As the date for professional indemnity insurance renewal approaches, it is becoming clear that in many cases it will again be the indemnity insurers who have the final say as to which firms live and which die. Anxiety is running high in some quarters as to whether insurers will make an offer and whether that offer will be economically viable.

Some firms have expressed frustration that having applied early, in some cases months ago, they are still awaiting a response from their Insurers. Others, who fears that he may have to close as a result, are concerned that they will be in breach of the SRA?s guideline as to the notice to be given of clients in the event of a transfer of a live matter.

But what will happen to those who have to accept that there is no way forward on the same basis as before?

There are essentially five main options:

• find another firm with whom to merge,
• sell the practice,
• close the practice,
• go into the assigned risks pool, or
• run away and abandon the practice.

Needless to say, we could not possibly condone the latter!

As the renewal date approaches, each of these options becomes more difficult to achieve.

There are, of course, many solicitors who have their heads firmly in the sand and who cannot bring themselves to believe that an acceptable offer will not be forthcoming.

Many are concluding, however, that since merger partners are not easy to find that even a merger on mediocre terms can be better than the alternative.

So how do you find a merger Partner? Who is in the market to acquire or, indeed, to be acquired?

Increasingly many firms are offering themselves for sale through Agents. However, there is sometimes a suspicion of those Agents and the costs that may follow.

In the light of these difficulties, and to assist those firms who would like to dispose of their practice or who wish to merge with, or acquire, another firm, the Lawyers Defence Group has created a free Practice Register for firms to make others aware of their intentions.

Firms who would like to take register their interest in merger or takeover can provide details of their firm, including:

1. some background basic statistics,
2. nature of work,
3. location,
4. area of work of interest, and
5. geographical areas of interest,

and of course, whether the firm wishes to acquire, would be prepared to be a successor practice, wishes to sell, and any other key criteria of importance.

We will keep the list and introduce individuals to firms who are potentially interested. In submitting your name and details to this firm, you will of course be authorising the release of your identity to another firm whose interests appear to match your own.

There is no fee for the introduction and, from then on, you are free to negotiate your own arrangements, although you can consult us further if you wish, to assist in the process.

If you are interested in registering, please either complete the form in the registration section of this web site or alternatively send your details to Lawyers Defence Group, 8 The Courtyard, 707 Warwick Road, Solihull, B91 3DA or email register [Email address: dfinlyson #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ].

Where insurance is not obtained on the open market and where a merger or takeover is not possible, options remain extremely limited.

The Law Society has negotiated a scheme to secure further insurance quotes but, in some cases, insurance at an acceptable premium is impossible to fund.

The options tend to boil down to entry to the Assigned Risk Pool (ARP) or a closure of some kind.

Entry to the ARP is automatic if you practise on 1st October without having qualifying insurance, but incurs a penalty premium. However, you can apply to go into the ARP at the basic rate.

If you apply before 1st October to go into the ARP, your premium is based on the previous year?s turnover. Typically, this will be somewhere in the region of 27% of last year?s gross turnover. The calculation is higher for LLP?s and limited companies. The period of cover has been reduced this year from 1 year to 6 months, meaning that the premium is halved.

Closure requires you to take run off cover which if taken from your current Insurer is typically between two and three times your last annual premium.

If you choose to close and take run off cover under your current policy, you will need to notify your Insurer and cease to practise before the policy expires on 30th September and pay the premium. If you go beyond that date, you will need further insurance for 2011/12 and to enter the Assigned Risk Pool and will then take run off cover from the ARP. In effect, if you enter the ARP and then take run off cover, the cost to you will be the cost of 6 months in the ARP plus one full year?s ARP premium.

Please note that if you fall into the ARP rather than apply to enter in a timely fashion, you will pay an additional 20% of the premium as a penalty payment.

The important thing is that you need to make a decision before the end of the insurance year and so by 30th September. You will need to do your sums but, usually, it will be better to take run off cover under the terms of your commercial professional indemnity insurance policy rather than through the ARP. However, the ARP should be considered in circumstances where either your turnover was particularly low or your premium represented a particularly high proportion of your annual fees.

Remember, if you take run off cover, you may not subsequently do any further work to assist, advise or represent a client or to further that client?s interests. You may not even submit a form on a client?s behalf or offer telephone or friendly advice. This would invalidate your cover.

You may, however, during a period of grace of 3 months, deal with administration to allocate files to other Solicitors, repay client funds, issue bills and collect fees and take the necessary regulatory steps in connection with the closure of the practice. You will, for example, need to submit a Cease to Hold report confirming that you no longer hold clients? monies.

One final matter that is often overlooked is that insurance premiums and any excess payable under any insurance policy are personal liabilities of the Partners even where the practice itself was an LLP or limited company. There is no distinction between equity and salaried Partners for this purpose.

Not only is it time to do the sums and budgetary planning but the insurance renewal round is a time for making a decision whether, when and how whether to close. Whatever that decision, it seems it is important it is made on or before 30th September and accepting a higher premium now may have the effect of increasing the costs of closure later.

Can you succeed without being a successor? Happily, the answer is yes provided the cheque book can come out.

The definition of ?successor practice? is contained in the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors. Minimum Terms are varied occasionally and not always for the benefit of Solicitors. For example, from 1st October 2010, Solicitors lost the right under their PII cover to recover the costs of being represented in disciplinary.

However, there has been a commonsense inclusion allowing a practice to pay its way out of future liabilities for claims arising despite there being a successor practice.

In short, it is possible now to become a successor practice for all purposes save that of insurance liability, so that the succeeding firm does not pick up the liability for the knapsack of claims past and present of the practice that it is taking over.

This is achieved by paying run off cover on the one firm, thereby drawing a line under its own insurance liability for negligence up until the date of closure whenever those claims may arise. It has the effect that the acquiring firm?s Insurers will not need to inflate the premium based on the danger of claims and the claims history of the other firm.

There is, however, nothing to stop the Insurers taking into account the history of individuals and their attitude to work and compliance if they are continuing in the new firm.

Of course, there is a cost to run off cover and the cost itself will have to be balanced against any likely increase in insurance premiums. The arithmetic will have to be done in each case and you will usually need to consult your Broker and/or the Insurance Company but paying run off cover in this way is one way of limiting your risk and your future exposure.

Hopefully, this will open the way for the reputation and goodwill of many firms to be developed. It may even allow firms that are facing intervention to be continued albeit at a cost.

Remember, however, that there is a time limit to notify the SRA of the arrangement.

This year?s professional indemnity insurance renewal is likely to be one of the most difficult the profession has seen for some considerable time and many firms should already be making contingency arrangements in the event that they are not successful in placing their insurance business.

A number of reasons have led to the current position.

Problems in connection with the level of claims combined with the ever increasing costs of funding the assigned risks pool (ARP) are making several insurers review quite closely their involvement in the solicitor PII market.

Hiscox, one of the market leaders with 1.6% of the market share, have pulled out of what it described as the deteriorating? solicitor professional indemnity market in the light of concerns about recession related fraud, punitive regulations and the costs of the ARP and there remains concern that others may follow suit.

A further factor was the withdrawal from the market place of Quinn, who last year insured many of those firms unable to obtain insurance elsewhere.? Quinn covered some 2,911 solicitors firms, and last year wrote ?23.7m worth of business ? roughly 10% of the market, making it the fifth-largest provider of indemnity insurance to solicitors.? That is a large gap in the market to fill.

A final, and less obvious effect upon the market was the number of new entrants to the market last ? accounting for about ?40 million worth of the total premium take of ?246 million for the first compulsory layer of cover. ?This had the effect of holding rates down for many other firms – new firms are less likely to produce large claims since they have not undertaken any work in previous years which could become the subject of a claim in the current insurance year.? Unfortunately this will have to be reflected in this years premiums.

The following guide is designed to take you through some of the issues which have arisen this year, looks at the future of the Assigned risks pool and then considers what firms should be doing in relation to their PII cover looking at issues such as:

• becoming a more attractive insurance proposition,
• applying for cover,
• the ARP,
• merger and take-over,
• practice closure, and
• where to get further help.

In order to be able to practice, all solicitors must now have professional indemnity insurance taken out in accordance with the Solicitors’ Indemnity Insurance Rules and this must meet the minimum terms and conditions. It may be provided by a qualifying insurer or via the assigned risks pool.

History of Solicitors’ Professional Indemnity Insurance

This has not always been the case. Before 1975 solicitors were under no obligation to insure in respect of claims made against them as the result of negligence or lack of care. However, in 1975, in response to concerns about the reputation of the profession and to deal with concerns from those who did have insurance as to the terms upon which they were covered and their treatment at the hands of insurers, the Law Society stepped in and the Master Policy Scheme was established. Under this scheme, the Law Society placed insurance on the open market for the benefit of the profession as a whole and premiums were collected from the profession to cover its cost. A specialist firm of brokers, the London Insurance Brokers (LIB) was established, and they arranged for a number of insurers to provide the cover.

The Master Policy worked well at first but problems with the scheme soon arose – including problems in obtaining sufficient cover from the market. Indeed, by 1984, only one underwriter remained who was prepared to participate. The Master Policy continued but by 1986 it had become apparent that the it could no longer continue as the method of insurance for the profession, and after much debate it was decided that a mutual fund should be created. This came into effect in 1987 when the Master Policy was replaced by the Solicitors Indemnity Fund (SIF), which continued until 2000 when, rightly or wrongly, the profession decided that open market insurance was to be the way forward.

The decision to move away from SIF was not one which was taken lightly. However, the previous years had seen a number of problems arise in relation to the fund, including a potential shortfall in 1997 of ?450 million which would have to be met by the profession, it was decided, over the ensuing seven years. It was this claw-back that led many to question whether a mutual fund was the correct way and on 31 August 2000 the profession returned to insuring on the open market. 70% of those who had voted opted for the return to the open market – a decision which many today may have come to regret!

Current provisions as to insurance

The system that was established to replace SIF was one of solicitors obtaining a set minimum cover on the open market through approved insurers known as qualifying insurers. SIF would continue to handle claims notified before 1 September 2000, in respect of firms that had closed before that date without leaving a successor practice and in respect of run off cover for claims notified to authorised insurers after the expiry of the six year run-off cover between 1 September 2007 and 30 September 2017.

The Law Society arranged for standard policy wording to be drawn up and those insurers who wished to provide cover to solicitors would have to agree to certain minimum terms and conditions in order to become a qualifying insurer. To ensure that all sectors of the profession were able to obtain cover (although note not all firms within those sectors) the Law Society entered into a joint arrangement with a company called St Paul International who agreed that they would quote in all sectors. As the final piece in the jigsaw of getting profession wide cover, the Law Society had to deal with those firms who were unable to get cover on the open market. This had not been a problem under SIF as no firm was ever denied cover. Under the new provisions those firms unable to obtain cover would, on a short term basis, be able to obtain their cover through a vehicle known as the Assigned Risks Pool (ARP). This was cover which was underwritten by all of the insurers providing qualifying insurance to the rest of the profession with the cost of that cover being shared by them all in the proportion to which they provide qualifying cover.

Initially under the new terms, the minimum cover which a firm was expected to have was ?1m, although this was increased in October 2005 to ?2m and, if the practice operates as a limited liability partnership (LLP) or other recognised body, the minimum level of cover is ?3m. All solicitors in private practice must, by reason of the Solicitors? Indemnity Insurance Rules, have cover in place for the following practising year. That cover must meet the minimum terms and conditions laid down. The power for this is contained in section 37(1) of the Solicitors Act 1974.

The rules governing indemnity insurance can be found on the SRA web site in Professional Indemnity section. Note in particular the new provisions which have been brought in since the introduction of the Legal Services Act 2007 and which can be found in the Legal Services Act ? new rules and regulations section.

There is also a considerable amount of useful information on the Law Society’s web site. This can be found in their practice notes in the section entitled Professional indemnity insurance.

Indemnity Insurance and Conduct

The firm, and each and every principal in the firm, has a responsibility to ensure that the firm has in place the appropriate qualifying insurance or, that if it does not, that the firm has applied to enter the ARP before the start of the relevant insurance year. The SRA can require any firm to prove that it has appropriate indemnity cover in place and the accountant’s report which must be submitted each year for every firm must confirm that indemnity insurance was in place for the whole of the period covered by the report. In addition, solicitors are required to provide on their practising certificate application details of their qualifying insurer’s name, the policy number and period of cover. Note this does not apply to “solicitors who work in-house, for example in local government, commerce or industry”, and “solicitors whose practice consists only of providing services without remuneration for friends, relatives, companies wholly owned by the practitioners family, or registered charities, or administering oaths.”

Any solicitor who is in breach of the Indemnity Insurance Rules may commit a disciplinary offence – although note that an insignificant breach may be disregarded (currently dealt with in section 19.2 of the Solicitors’ Indemnity Insurance Rules 2009). Thus, practising without appropriate cover, failing to pay premiums or making material misrepresentations when applying for cover could amount to a disciplinary offence and could in certain circumstances give rise to an intervention in the firms’ practice.

Run-off Cover

One final point to note is that where a firm ceases to practice and there is no successor firm taking over that practice, run-off cover must be obtained in order to protect former clients of the closed down firm. Qualifying insurers are under a duty to provide such cover by reason of the minimum terms, however, payment of the premium for that run-off cover is the responsibility of the principals in the firm at the date it ceased to practice.

Thus, a firm of solicitors that is ceasing to practice should think carefully about whether or not they can find a firm who will take over from them as a successor practice since this will mean that they may be able to avoid needing to pay run-off cover – which can be in excess of 225% of an annual premium.

From the other side of things, firms who are taking over matters from firms who are closing down and who do not want to become a successor practice should also be wary. Firms may become successor practices even though they did not intend to take on the liabilities of another practice when taking it over or merging with it, and even in circumstances where it has been specifically agreed that those liabilities would remain elsewhere.

Thus, a firm may become a successor practice by:

• holding out their practice as being the successor (whether expressly or impliedly from their actions),
• incorporating the other practice into their own,
• taking on a majority of the principals in the other practice as principals in their firm,
• taking on at least one such principal as a principal when the majority have not become principals in another practice,
• taking a sole practitioner or Recognised Body into the firm as a principal, or
• taking on a sole practitioner as an employee after 31 August 2000.

Contact Lawyers Defence Group

If you or your firm is experiencing any difficulties arising as a result of problems with professional indemnity insurance, you should contact the Lawyers Defence Group who will be able to assist you in dealing with those problems.

Whether the problem is in relation to:

• a claim already made against you,
• notifying insurers of a potential claim,
• dealing with a situation would could if not handled correctly give rise to a claim,
• conduct related issues such as practising without indemnity insurance,
• disputes with insurers of the nature of the cover or the premiums being charged, or
• closing down your practice and the implications in relation to run-off or successor practice

the Lawyers Defence Group can help you.

For further information, or to contact the Lawyers Defence Group about a problem which you have:

• phone on 0333 888 4070
• email on help [Email address: help #AT# lawyersdefencegroup.org.uk - replace #AT# with @ ]
• request a callback using the form in the right hand menu and someone will call you back at a pre-arranged time
• write to Lawyers Defence Group, Richard Nelson LLP, 8 The Courtyard, 707 Warwick Road, Solihull, West Midlands, B91 1TT