A new category of professional indemnity (PI) business worth around £250m per annum is about to come onto the market. The Solicitors' Indemnity Fund, which has been the compulsory mutual insurer of the solicitors' profession in England and Wales since 1986, goes into run-off on August 31 this year. Solicitors in England and Wales are now obliged to obtain cover on the open market.
The change follows an 18-month debate within the profession, terminating in a vote in which 70% expressed a preference for choice among insurers.
Solicitors will still be legally required to take out a minimum cover of £1m for each and every claim. Policies starting on September 1 this year must be obtained from one of a number of qualifying insurers.
The St. Paul International is one of the qualifying insurers (so far there are 18 companies that have signed up to the minimum terms). Uniquely, The St. Paul has also entered into a partnership with the Law Society to set up a joint venture company offering PI to solicitors.
The new company is under the managerial control of The St. Paul. It is a fully commercial market insurer that will function like an operating division of The St. Paul International.
Although SIF will not be renewing any insurance, it will continue to deal with claims or circumstances notified before September 1. Run-off claims will be dealt with under the Solicitors' Indemnity Rules in force at the time the matter was notified. In common with other categories of long-tail business, it is expected to be many years before outstanding claims are resolved.
The open market will not be governed entirely by laissez-faire principles. It will be strictly regulated by the Law Society. Insurance cover will still be compulsory (for the first million), and firms will be required to furnish proof that they have obtained cover from a qualifying insurer.
The new terms
To qualify, insurers must sign up to the minimum terms and conditions included in the Solicitors' Indemnity Insurance Rules 2000 – approved by the Law Society's ruling council in April this year. These closely match the very broad scope of cover provided by the mutual.
Terms that remain the same include the requirement that insurers meet the excess whenever the insured solicitor fails to do so – recovery must then be sought from the firm. And insurers will still not be allowed to avoid policies for non-disclosure or misrepresentation of material facts – claims must be dealt with by insurers, who may then subrogate against the firm in question.
There are, however, some important exceptions. One of the most important relates to notification. SIF required firms to notify only claims, though they were also entitled to notify circumstances that might give rise to a claim.
Market insurers will expect firms to notify circumstances. If a law firm fails to do so, insurers may be able to argue that they have been prejudiced by the non-disclosure and may accordingly seek recovery from the firm of the cost of any claim arising from the circumstance.
The current rules allow for notification of circumstances, so it would be naive to expect commercial insurers not to encourage firms to notify all such matters to SIF before September 1.
There are other significant changes. Previously firms had an excess imposed according to the number of its partners and principals. Now firms can choose the level of excess they want. The St. Paul, for example, is offering excesses of between 0.5% and 3% of gross fee income with a minimum of £2,500.
Another difference: under SIF a retiring partner with no successor practice received unlimited cover for run-off claims arising after the firm had discontinued. Now insurers are required to provide cover for six years only.
If a firm cannot get cover, they will enter the Assigned Risks Pool where they will be charged a punitive premium. The Law Society will be entitled to compel the firm to submit to investigation and monitoring and to take special measures. Firms can remain in the ARP for a maximum of two years.
For the majority of law firms, cover will be readily available in the market and they will have a real choice. So how does The St. Paul joint venture with the Law Society differ from other qualifying insurers?
A unique joint venture
The distinctive feature of the joint venture is that it must offer cover to all sectors of the solicitors' profession and may not exclude a particular market segment on grounds of location, type of work or size. The St. Paul may only decline a risk from an individual underwriting perspective.
This does not mean that The St. Paul is obliged to accept every risk. The company is certainly not an insurer of last resort. Nor will the cost of insuring higher risk practices be passed on to lower-risk firms. Each firm will be assessed individually. Premiums quoted to firms will reflect their fee income, areas of practice, claims history and risk management procedures. They will be highly competitive.
The St. Paul's market research revealed that despite widespread dissatisfaction with the level of contributions payable to SIF, many solicitors valued the mutual's claims handling – in particular the involvement of solicitors and legal executives in delivering the service. The St. Paul is retaining lawyers from SIF's claims handling and risk management units and aims to develop both functions to provide enhanced services to the legal profession.
Solicitors will be able to obtain a quotation from The St. Paul directly or through a broker. We have written to law firms asking them for their preferred limits of indemnity, their choice of excess, whether they would like to limit their maximum total excess payment per annum and whether they have appointed a broker.
Solicitors have been waiting many years for the right to obtain insurance on the market. Now the time has come, bringing with it opportunities and challenges – for solicitors, brokers and insurers alike.