The Solicitors Regulation Authority’s (SRA) July discussion paper Protecting clients financial interests gives a hint of its thinking on changes to solicitors’ professional indemnity insurance and the compulsory Minimum Terms and Conditions (MTC) of that insurance. Although couched in terms of a series of questions, it returns to themes proposed shortly before last year’s renewal season. One proposal – to reduce the compulsory level of cover (£2 million for partnerships, £3 million for incorporated entities) – was rejected by the Legal Services Board (LSB), the “super regulator”.
The main current proposals are to:
- Limit compulsory MTC cover to private clients because “… more sophisticated clients, such as large corporations… do not require the protection of the MTC.”
- Limit the cover required by the MTC to an aggregate cap rather than providing (as is currently the case) cover for an unlimited number of claims during the period of insurance.
- Revisit the limit of cover for each claim despite the LSB’s rejection of the earlier proposal to limit it to £500,000.
- Reduce post-cessation run-off cover from the current six years to only three.
- Remove the current provision in the MTC requiring cover for defence costs (in addition to the cover for damages and claimant’s costs) so as to “… give firms and their insurers flexibility to arrange policies that best meet the needs of the firm without impacting the protection afforded to consumers…”
There are a number of further proposals for amendment of the MTC about which the SRA seems lukewarm. However, it does appear that pretty much the entire MTC is up for review.
Other themes running through the paper are:
- Consumer protection - tempered by a desire to reduce the cost of professional indemnity insurance so as to reduce firms’ overheads enabling them to provide cost competitive services.
- The relationship between the provisions of the MTC and the SRA’s Compensation Fund – and a desire to avoid transferring claims from the insurance market to the Fund.
It would be easy to condemn the SRA’s approach as combining a naïve faith in a simplistic view of neo-liberal market economics with an almost complete ignorance of the professional indemnity insurance market. What is clear, however, is that up until now this discussion has been taking place without any statistics relating to claims against the profession since the demise of the Solicitors Indemnity Fund (SIF) in 2000. The SRA is attempting to obtain from the insurance market “an up-to-date detailed analysis of claims data to capture information requested during an earlier consultation”. It remains to be seen just how successful that will be with the fragmentation of the market in recent years.
There is, however, a more fundamental issue. Relaxation of the MTC may potentially mean that those practitioners who most need the cover afforded by the current “gold plated” MTC are precisely those who will try to economise by reducing the level and extent of their insurance cover. That is unlikely to be good for consumers. It may also not be good for the market if it has to grapple with (and bear the costs of) complex problems of under-insurance. The costs of defending a £1 million claim will not be reduced if the level of cover drops to £500,000 and may indeed be increased. And it remains to be seen whether a reduction in the limit of indemnity will in fact feed through to provide insured solicitors with cheaper premiums.
It may be that the “gold plating” of the MTC – and particularly run-off cover, the claims that arise during it and the frequent lack of premium payment – are the real problems for the market which could be usefully addressed.
The SRA is probably right about one thing – that the current MTC regime is unsustainable – but for the wrong reason. That reason has nothing to do with the nostrums of fashionable economics about the MTC deforming the market. It has everything to do with the fact that the MTC regime will be unsustainable when the market is confronted with a serious upswing in claim numbers and size. Experience shows that is inevitable and will lead to insurers withdrawing from the market. The remarkable feature of the recession in the residential property market after 2008 was that while increased conveyancing claims led to many insurers withdrawing from the market, their place was taken by new insurers. That is unlikely to be repeated in the future.
So reform of the MTC is probably overdue but this is an unpromising start. In the meantime, some problems are building up – see for example the recent decision in AIG v OC320301. If insurers cannot aggregate a group of large claims they will respond by putting up premiums (in the short term) and withdrawing from the market (in the long term).
We shall have to see how matters develop but the outlook is not encouraging. Further consultations are promised subsequently when it may be possible to deal with the main problems – in particular, run-off cover and how to pay for it.
Click here to read the SRA’s discussion paper.