By Simon Thomson, Policy Adviser - Professional Indemnity Insurance, Law Society of England & Wales
The Solicitors Indemnity Fund (SIF) will stop accepting new claims after 30 September 2021. It’s important that you understand what this means for you in order to protect yourself against potential future claims.
Originally, SIF was the statutory fund that used to provide cover to solicitors in England and Wales.
When the profession voted to move from a statutory fund system to purchasing professional indemnity insurance (PII) on the open market, a portion of SIF was retained to provide ongoing run-off cover for firms that had already closed. Later, its scope was extended to cover other closed firms once their mandatory six-year run-off cover had expired.
After a law firm closes, run-off cover must be purchased to protect solicitors and their clients in the event of any civil claims that arise because of negligence. This mandatory run-off cover is purchased as part of the firm’s professional indemnity insurance (PII) and lasts for six years.
Coverage after this six-year period is called supplementary run-off cover and is currently provided by SIF by way of indemnity, at no additional cost to the former principals of a closed firm. However, for firms that closed on or after 1 September 2000, this cover will end on 30 September 2021.
Unless alternative arrangements are made, the former principals of firms that closed from September 2000 onwards, their estates, and even individual employees, may be personally liable for losses from any claims that are made.
Around 11% of claims are made after the mandatory run-off period has expired. Most of these late claims occur between six and 15 years after a firm has closed.
Some types of legal work are at substantially greater risk of claims being made after the six-year run-off period. These include:
Over the last decade, the Law Society has been actively engaged in trying to find a solution to this issue.
We have successfully lobbied the SRA on two occasions to postpone the closure of SIF, and it is unlikely that any further extension will be made.
We have actively explored alternative solutions in the insurance market.
There are still several alternatives under consideration, and it is possible that some of these will come to fruition.
However, market conditions are challenging, and there is no guarantee of success. It's unlikely that any solution will provide comprehensive cover to all firms that closed without a successor practice, so it's important that you carefully consider your exposure and any actions that you could take to protect yourself.
SIF’s closure could affect you differently depending on if or when a practice at which you were a principal or employee closed. This means that there’s not a simple solution for the whole profession. You’ll need to consider your risk exposure when deciding how you want to proceed.
We have identified four groups, and the steps that solicitors could now be taking in preparation for the closure of SIF, depending on the group (or groups) in which they find themselves.
Group A: firms that closed on or before 31 August 2000
These firms are currently covered by SIF and will continue to receive cover because they closed before the profession moved to purchasing insurance on the open market.
When SIF is closed, risks relating to this group will be covered to provide ongoing protection.
Group B: firms that closed between 1 September 2000 and 30 September 2015
These firms are in SIF, or will be in SIF, by 30 September 2021.
This is the group that faces the greatest difficulties because of SIF’s closure. For some time now, we have been actively pursuing options for this group and continue to earnestly engage with the insurance industry to find a solution. However, there are currently limited alternatives available.
Suggested actionsFormer principals
Group C: firms that have closed since 1 October 2015
These firms have closed and they’ll never enter SIF because SIF closes to new claims after 30 September 2021, which is before their six-year mandatory run-off period comes to an end.
Unless alternative arrangements are made, these firms will be left without protection once their run-off cover expires.
Group D: existing or new firms
The closure of SIF requires the principals of any firm which may close at some point in the future to think about the steps that they can take to minimise their future liability.
None of these firms will benefit from the cover of SIF. Unless alternative arrangements are made, they’ll be left without protection once their run-off cover expires.
However, there are still precautionary measures that firms can take to reduce their long-term exposure.
Principals of existing firms
If you’re a traditional sole practice or partnership, consider incorporating as a limited liability company, as this will reduce your personal exposure to claims arising from work carried out subsequent to incorporation. However, we recommend you take independent advice on this as it may have other consequences for your practice.
Work to improve risk management systems
Carefully consider whether you should stop taking on any new work in areas with a higher risk of long-tail claims and retain records of any such work you’ve done previously, or do in the future in order to defend any claims that may arise subsequently.
Principals should consider their likely need for supplementary run-off cover, and how they’ll pay for it.
Consider setting aside funds now, or start to implement a plan to help you to pay for your mandatory and supplementary run-off cover in the future.
Former principals of existing firms
Contact the current principals of the firms and encourage them to consider their likely need for supplementary run-off cover, and how it would be paid for.
Principals of new firms
Ask prospective employers if they’re aware of the closure of SIF and – if the firm closes without a successor practice – what steps they’re taking to make sure that you will not be exposed to unnecessary risk once their mandatory run-off period comes to an end.
Paying for your mandatory run-off cover has always been an obligation for solicitors when closing their firm in an orderly fashion.
Despite this, a significant minority of firms that close without a successor practice do so without making the necessary payment. This has serious negative effects because the Solicitors Regulation Authority (SRA) requires participating insurers to provide this cover regardless of whether firms have paid for it or not. This means that the profession as a whole has to pay higher premiums for their PII, and it strains the relationship between the SRA and participating insurers.
In the future, we expect that an orderly closure, and paying your run-off premium is likely to be essential for any firm which hopes to secure post six-year run-off cover (PSYROC).
Supplementary run-off cover does not have to comply with the SRA’s minimum terms and conditions (see Annex 1 of the SRA Indemnity Insurance Rules), so you may be able to purchase less comprehensive cover which would still meet your needs.
The policy term is likely to be limited to a year, and the duration of such cover would depend on the type of work in which your firm was involved.
An additional nine (or 10) years of cover, on top of your mandatory six-year run-off period, will protect you from most claims as it puts you beyond the 15-year secondary limitation period.
However, some claims may still be valid more than 15 years after the work was completed. Claims relating to residential property, wills and trusts, and child personal injury are areas that are particularly problematic in this regard.
Some low risk areas of work may not require further cover once the mandatory six-year run-off period has ended. You will need to consider your liabilities and determine what represents a tolerable level of risk.
You can improve your chance of obtaining ongoing cover if you can provide evidence that you:
If you do not have previous indemnity insurance records, you should ask your former insurer(s) for copies of your last three proposal forms and retain these. You should also gather any relevant papers that may still be available as soon as possible.
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