Carelessness can cost cash

The Solicitors Indemnity Rules 1996 which come into effect at the beginning of September could lead to some solicitors paying double for their indemnity cover.

For the first time the new rules provide for low-claims discounts and claims loading. Practices which have a good claims record will benefit; those with a poor record may be subject, through the calculation of a loss ratio, to a maximum 100 per cent loading in any indemnity year.

This means that indemnity cover could cost a firm with a poor claims record double the premium it would otherwise pay to the Solicitors Indemnity Fund (Sif).

But that's not all. The rules also provide for penalty deductibles (deductibles are the equivalent of an excess on a motor policy, they are the proportion to be paid by the indemnified before payment is made by Sif). The purpose of penalty deductibles is to act as an incentive to practices to implement effective systems for the prevention of what would be obviously avoidable claims.

The new rules list circumstances where a 50 per cent penalty will apply. They include obvious examples of negligence, such as: failure to start proceedings within the time permitted under sections 2, 5 or 11 of the Limitation Act 1980; failure to serve a notice or issue an application within the periods permitted under Part II of the Landlord and Tenant Act 1954; and failure to register at Companies House a charge against the assets of a company within the time permitted by section 395 of the Companies Act 1985.

The rules also allow practices time to review their systems and make appropriate improvements. A penalty deductible will only apply to claims on the Sif where the date of the negligent act or omission is on or after 1 September 1996.

As a result, risk management should now be high on the agenda at partners' meetings. Those firms which have effective risk avoidance procedures in place must remain vigilant to ensure the processes they follow continue to be effective. Firms which do not have clearly formulated procedures and policies need to act now.

If, as is likely, indemnity cover (contributions to Sif and 'top up' cover) is a significant cost in your firm's budget, failure to act now could mean financial difficulties ahead.

A short checklist may help in deciding where to start:

Review your firm's compliance with the Law Society's Practice Management Standards (which came into force in April 1993), particularly Case Management Standard F. It is this standard which deals with client care (F3, F4, F5, F6, F7), using the services of others (F8), file management (F9), file review (F10) and complaints handling (F11).

Review the procedures which your firm adopts in order to comply with Rule 15 of the Rules of Professional Conduct and the Written Professional Standards.

Consider the procedures you follow to ensure effective supervision of all solicitors, unadmitted fee earners and support staff in the delivery of service to clients.

Conduct a detailed review of the firm's file management procedures. Check that they are sufficient to minimise the risk of claims. As an absolute minimum the procedures should eliminate the risk of a claim being made in circumstances which give rise to a penalty deductible.

Sometimes not even effective procedures are enough. There is a clear need for training in risk management and, more specifically, in risk avoidance.

Partners should be aware that without effective professional development to underpin the parameters within which files are managed – such as procedures and protocols – and a demonstration of how compliance operates within the practice, there remains a real risk of substantial claims being made against the firm.

Compulsory risk avoidance or risk management training is a constructive step, but the best way to eliminate claims is to have in place clear and effective procedures to minimise risk. They must be known, understood and operated on a day-to-day basis by every partner, each of whom must also ensure that they are followed by those for whom they are responsible.

Professional development spreads the message to recalcitrant partners as well as all other members of the firm.

My own view is that risk management and risk avoidance should be fully explained in the Professional Skills Course. They fall, respectively, into the personal work management and professional conduct modules. Further up the career ladder, assistant solicitors and partners will need to be reminded of them. And practical, training based on case studies should form part of the compliance for continuation of practising certificates.

Firms should be encouraged to provide their own Law Society-accredited programme. It should be tailored to meet a firm's specific requirements, by practice area and by length of admission – nought to two years Post Qualification Experience (PQE), three years post-PQE and on attaining partnership.

Partners will always listen when trainers address a topic which has an impact on finance, on the firm's profits and so, ultimately, on their wallets.