What is run-off cover?
Run-off cover is where an insurance company pays claims made against a business after it closes and ceases operations.
My firm is ceasing to practise, do I need to purchase run-off cover?
Run-off cover is a regulatory requirement imposed by the Solicitors Regulation Authority (SRA) that ensures that consumers are compensated for claims that arise after a firm has closed down and gives financial security to retired partners.
The SRA Indemnity Insurance Rules and Code of Conduct provide that your clients must have the benefit of your compulsory professional indemnity insurance (PII), including run-off cover (outcome 1.8).
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But I've stopped practising, why do I need more insurance?
PII is provided on a 'claims made' basis which means that the responsibility for paying a claim lies with the insurer on cover when a claim is made against the practice, and not the insurer on cover at the time of the event that gave rise to the claim. 'Claims made' insurance is common in professional indemnity insurance lines and there is no indication that the market or the SRA is prepared to move to an 'events occurring' approach for solicitors' PII cover.
Run-off cover is necessary because after cessation there remains the possibility that claims will be notified. Some claims are made very soon after the alleged error or omission by the firm because the mistake is immediate and obvious to the client. In other cases, it can take many years before the problem comes to light. If a client acquires property, for example, negligent advice during the transaction may only become apparent during a subsequent sale.
About 40% of claims are made more than three years after the alleged error or omission. Therefore, run-off cover is essential for client protection and peace of mind of former principals.
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When do I need to purchase run-off cover?
Under clause 5.1 of the minimum terms and conditions (MTC), your insurance must provide run-off cover in the event of a cessation. For these purposes, an insured firm's practice shall be regarded as ceasing if the insured firm becomes a non-SRA firm. The cessation takes effect on that date.
Where there is a successor practice you may elect to trigger run-off cover under your current PII policy (clause 5.3 of the MTC). You must make an election and pay your run-off premium before the date of cessation for your run-off cover to be effective. The insurer must give notice of the election to the SRA within seven days.
If you do not elect to trigger run-off cover, or do not meet the notification and premium payment requirements, the insurer of the successor practice will be required to cover the claims against your ceased firm. If there is a successor practice willing to take on the risks of a prior practice and an insurer is prepared to insure both entities, then you will not need to purchase run-off cover.
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How much run-off cover do I get?
Under the SRA Indemnity Insurance Rules 2011 (SIIR), firms are required to obtain six years' run-off cover when they cease to practise without a successor practice (or with a successor practice but an election is made to run-off the prior practice's PII policy). This requirement to cover any claims that arise after cessation is common to many other professions and reflects the fact that PII generally operates on a 'claims made' basis, rather than an 'events occurring' basis. For further information, see But I've stopped practising, why do I need more insurance?
In the solicitors' PII market, the qualifying insurer that was on cover at the time of the firm's cessation is obliged to provide six years of run-off cover from the expiry date of the policy (even if the firm ceases or merges part way through the policy year) in return for the payment of a premium. For example, if your firm ceased without successor on 1 August 2009 then it would be provided with run-off cover for the balance of the indemnity period (i.e. until 30 September 2009) and for a further six years to 30 September 2015. For further details about the scope of run-off cover, refer to clause 5.2 of the minimum terms and conditions.
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How much do I have to pay?
The cost of run-off cover under the minimum terms and conditions is unregulated but is typically equivalent to about two to three times the last annual premium. In other words, because no new work is being undertaken, the run-off premium is set at approximately 50% of what it would have been spread over six years.
Details of the cost of your run-off cover can be found in your insurance policy. This is a significant overhead that should be budgeted for as part of your retirement or succession plan. Run-off premium is a factor that you should consider when deciding on whether or not to accept an insurance quotation, particularly, if you may cease to practise within the next indemnity year.
If you are insured with the assigned risks pool (ARP), the run-off premium will be calculated in accordance with Appendix 2 to the rules and is based on a firm's gross fees. ARP run-off is 100 per cent of the full annual ARP premium, that is the amount that would have been payable if the firm had spent the entire year in the ARP.
In addition to this run-off premium you will also be charged an ARP premium for the amount of time that you spend in the ARP. While there is provision for a short period ARP premium based on the number of days spent in the ARP before a firm ceases to practise (clause 1.17), the rules do not provide for return of ARP premium if you choose to run-off in the ARP (clause 1.10). The minimum ARP premium that you will have to pay is £1,500 irrespective of the level of your gross fees, or the period of time spent in the ARP during an indemnity period.
Therefore, depending on the length of time spent in the ARP before ceasing to practise, a proportion of the ARP premium will be added to the run-off premium (clause 3). For example, if you cease in ARP on 1 January (ie 92 days into the indemnity period), the total that you will pay is 100% of the full ARP premium as run-off premium plus 92/365 times ARP premium.
If you are contemplating closing your practice, you should consider the PII implications, particularly the cost of run-off cover. There are also other regulatory requirements, outlined in the Law Society's practice note on closing down your practice.
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What happens to run-off cover after six years?
Your qualifying insurer is only required to provide run-off cover for six years under its agreement with the SRA. Currently, the Law Society, via the Solicitors Indemnity Fund (SIF), provides supplementary run-off cover beyond this period, although this insurance cover is due to expire in September 2017. The Law Society Council is committed to providing this additional cover and is currently lobbying the Solicitors Regulation Authority to examine ways that this cover can be extended beyond the expiry of the SIF arrangements in 2017.
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I am a former principal of a ceased practice that has just been notified of a claim, what do I do?
It depends on the length of time since the cessation of your practice.
If a claim is made or circumstances are notified within the six year period from the end of your previous policy, then you should contact the insurer who last provided you with cover.
If it is after this time, you should contact the Solicitors Indemnity Fund:
Lower Ground Floor
2 Minster Court
Telephone: 020 7871 6800
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What is supplementary run-off cover?
The Law Society, through the Solicitors Indemnity Fund (SIF) and in accordance with the SRA Indemnity Rules 2011, currently provides a further period of run-off cover that is collectively funded by the profession for the benefit of firms that cease to practice. This 'supplementary run-off cover' provides additional cover beyond the six years' run-off cover provided for by qualifying insurers under the minimum terms and conditions (MTC).
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Why do I need supplementary run-off cover?
The need for supplementary run-off cover arises due to the fact that claims may be made beyond the six year limitation period for negligence claims because of provisions in the Limitation of Actions Act 1980 (LAA) that extend time in certain cases, for example, where facts relevant to cause of action are not known at date of accrual (s. 14A LAA) or until a plaintiff discovers any fraud, concealment or mistake (s.32 LAA).
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What is the Solicitors Indemnity Fund?
Prior to moving to the open market system in 2000, the solicitors' PII market operated on the basis of a mutual fund, called the Solicitors' Indemnity Fund (SIF). This involved the Law Society establishing an indemnity fund under which the profession became its own insurer. SIF provided PII to all firms in private practice regardless of their practice area, size or claims history. The difficulty with a mutual fund is that the entire risk of PII claims is borne by the members of the scheme. Due to the perception that premiums were excessively high, the profession voted to move to the open market in the late 1990s to avoid the costs associated with this risk.
Although it does not participate in the open market, SIF continue underwrites the following exposures:
- claims made during the period a firm was covered by the SIF master policy (i.e. notified from 1 September 1987 to 31 August 2000) i.e. 'historic SIF claims';
- claims made after 31 August 2000 by practices that ceased while covered by the SIF master policy i.e. 'SIF run-off claims'; and
- claims made between 1 September 2007 and 30 September 2017 that arise after the run-off cover in the MTC has expired i.e. 'supplementary run-off claims'.
At the request of the Law Society, as part of the transition to open market insurance, SIF put in place an insurance programme to provide supplementary run-off cover. This only applies to firms that ceased practising after 31 August 2000 and before 30 September 2011 and covers claims notified prior to 1 October 2017. The scope and coverage of supplementary run-off cover is governed by the SRA Indemnity Rules 2011 (note supplementary run-off claims are referred to in the rules as 'expired run-off claims' see rule 8.5).
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Who pays for supplementary run-off cover?
As part of the transition to open market insurance, the Law Society Council (which at that time held both regulatory and representative functions) agreed that the profession should collectively fund supplementary run-off cover. Under the SRA Indemnity Rules 2011, the SRA has the power to require principals to make contributions to fund indemnity against losses under supplementary run-off cover.
As such, this cover is provided at no additional cost to the individual solicitor or firm. The rationale behind this provision is to give peace of mind to retired former principals whose firms closed with no successor practice.
How much supplementary run-off do I get?
Supplementary run-off cover is provided to firms on the sixth anniversary of the date on which its run-off cover under the minimum terms and conditions (or the ARP run-off policy) ends.
Currently, SIF will only provide supplementary run-off cover until 30 September 2017. The Law Society is committed to providing this additional cover and is lobbying the SRA to examine ways this cover can be extended beyond the expiry of the SIF arrangements in 2017.
The Law Society has been instrumental in obtaining approval from the SRA of an extension of the supplementary run-off cover until 30 September 2020. This forms part of the draft SRA Indemnity Rules 2012 that are subject to approval by the Legal Services Board. However, the Society's call for a cap on the cost of the extension to the profession was not presented to the SRA Board. The Law Society sought to ensure that the profession was not unduly exposed and suggested a cap that would limit cover only in the event of abnormally high level of claims within the three year period.
We will be undertaking further work to consider the impact on SIF reserves if used to fund and manage this cover beyond 2020, but this extension will give practitioners peace of mind until the decision about future continuation of the cover is taken.
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