Updated: The Solicitors Minimum Terms – time for a change?
January 2021The past twelve months have witnessed unprecedented challenges, and the economic pressures brought on by Covid 19, Brexit and the threat of a long economic recession have all taken their toll. And, in the context of the solicitors’ professional indemnity (“PI”) insurance market, these pressures are being felt particularly keenly.
The Solicitors Regulation Authority (SRA)’s Minimum Terms and Conditions of Professional Indemnity Insurance (“MTCs”) impose extremely onerous obligations on Insurers, with very wide mandatory cover and high limits of indemnity, minimal exclusions, and a potentially very long tail in view of the 6-year run-off provisions which kick in automatically if a firm shuts down, whether or not the firm pays the run-off premium. In the current economic climate, with the likelihood of many firms failing and closing down, insurers are understandably concerned about their potential exposure to claims; and they are raising their prices to match their potential exposure.
In this article we consider the current state of the solicitors’ PI market, the trend in claims, and the resulting need (in the author’s view) for the MTCs to be diluted so as to retain a viable and healthy market – for both the profession and its insurers – into the future.
Background
The MTCs were introduced by the SRA in 2000, when solicitors’ professional indemnity insurance first moved away from the Solicitors Indemnity Fund and returned to the open market. This was initially seen as a positive move for policyholders, with Insurers vying for solicitors’ business and a glut of supply resulting in competitive pricing in an already soft PI insurance market. At that time, solicitors were seen as an attractive risk, and a necessary part of any discerning PI insurer’s portfolio. Business was brisk.
In 2005, the SRA insisted that the minimum ‘per claim’ limit of indemnity be increased from £1m to £2m (or £3m if the firm was an LLP) and, in an attempt to mitigate the increased risk for insurers, a very broad aggregation clause was added into the MTCs.
For a long while thereafter, soft trading conditions across the whole insurance market kept premiums pegged back, despite the fact that the legal profession started to see a marked increase in claims activity and many insurers began to suffer overall losses to their books as a result.
However, from perhaps 2009 onwards, in the lead up to each October renewal cycle the pervading view across the insurance market was that ‘this will be the year rates will increase’ and so, feeling the pressure, the SRA began to consider changes to the MTCs to keep them attractive to insurers and keep prices down. Various ideas were mooted but without take-up, and the SRA eventually hit upon an idea to allow unrated insurers from outside of the London Market to gain access to solicitors and underwrite MTC-compliant cover, the hope being that their low prices would force the London Market insurers to keep their prices keen. This idea worked for a while, but it had the unfortunate consequence of sending the various unrated insurers out of business, as the amount being paid out in claims rapidly escalated way beyond the amounts charge in premiums, leaving their hapless policyholders high and dry.
In 2018, the SRA launched a consultation on the MTCs, which included proposals both to reduce the minimum level of cover to £500,000 (subject to a higher limit for claims for conveyancing services) and to reduce the period of run-off cover from six to three years. The proposals received a luke-warm reception in the insurance market, with most commentators predicting that, far from the desired decrease in the cost of cover, they would actually result in a net increase in most cases. Ultimately, beyond the departure from the SRA of the author of the proposed reforms, nothing changed.
The MTCs remain just as prescriptive as they were back in 2005.
Current terms
As they stand, the MTCs compel Insurers to provide insurance cover as follows:
- Full civil liability cover, with a minimum level of cover of £2,000,000 per claim (£3,000,000 for LLPs), with no aggregate limits permitted
- Defence costs payable in additional of the limit of indemnity on an unlimited basis
- Insurer to pay the excess if the firm does not
- Very few exclusions permitted
- Breaches of policy terms by the firm entitle Insurer to seek compensation from the firm, but only after the claim has been resolved (and paid to the client in full by the insurer).
- Automatic six-year run-off cover in the event that the firm ceases trading during the policy period, regardless of whether the run-off premium is paid
Also, and of particular concern, is a prohibition on Insurers avoiding or repudiating the insurance on any grounds whatsoever, including non-disclosure, misrepresentation or even failure to pay the policy premium.
All of these requirements were designed to ensure that clients are protected and that they receive their due compensation even if the firm has breached its insurance obligations or cannot afford to meet its own financial or general obligations towards its insurer; and that, ultimately, the legal profession continues to be viewed by the public at large as the honourable and trustworthy profession that we all want it to be.
This goes to the heart of the SRA’s consumer-focused agenda, and no-one would doubt that it is a very laudable aim.
However, these insurance requirements go far further than those of any other profession, and the ‘gilt-edged’ nature of solicitors’ PI insurance has had two profound consequences over the past few years. First, it has driven up the cost of cover, with many insurers exiting the market over time due to compounded losses and a loss of underwriting appetite, and those that remain rightly insisting on a pricing policy that is commensurate with the quality of cover being demanded.
And secondly, it has, over time, put a target onto solicitors’ backs, with Claimants increasingly viewing the guarantee of solicitors’ insurance cover as providing easy pickings.
Claims
From failed investment schemes to escalating ground rent, multiple dwelling relief and pension-sharing issues, one does not need to look far to see significant claims trends that have emerged against the legal profession over the past few years. Claims management companies have sprung up to pick apart personal injury settlement looking for arguments that more could have been obtained, and swathes of proforma litigation has been launched across the board, all safe in the knowledge that the MTCs sit behind the solicitors in each case.
Away from civil claims, the SRA have become more hands-on of late, and regulatory activity has increased markedly. And the widely-reported ‘Friday afternoon fraud’ scandal has involved PI insurers repaying millions of pounds in cyber-enabled theft upon their policyholders’ client accounts. All of this has been largely dealt with under the auspices of the MTCs, despite the fact that much of it really falls beyond the scope of what would normally be considered ‘professional liability’.
And, just to add the final ingredient into the pressure cooker, the recent case of Lord Bishop of Leeds v Dixon Coles & Gill¹ has thrown uncertainty upon the aggregation provisions in the MTC. In compelling the firm’s PI insurers in that case to pay more than the limit of indemnity in respect of a fraudulent partner’s misdeeds, this case appears to have single-handedly removed the comfort blanket that was the very purpose of the amendments to the MTCs back in 2005.
The MTCs unyielding rigidity and the claims activity that it has driven has pushed Insurers’ financial exposure to the point where many have decided to deploy their capital elsewhere. Those that remain are being so selective in their choice of firm – and are demanding such significant premium increases – that many firms have found themselves uninsurable and have been forced to close as a result. October 2020 PI insurance renewals saw an average premium increase of 17%, with greater increases of up to 27% for firms with any claims exposure. There is undoubtedly more to follow for firms whose renewals are due to take place in April 2021.
Changes required?
The uncompromising nature of the MTCs is stifling a once buoyant PI insurance market and, with it, is risking the destabilisation of the very profession that the SRA is there to regulate.
In September 2020 the International Underwriting Association (IUA) set out its concerns in an open letter to the industry, calling for the MTCs to be changed to include (among other things) a right to cancel cover if premiums remain unpaid (particularly for run-off cover), and for the payment of excesses on a policy to be mandatory. The IUA has said that the credit risk taken on by insurers for the non-payment of solicitors’ PI insurance premiums and excesses is shortly likely to become “commercially unacceptable”, leading to a further restriction in the supply of insurance “across the board”.
Lloyds of London have also mandated that all professional indemnity insurance policies should clearly state whether or not they will provide affirmative coverage for cyber risks and, as stated above, this is something that the MTCs currently fail to do. There is no mention of cyber cover in the wording, and yet the SRA insist that insurers meet the various ‘silent cyber’ risks that continue to emerge.
Lloyds have just (22 January 2021) granted the SRA a temporary dispensation from these requirements until 1st October 2021, so changes will need to be made in advance of that deadline. It is currently difficult to see a solution that will satisfy insurers whilst maintaining the SRA’s consumer-protection focus; if the SRA decide to bring cyber risks expressly within the MTCs, premiums will escalate further and there will be yet more insurer departures from the market; but exclude cyber risk and consumers will become exposed.
The coming months will be very interesting; pressure is mounting.
Comment
Ever since the MTCs were first introduced, the consumer protection agenda has driven their formulation and evolution. But the system is breaking and, with the insurance market gradually turning its back on the profession, the financial pressure of giving clients a ‘compensation guarantee’ is now being felt at the coalface. It is a tragedy that so many of the firms that the SRA is there to serve are being allowed to collapse under the weight of this burden.
The balance between consumer protection and the viability of the legal profession is undoubtedly a hard one to maintain. But for too many years it has been tipped too far in favour of the consumer, and now is the time for the SRA to redress the imbalance that the consumer protection debate has created. The ‘guarantee’ that the MTCs provide needs to be removed, and a ‘fair’ deal put in its place, where risk is shared. Only then can the profession (and the insurers that underpin it) emerge from the chaos and consider a more viable future.
- Lord Bishop of Leeds v Dixon Coles & Gill [2020] EWHC 2809
