What is the Solicitor’s Indemnity Fund?
The SIF was set up in 1987 to provide compulsory professional indemnity cover to all solicitors. The role of the SIF changed over time and in 1999 it was abolished, and professional indemnity insurance moved to an open market system. Responsibility for indemnification arrangements were delegated to the Solicitor’s Regulatory Authority (SRA) in 2006.
What is the Legal Services Board’s role in these matters?
A key function of the LSB is to approve applications by regulators for changes to their regulatory arrangements, including indemnification arrangements for authorised persons that they regulate.
In deciding on applications, the LSB must consider criteria including that the proposals are not prejudicial to protecting the interest of consumers and the public interest. We also must have regard to whether the proposals are proportionate, targeted, consistent, and transparent.
What is ‘Run Off Cover’?
Professional indemnity insurance policies are generally written on a “claims made” basis rather than a “losses occurring” basis. This means that the responsibility for paying for a claim lies with the insurer at the time the claim arises. Run off insurance is necessary if a firm is to have cover for claims made against them after it closes, particularly where there is no successor firm.
What are the SRA’s Minimum Terms and Conditions (MTCs) in relation to run off cover?
The SRA has comprehensive MTCs for professional indemnity insurance for the solicitors and firms that it regulates. Amongst other requirements, these stipulate that when a firm closes without a successor practice, they must purchase six years run off cover, to cover claims made up to six years after closure.
Why is the minimum run off cover set at six years?
The SRA’s stated position is that six years’ run off cover strikes the appropriate balance of protection for consumers with the cost of providing that protection. It also notes that the six-year minimum period of run-off cover is consistent with that required by other regulators of legal services.
Why was post-six-year run off cover provided?
The SIF currently provides indemnity cover in respect of claims made more than six years after a firm has closed. It therefore provides cover beyond the period required under the MTCs. This SIF cover is provided from residual funds built up prior to 2000, before the current indemnity insurance arrangements were brought in.
When will the post-six-year cover end?
The post-six-year cover is set to end in September 2021.
Why was the post-six-year cover extended?
As the current post-six-year cover is provided from residual funds previously built up, the SIF rules set a date for the fund to close, which was initially set for September 2017. In 2012, the LSB considered and approved an application from the SRA to extend the SIF from September 2017 to September 2020. One of the reasons for this extension was to allow the SRA to conclude a wider review of client protection arrangements. The SRA has completed this review which included consideration of the level of run off cover that should be provided through the MTCs. It has concluded that six years mandatory run off cover is appropriate.
In September 2020, the LSB approved another application made by the SRA to extend the SIF by another year, to September 2021. Extending the arrangement allowed the profession and the insurance sector another year to develop a similar product. It also provided additional stability and security for consumers and retired solicitors during a time of uncertainty being caused by the COVID-19 pandemic.
To inform its application to the LSB, the SRA requested an actuarial report on the financial viability of extending the SIF by one, two and three years. The advice the SRA received set out that there were sufficient funds to be able to extend the SIF by a further year, but it would not be financially viable to extend it further.
Our decision noted that the SRA had not altered its general position, as set out in the MTCs, regarding the appropriate level of mandatory run off cover.
Why did the SRA not change the MTCs to raise the mandatory cover above six years?
The SRA’s stated position is that a six-year minimum period of run-off cover is consistent with that required by other regulators of legal services. Any extension to this would increase costs to providers, which would ultimately end up being passed on to consumers. The current cost of indemnity cover of six years is seen by some as a barrier to firms closing. Increasing the MTCs above six years would only increase the costs even further, so the SRA views the current level of mandatory cover as an appropriate balance between consumer protection and the costs of that protection.