returned to pre-crisis levels.
By 2011 it became clear that the system of run-off cover required improvement. Formerly, run-off cover was limited to two years and was subject to payment of an additional premium when a firm ceased practice. Run-off cover could be cancelled by insurers due to failure to pay the required premium which, in many cases, was twice the annual premium.
The Law Society believed that many sole practitioners were unable to afford to pay for run-off cover and, in some cases, solicitors were delaying retirement due to the high cost of run-off cover. There was also a possibility of claims after the two-year period, meaning that the cover was not adequate to fully protect the public or retired practitioners.
To assist firms ceasing practice and, in particular, sole practitioners who wished to retire, a new fund for run-off cover was established which now provides run-off cover for firms ceasing practice without payment of any additional premium. This run-off cover should remain in force for as long as the ‘freedom of choice’ model is retained.
To administer the assigned risks pool (ARP) and the new run-off fund (ROF) efficiently, a special purpose fund (SPF) was established which consists of the existing ARP and the new ROF and is contributed to by the participating insurers in proportion to their market share. Run-off cover is provided through the new ROF to make retirement more affordable for solicitors, improve public protection, prevent abuse of the system and provide incentives for solicitors ceasing practice to do so in an orderly fashion under the following terms:
1) Insurers recover the cost of providing run-off cover through the general premiums collected from firms in practice.
2) Anti-abuse provisions apply to prevent ‘phoenix firms’ (that is, firms ceasing in order to put claims into the ROF and then reopening under another identity).
3) All firms carry the same self-insured excess into run-off that they had in their last coverage period in practice. This standard excess is separate from any additional excesses which may be applied in certain cases.
4) Solicitors obtaining run-off cover through the ROF are not required to bear any additional excesses for run-off cover provided they meet the following cessation obligations in the required timeframes:
- notification of closure to the SPF manager;
- provision of last proposal form and policy document to SPF manager;
- adherence to closure guidelines;
- meeting a minimum risk management standard;
- prompt notification of claims to the SPF manager; and
- co-operation with the conduct of claims.
Additional self-insured excesses are applied to firms commensurate with any failure to meet these cessation obligations. This provides an incentive for solicitors ceasing practice to co-operate, so as to ensure that former principals leave their firms in good order on retirement. There is no payment by insurers of excesses for claims by financial institutions.
As against a current total of around 2,300 open firms, 115 closed firms have entered the ROF since it commenced at the end of 2012. After initial uncertainties, the insurers have come to live with the ROF. I believe that generally in the profession it is regarded as a significant success.
John Elliot is registrar of solicitors and director of regulation at the Law Society of Ireland
- Consultation on the SRA’s PII reform proposals closes on 18 June. To respond see the authority’s website