Calum MacLean, Risk Manager at Lockton Solicitors, and Steve Holland, Senior Vice President of Global Professional Risk Solutions at Lockton, warn that firms who have not informed the Solicitors Regulation Authority (SRA) of their insurance status could face en-forcement action for regulatory breaches.

Original news

Press Release: Firms warned to confirm insurance position

A warning advising law firms to declare their insurance position or risk enforcement action has been issued by the SR). On 1 October 2013 the previously assigned risks pool (ARP) ceased to exist as part of a review of Client Financial Protection Arrangements, providing for professional indemnity insurance. A new Extended Policy Period (EPP), allowing firms to continue insured trading for 90 days has been made operational.

Now that the deadline of 6 November 2013 has passed, can firms still declare their insurance position?

Calum MacLean (CM): It appears the SRA has taken a fairly lenient approach with firms to date (in recogni-tion of it being the first year of this new approach, and to allow firms that have perhaps relatively innocently, failed to inform it within the required time period, some period of grace).

However, it is clear that a number of firms who notified the SRA that they required to go into the Extended Policy Period post 1 October 2013, have not updated the SRA as to their status now. This is a clear breach of professional practice rules, and enforcement action will be taken.

Steve Holland (SH):  Firms who have now entered the cessation period should only undertake work to dis-charge any of its obligations for existing instructions. Any firms who ignore this restriction and continue in private legal practice regardless, are exposing themselves to insurers exercising rights of recovery for any claims paid. Insurers are permitted to recover claims in accordance with the reimbursement clause of the Minimum Terms and Conditions.

What happens if they fail to do so and what are the possible consequences?

SH:  There are no doubt firms who will not declare themselves to the SRA, however they will not remain un-detected forever. They will have needed to produce evidence of their professional indemnity insurance (PII) for renewal of their practicing certificates. Insurers will also be declaring firms they have recorded as being in the extended indemnity/cessation period to the SRA.

Firms who are in breach of their duty to report themselves to the SRA for entering the second phase 60-day cessation period, will not only face enforcement action from the SRA, but are unlikely to be looked at fa-vourably from the insurance market and will ultimately reduce their chances of securing cover from a partici-pating insurer. Firms who have not yet declared themselves formally to the SRA as being in the cessation period should do so now. It is never 'too late', but those firms will need to prepare for an inquisition as to why they had not reported themselves earlier.

CM:  This will ultimately mean that firms who still do not comply within a very short period of time will be forced to close down. I strongly suspect action will also be taken against the individual partners/members concerned in such circumstances.

What can law firms do if they struggle to secure new insurance policy cover?

CM:   It is somewhat too late for this renewal for firms asking this question. Those that have still failed to ob-tain cover are very unlikely to be able to do so. Many higher risk/smaller firms have decided to place cover with unrated markets--itself a high risk strategy given the high incidence of failures of such insurers.

We recommend that firms which have managed to obtain cover this year, but only with difficulty, at penal rates or with unrated carriers, start working now on addressing the issues that impacted on their ability to obtain terms this year.

These issues can be categorised as follows:

  • pattern of paid claims--particularly anything that looks systemic, the tip of an iceberg
  • high percentages of the highest risk category work (residential conveyancing being at the top by a considerable margin)
  • sole practitioners up to three partner firms--these consistently cost insurers far more as a pro-portion of premium than larger firms
  • those with less robust finances--given the risk that an insurer may have the liability for any claims for six years if the practice ceases during that insurer's watch, and firms in decline tend to be less well managed and experience more claims

Do you have any best practice tips as to how to manage the securing of new insur-ance in an efficient and timely fashion?

CM:  Firms need to honestly appraise any problem areas now and start to implement an improvement plan. Working with brokers on risk management initiatives, financial audits, risk management audits, claims anal-yses will identify priority issues that the firm should put a plan in place to tackle.

Insurers welcome evidence that active management of risk is taking place. Even small firms undertaking high risk work (which do not have a history of claims) can do a lot to improve their chances of a positive PII out-come if they can demonstrate effective systems and procedures are in place which act as meaningful risk controls--and do not simply rely on the professionalism of one or two members of staff. The advent of cloud-based systems means even small firms can often afford beneficial systems.

There is rarely any excuse for a last minute cobbled together insurance submission. While the application forms for PII can be lengthy, and some of the information hard to capture, the vast majority can be planned for in advance. We recommend that high risk firms complete a risk management submission--we provide our clients with a template and guidance.

It is about being transparent, well managed, with well evidenced systems and procedures in place and on-going improvement of recognised risk areas.

This article was originally published on the Current Awareness service on LexisLibrary on 20 November 2013