The Solicitors Regulation Authority (SRA) requires all law firms that close operations without being succeeded by another have run-off cover for their Professional Indemnity Insurance (PII) exposures.
Since September 2000, commercial insurers have been obligated under the Participating Insurers Agreement to provide run-off cover for a minimum period of six years from the next renewal date following a firm's cessation. After the six-year period expires, any PII claims not covered by a commercial insurer are automatically covered, subject to its rules, by the Solicitors Indemnity Fund (SIF).
What is the SIF?
The SIF was established in 1987 as a mutual insurer to provide PII to solicitors in England and Wales, but its role changed when the profession voted to enter the commercial market in September 2000. While it still dealt with claims notified prior to that date, it also took on the role to provide PII cover for closed firms once their six-year run-off period had expired.
Generally, this has worked well. However, in 2016 the SRA announced the SIF should close at the end of September 2020. This has been extended a number of times with closure now due at the end of September 2022. The SRA recently launched a consultation, though its preference is seemingly for the SIF to close.
Should law firms be worried about this?
The answer is: some should – it depends on the types of work conducted and their attitude to risk.
PII is underwritten on a claims-made basis. This means that a policy will cover claims made during a policy period irrespective of when the work is done. Statistics show that most claims are notified relatively early on. However, there is the possibility of notifications being received right up to the 15 year long stop date under section 14(b) of the Limitation Act (1980).
According to the Law Society, in January 2020 around 10% of claims were made after the compulsory run-off period had expired. This means that if a firm only relies on the run-off cover provided by their commercial insurer and does not consider its post six-year exposure, there are potential uninsured liabilities for a nine-year period and possibly even beyond in some instances. Recent information provided by the SRA highlights that the predicted number of claims each year will fall from about 45 in 2023 to 31 by 2029, and that the average cost of each claim will be about £34,000.
If the ceased firm does not have the benefit of PII cover, there is a possibility that both partners and employees could be pursued directly and held personally liable, to the extent that they do not have limited liability (Merrett V Babb  EWCA Civ 214). This is potentially a worrying prospect for those who have ceased trading in the belief that they had run-off cover and that their liabilities were insured. It also raises another important consideration; how can individuals mitigate risk to their personal estate?
Before a firm closes, those running the practice must consider this very real danger and should agree on a strategy.
The SRA's consultation runs until mid-February 2022 and we would encourage any interested parties to have their say.
In the meantime, we suggest firms should:
- Recognise that there are potential uninsured exposures that need to be addressed on expiry of the six-year run-off and ensure an appropriate diary reminder is in place
- Look out for any updates from Lockton, the SRA, and the Law Society
- Maintain a policy with an established insurer that is committed to the profession
- Engage with your previous broker, or a broker of good standing if the PII was placed directly with an insurer
- Ensure any historical data is available for insurers to review
- For firms going into run-off, agree who will maintain PII records and coordinate with insurers during the six-year period, and confirm who has responsibility for reviewing matters as run-off comes to an end
One final note to add is that none of the above considers any excess layer PII cover a firm may have bought before going into run-off. Excess layer cover may be required in circumstances where the firm has committed to maintain a higher limit of indemnity, for example in undertakings to clients.
To conclude, at this stage there is still speculation around the closure of SIF. Across the industry, there is a consensus that now is the time for a solution need to be found. The upcoming SRA consultation will hopefully trigger that resolution.
Our advice remains the same; firms should keep abreast of developments on this topic, while also understanding the issues that could arise in the unlikely event that no solution is found.
To learn more about this topic, or to get advice on your run-off cover, please do get in touch with our experts today – we'd be more than happy to help.