Frank Maher explains why the continuing saga of The Accident Group's downfall will push many solicitors' firms to the limits

Rag TAG and bobtail. Or 'the rabble', as it is defined in the Oxford Dictionary of Idioms - perhaps an apt description of the chaos that emerged in the fallout from the collapse of The Accident Group (TAG).

The latest chapter in the saga is the largest claim against the legal profession since the home income scheme litigation of the 1990s.

It is the biggest test of the solicitors' professional indemnity (PI) market since the demise of the Solicitors Indemnity Fund in 2000.

As most readers will recall, TAG was a claims farmer that fed personal injury work to solicitors that acted on 'no-win, no-fee' conditional funding agreements.

Lenders covered the expenses of pursuing claims such as court and medical fees, and insurers provided cover against losing and having to pay defendants' costs. Everyone should have been a winner, but the rest became history.

Over-enthusiastic chasing of claims resulted in time, effort and money being devoted to many claims that were without foundation.

The Court of Appeal found that solicitors had paid fees to Accident Investigations Limited (AIL) which, although ostensibly for preliminary investigation, were in reality introduction fees - at the time banned by the Law Society.

These costs had been added to claims, and following the Court of Appeal's decision the Law Society advised firms to refund clients. Now insurers that backed the scheme, perhaps suffering post-litigation remorse, are claiming against over 600 law firms that ran the cases.

Claims may exceed £100m - against a total premium spend of £243m by the legal profession for primary cover in the current year. Proceedings have now been issued, with two hearings in the High Court over the next month to determine future conduct.

The impact for these firms is massive, with the whole profession's PI cover renewal date looming on 1 October. One in seven firms is involved with the proceedings - meaning several in almost every high street.

By way of example, one small firm that paid £9,200 for cover last year has been quoted over £43,500 this year, which could wipe out all its profit.

And that is not all. Solicitors have been used to aggregate excesses for years but, for personal injury work, they are vanishing fast.

The case provides an illustration of much of the solicitors' profession.

Perhaps a symptom of the declining market for defending solicitors' claims, firms traditionally viewed as acting only for defendants were, initially at least, fired into action on behalf of claimants.

Aggregation
There are numerous issues of interest in respect of the claims - cover, placement and risk management. The cover issues are concentrating minds - particularly aggregation and scope of cover.

First is aggregation, with insurers contending that the claims are separate with separate excesses, which for firms with uncapped excesses means they are virtually without cover apart from defence costs.

The flip side to multiple excesses is multiple policy limits - a point which has alarmed insurers (perhaps surprisingly) following the decision of the House of Lords in Lloyds TSB General Insurance Holdings and others v Lloyds Bank Group Insurance Company Limited [2003]. This has resulted in a word change from 1 October 2005.

The reworded definition of "one claim" will include "similar acts or omissions in a series of related matters or transactions" and "all claims against one or more insured arising from one matter or transaction will be regarded as one claim".

The new wording is intended to provide greater scope for aggregation of claims, which may work well for insurers on, say, multiple dishonesty claims or those arising from misselling of financial products, but may count against them in a future TAG-type situation.

As an aside, the change will cause real difficulty to firms seeking to limit liability to individual clients by contract, as they will no longer be able to do so by reference to their policy limit. Their liability to clients is effectively on an 'each and every claim' basis, but the cover they can buy will in some circumstances operate on an aggregate basis.

The second issue on indemnity is the fees paid to AIL. Having recommended that firms should repay these, the Law Society has recently sent questionnaires to all firms to check on progress.

The claimants seek reimbursement. These are six-figure claims against small high street firms whose ability to pay in many cases may be highly doubtful, unless they are insured.

The minimum terms and conditions provide cover in the widest terms for any profession in the world.

Most insurers have reserved their position on cover and the claimants' solicitors have indicated that they do not expect these to be covered.

They require that 'the insurance must indemnify each insured against civil liability to the extent that it arises from private legal practice in connection with the firm's practice'.

The sharpest legal minds are therefore being exercised on the issue of why liability to repay AIL fees might not be covered. An array of ingenious arguments will doubtless follow on both sides.

Everyone is waiting to see who will be first to test the issue. A surprise but possible outcome would be action by one of the claimants rather than an insured firm. With firms on the brink of bankruptcy this could open the door to a claim under the Third Parties (Rights Against Insurers) Act 1930.

The PI renewal will test the mettle of both the market and the solicitors. Firms with personal injury practices not caught up with claims farmers system are not having major problems getting cover. But firms that worked with TAG may face problems when seeking new insurance elsewhere? IT

' Frank Maher is a partner at Legal Risk, a firm of solicitors which advises on risk management

Questions for PI insurers

  • How well have applicant firms gone about their 'laundry listing'? This is an issue on which some firms are already seeking legal advice.
  • Have firms notified all potential claimants - as it seems there may be more in the pipeline - and are they including work from any other claims farmers which might be relevant?
  • What systems do they have for obtaining the underlying data to ensure the listing of potential claims is complete?
  • Have they asked all staff, not just partners, and others covered under successor practice wordings?
  • Going forward, what systems do they have for running personal injury, and what quality assurance is in place?
  • How does their supervision work in practice? This is usually the second biggest problem for law firms behind their difficulty in effecting a robust file audit system.
  • Which firms will be able to produce the evidence to defend the claims?
  • All these answers will be awaited with great interest