1 Introduction
1.1 Who should read this practice note?
Firms whose professional indemnity insurer has become insolvent.
1.2 What's the issue?
A firm whose qualifying insurer has become insolvent needs to act immediately to put new qualifying insurance in place. This practice note acts as a guide for solicitors who find themselves in this situation.
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1.3 Professional conduct
The following sections of the Solicitors Indemnity Insurance Rules are relevant to this issue:
1.4 Status
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note, contact the Law Society's Practice Advice Service.
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1.5 Terminology
Must - a specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- outside of a regulatory context, good practice for most situations in the Law Society's view.
- in the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - a non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
Rules - Solicitors Indemnity Insurance Rules 2009
SRA - Solicitors Regulation Authority
- Qualifying insurance - professional indemnity insurance that is taken out with a qualifying insurer, and which meets the Minimum Terms and Conditions set out in Appendix 1 of the Solicitors Indemnity Insurance Rules 2011 as amended ('the Rules') (see 1.3 Professional conduct).
- Qualifying insurer - an authorised insurer that has entered into a Qualifying Insurer's Agreement with the Solicitors Regulation Authority (SRA) as the independent regulatory body of the Law Society. A list of all qualifying insurers is available from the SRA.
- Solicitor/You - includes all bodies (recognised and authorised) regulated by the SRA. For the purpose of this practice note, the term 'solicitor' includes Registered European lawyers, registered foreign lawyers as well as recognised and authorised bodies, their managers and owners.
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2 If your qualifying insurer becomes insolvent
If your qualifying insurer has become insolvent, you must arrange replacement qualifying insurance as soon as reasonably practicable and in any event within four weeks of the relevant insolvency event (Rule 6).
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2.1 Why you need new qualifying insurance
If your qualifying insurer becomes insolvent, your existing policy still constitutes qualifying insurance and the insurer is still a qualifying insurer in respect of your policy. Although claims notified to the insurer are notified under a valid policy of insurance, the insolvency means the insurer could be unable to pay claims in full. The Rules therefore require you to put replacement qualifying insurance in place.
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2.2 Why you should act as soon as possible
Alternative cover will not be retrospective. In the four weeks following the relevant insolvency event, until you have arranged a replacement policy, any claims that are made against you will be made on the insurance provided by the insolvent insurer.
Such claims are unlikely to be paid in full leaving you liable for any shortfall. Moreover, there is likely to be a lengthy delay in handling and/or paying such claims (see section 3, Claims against your insurer).
Until you have alternative cover in place, you are at risk of making payment from your own resources.
If you fail to obtain a replacement policy within four weeks of the relevant insolvency event, you will have committed a regulatory breach and will be deemed a firm in default under the rules. This means that the assigned risks pool (ARP) will in the first instance meet any claims made against you that arise at this time. The ARP manager will be entitled to recover the amount of these claims, associated costs and interest from the principals of your firm. A firm in default which is entitled to be admitted to the ARP will also be liable to pay an amount equivalent to the ARP Default Premium.
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2.3 Once you have replacement cover
Once you have replacement cover, you should cancel your policy with the insolvent insurer and, if entitled to do so, seek the return of the premium for the balance of the indemnity period.
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2.4. Applying for insurance through the ARP
Insurance through the ARP is a form of qualifying insurance and, if you are eligible to enter the ARP, you can apply within the four week period to enter the ARP.
The ARP is intended as an option of last resort for practices that are unable to obtain insurance from a qualifying insurer in the open market. ARP premiums are usually much higher than the market rate, and you will be required to be inspected and monitored by the SRA at your own expense. You may also be required to attend approved courses and to implement specified practice management measures.
Unless you hold an ARP policy before 1 October 2011, you may only be insured through the ARP for a maximum of six months in any five-year period. As a transitional arrangement, if you hold an ARP policy before 1 October 2011, you may be insured through the ARP for a maximum of 12 months in any five-year period. After this time, you must secure cover from a qualifying insurer or cease to practise.
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3 Claims made against the insolvent insurer
If you have already notified claims to the insolvent insurer, whether in this or in a previous indemnity period, you may find that these claims are not met in full.
You will be an unsecured creditor of the insolvent insurer and may in due course be able to receive partial payment of your claims but this is likely to be a drawn out process. You may also be eligible for compensation under the Financial Services Compensation Scheme.
3.1 Claims made against the ARP
The insolvent insurer is automatically removed from future participation in the ARP when it ceases to be a qualifying insurer. All the qualifying insurers contribute to the ARP in accordance with their own market shares. However, as of 1 October 2011, there is no longer the requirement for qualifying insurers to take over an insolvent qualifying insurer's market share.
If you are already insured through the ARP, you do not need to take any action.
However, you should note that any claims already made, whether in current or previous indemnity periods, may not be paid in full. The reason for this is that there may be a shortfall in the insolvent insurer's contribution to the ARP. If you find yourself in this situation, you may be eligible for compensation under the Financial Services Compensation Scheme.
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3.2 The Financial Services Compensation Scheme (FSCS)
The FSCS provides compensation for payment of claims. It may also include return of premium for the period from cancellation of the policy to the end of the indemnity period, if the terms of the policy provide for a return of premium in those circumstances.
However, the FSCS rules are aimed at allowing the FSCS to provide compensation at a 'level appropriate for the protection of retail customers and small businesses'.
The FSCS rules are complicated and there are several important restrictions on the scheme in so far as solicitors' firms are concerned. The key points to note are:
- Partnerships (other than limited liability partnerships) are only eligible to bring a claim if their annual turnover does not exceed £1m and their net assets do not exceed £1.4m.
- Corporate bodies (including limited liability partnerships) are only eligible to bring a claim if their annual turnover does not exceed £1m, and either they have not more than 50 employees or their balance sheet net assets (as defined in section 247 (5) of the Companies Act 1985 and section 382(5) of the Companies Act 2006) do not exceed £3.26m.
- Individuals are eligible to bring a claim irrespective of their turnover, net assets or number of employees. This will include sole practitioners and individuals whose practice has ceased and whose policies are in run-off.
- Compensation from the FSCS is limited to 90 per cent of the total amount claimed.
More information can be found on the FSCS website or you can call their customer service team on 0800 678 1100 or 0207 741 4100.
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4 More information
4.1 Law Society products and services
4.1.1 Practice Advice Service
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays.
4.1.2 Law Society publications
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5 Amendments
This practice note has been updated to reflect changes relating to the introduction of outcomes-focused regulation (OFR).
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