Insurers will have to provide six-years run-off cover for little or no premium if firms close

Some of the 117 law firms facing closure owing to a lack of insurance may get a reprieve from insurers looking to avoid costly run-off periods, according to Hill Dickinson.

Hill Dickinson partner Christopher Stanton said insurers who did not offer renewal policies to law firms at the October renewal will have to provide potentially expensive run-off cover if the solicitor ceases trading, with little or no premium in return.

Stanton said: “If [the solicitor] hasn’t got insurance then whichever insurer was last providing cover, ie the insurer that was on-cover for the period ending on 30 September, has to provide six years’ run-off cover.

“There’s a formula as to how the insured pays for that run-off cover, but the reality is that I can’t think of any law firm that will be able to pay that. Normally it’s done as three times the last year’s premium, but most of these firms are struggling to make ends meet anyway so the chances of the insurer actually getting any premium income are remote. But, they still have to provide the six years’ run-off cover.”

He said that insurers may therefore look to offer affordable terms until the next renewal date with the hope that the law firm will then move on to another insurer at renewal.

This would then remove them from being liable for providing the run-off cover.

“If they have an insured that wasn’t able to get cover, they will probably be better off offering terms that the insured could pay for the next 12 months with the view of getting some premium income in,” he said. “[They would then hope to] pass it on to another insurer next year [at the 2014 renewal date] so they avoid having to provide six years’ run-off cover.”

However, Stanton said this would be of no relief to the law firms that could not renew their policies because their existing insurer had gone out of business.

“Balva is no longer trading, it’s in liquidation,” he said. “It’s not able to offer renewals, so even if it wanted to [offer a policy] it can’t.”

All firms that have not got cover in place by 29 December will be forced to cease trading, and the Solicitor’s Regulation Authority (SRA) has warned that swift regulatory action will follow for any firms not following these orders.