Professional Indemnity - Post six year run-off cover Purpose 1 To consider the Law Society Council's invitation to the Board to extend the post six year run-off cover provided by the Solicitors Indemnity Fund (SIF) by three years with a new end date of 30 September 2023. Recommendations 2 The Board is asked to: a) agree not to extend the post six year run-off cover provided by the Solicitors Indemnity Fund (SIF) under the SRA indemnity Rules 2012 for a further three years beyond the current end date of 30 September 2020 (paragraphs 3 to 22); b) agree to consider the issue of a one or two year extension only after a further consultation on professional indemnity insurance in the Spring of 2015 (paragraphs 3 to 22); and, c) agree that the Board's decision should be communicated through SRA Update and on the SRA website and subsequently alongside the Spring 2015 consultation on related PII matters (paragraphs 25 and 26). If you have any questions about this paper please contact: Crispin Passmore, Executive Director, Policy, crispin.passmore@sra.org.uk; 0121 329 6687. Page 1 of 7
Background Professional Indemnity - Post six year run-off cover 3 Professional indemnity policies are generally written on a claims made basis rather than a losses occurring basis. This means that responsibility for paying a claim lies with the insurer at the time the claim arises, or circumstances which may give rise to a claim are notified, rather than with the insurer that was on cover when the alleged negligent act took place. 4 Run-off cover serves two principal purposes: it provides continuity of client financial protection (which is principally a regulatory function); it provides indemnity cover for retired solicitors (sometimes referred to as the "sleep easy" factor which is principally a representative function). 5 Under the current compulsory professional indemnity insurance arrangements if a firm ceases due to a succession by another firm then future claims made against the ceased firm fall within the cover of the successor practice's qualifying insurance. In the event that a firm ceases without a successor practice then the participating insurer on risk at the date of cessation is required to provide six year run-off cover. Most insurers have a charging clause in their policy which typically is set at around three times the annual premium as a one off payment for the six years of run-off cover. 6 The periods in which claims can be made are subject to statutory limitation periods which vary between types of claim. The primary limitation period for negligence claims is 6 years with a 15 year long stop from the date of the act or omission giving rise to the claim. A summary of the different limits prepared by Pinsent Masons can be found at http://www.pinsentmasons.com/pdf/limitation.pdf. 7 When setting up the current compulsory professional indemnity insurance scheme the Law Society s Council agreed in December 1999 that arrangements should be made for the profession collectively to fund run-off cover under the new arrangements to the extent that it is not provided through the minimum terms. The Council acknowledged that something would have to be done at the appropriate time to supplement the six years cover provided by Qualifying Insurers (now called Participating Insurers) under the Minimum Terms and Conditions (MTC) in order to replicate as closely as possible the run-off cover provided by the Solicitors Indemnity Fund (SIF) without time limit. The first date that such post 6 year run-off cover was required was 1 September 2007. 8 The post six year run-off issue was considered again by the Council at its meeting on 10/11 May 2000. The Council had previously approved the new arrangements for professional indemnity insurance and had agreed that retired Page 2 of 7
principals whose firms closed with no successor practice should be provided with run-off cover for claims which arose after the six-year run-off period. Funds for this cover would be collected from the profession as a whole. The paper addressed options for collecting the required sums and identified concerns which some Council members had expressed as to the possibility of Council subsequently changing its mind on what was for many, a crucial issue. The Council resolved that the decision that claims arising after the run-off period from principals who retire with no successor practice should be met by the profession collectively be re-affirmed. Current position 9 SIF continues to provide run-off cover without time limit to any firm that ceased without a successor practice on or before 31 August 2000. SIF has set aside sufficient reserves to meet current and future expected liabilities in respect of this cover. This part of SIF's function should be concluded for all practical purposes by around 2017. The SRA is committed to continue this cover. 10 Since 2007 SIF has also provided post six year run-off cover to firms that ceased without successor on or after 1 September 2000 with a current end date of 30 September 2020. The cost of this cover is met from surplus within SIF. The relevant provisions are set out in the SRA Indemnity Rules. 11 The current end date means that the SIF cover will not be available to existing or future firms that close without successor. For example, take a firm that currently has a 12 month policy of qualifying insurance ending on 30 September 2015. The firm closes without successor before 30 September 2015. The firm will be provided with run-off cover by its current insurer until 30 September 2021 but it will not have the benefit of any post six year run-off cover from SIF. 12 In December 2013 the Law Society Council decided in favour of inviting the SRA to extend the post six year run-off cover by three years with a new end date of 30 September 2023 and the formal invitation to do this was received in February 2014. The effect of an extension of post six year run-off cover 13 The effect of such an extension would be to provide a further three years runoff cover to any firm that ceased without successor between 1 September 2000 and 30 September 2014 and up to three years additional cover for firms that cease without successor after 1 October 2014. Any extension has cost implications for the Fund. Consulting actuaries have been engaged by SIF to provide cost estimations based on one, two and three year extensions at both the 97.5% confidence level (as used by SIF and agreed by the SRA) and the Solvency II confidence level of 99.5%. Page 3 of 7
14 The figures from SIF indicate that at the 99.5th percentile there is sufficient surplus for a extension of only one year to 2021. At the 97.5th percentile there is sufficient surplus for an extension of up to two years to 2022. 15 Although there is sufficient surplus within SIF to meet at least a one year extension of post six year run-off cover, there is an opportunity cost associated with any extension. Any surplus not required by SIF to meet its obligations under the SRA Indemnity Rules can be released to the Society "... which shall apply the same if and to the extent the Society considers it reasonably practicable for the purpose of providing indemnity in any other way permitted by section 37(2) of the SA and otherwise for the overall benefit of the solicitors' profession in such manner as it may decide." (Rule 21.2, SRA Indemnity Rules 2012). 16 We are undertaking a wide review of our professional indemnity insurance (PII) arrangements with a view to going out to consultation in February 2015. Some of the changes may benefit from the use of surplus SIF funds to cover the cost of transitional arrangements. If the Board is minded to agree an extension of post six year cover then it may take the view that it would be prudent to delay a final decision until the package of proposed PII changes has been determined next year. Wider policy considerations 17 As part of the Board's programme of regulatory reform announced in May 2014 the issue of compulsory run-off cover was considered and the Board supported the proposed reduction of compulsory run-off cover from six to three years. The Board took the view that limiting the compulsory run-off cover to three years was proportionate and targeted regulation that struck the right balance between the protection of consumers of legal services and the cost of providing that protection which is ultimately paid for by clients. The proposal was part of a consultation on proposed changes to the minimum terms and conditions of professional indemnity cover that was issued in May. In the light of the responses received the Board agreed to defer the matter to enable further work to be carried out as part of a wider review of our compulsory professional indemnity insurance arrangements. 18 When reviewing the case for a further three year extension of post six year runoff cover to 2023, the Standards Committee agreed that it would be inconsistent for the SRA to mandate or provide run-off cover beyond three years after a firm ceases. 19 Even while compulsory run-off remains set at six years, the Standards Committee does not believe that there is a regulatory justification for mandating further post six year run-off cover through SIF. This does not prevent any solicitor purchasing such cover for themselves or the Law Society seeking to establish some product as part of its professional representative role. The SRA Page 4 of 7
Options is ready to assist the Law Society to develop a long term solution to the issue of run-off cover as a service to its members. 20 Taking into account the information provided by SIF the Board is invited to consider three options as follows: Option 1 - to agree not to extend post six year run-off cover beyond the current end date of 30 September 2020. This is the option preferred by the Standards Committee for the reasons stated in paragraphs 19 and 20. Option 2 - to agree to extend post six year run-off cover for either one year ending on 30 September 2021 or two years ending on 30 September 2022. Option 3 - to defer any decision to enable the issue to be considered as part of the ongoing review of the SRA's compulsory professional indemnity insurance arrangements. 21 Our recommendation combines these options. the SIF finances and projected surplus does not support a decision to fund a further three years but may do for a further one or two years. Such a decision to extend would need to be made in the light not only of financial information but also any changes that are made to run off cover within the minimum terms and conditions following further consultation. Recommendations - the Board is asked to: agree not to extend the post six year run-off cover provided by the Solicitors Indemnity Fund (SIF) under the SRA indemnity Rules 2012 for a further three years beyond the current end date of 30 September 2020; agree to consider the issue of a one or two year extension only after a further consultation on professional indemnity insurance in the Spring of 2015. Page 5 of 7
Public Item 6 Supporting information Links to the Strategic Plan 22 Strategic objective three of our Strategic plan is to develop the SRA regulatory arrangements and tools to better meet the regulatory objectives and the principles of better regulation and to mitigate emerging risks and anticipate changes in the external environment. This objective includes continued work on the review of our professional indemnity arrangements so that we can be in a position to implement further changes in 2015. How the issues support the principles of better regulation 23 As part of the Board's programme of regulatory reform announced in May 2014, the issue of compulsory run-off cover was considered and the Board supported the proposed reduction of compulsory run-off cover from six to three years. The Board took the view that limiting the compulsory run-off cover to three years was proportionate and targeted regulation that struck the right balance between the protection of consumers of legal services and the cost of providing that protection which is ultimately paid for by clients. It would be inconsistent with this view for the Board to extend post six year run-off cover. What engagement approach has been used to inform the work (and what further communication and engagement is needed) 24 Although it is recommended that the Board does not make a rule change to extend post six year run-off cover by three years to 30 September 2023, it will still be necessary to publicise that decision to two main groups: firms that have already ceased without successor; firms that are contemplating closure without successor. 25 The intention is to notify the profession by means of SRA Update which is sent to all those with a mysra account including retired practitioners who remain on the Roll. There will also be a record placed within the professional indemnity part of the website recording the fact that the Board have agreed to consider the issue of a one or two year extension only after a further consultation on professional indemnity insurance in the Spring of 2015. Recommendation - the Board is asked to: agree that the Board's decision should be communicated through SRA Update and on the SRA website and subsequently alongside the Spring 2015 consultation on related PII matters. What equality and diversity considerations relate to this issue 26 The provision of post six year run-off cover comes at a cost which has to be met in some way. Currently the cover has been provided from available surplus within SIF. As that source of funding draws to a close, alternative Page 6 of 7
Public Item 6 funding would need to be found for post six run-off cover to be provided going forward. Removing the necessity for firms closing without successor to have run-off cover beyond six years will avoid the need for these firms to pay for cover that they may not want or need. It is the smallest firms that are most likely to close without a successor and so enter run-off. BME solicitors are disproportionately represented in small solicitor practices so the proposal should have particular benefits to BME solicitors and the communities they serve. If you have any questions about this paper please contact: Crispin Passmore, Executive Director, Policy, crispin.passmore@sra.org.uk; 0121 329 6687. Page 7 of 7