Hundreds of firms face closure after failing to secure insurance

More than 5 per cent of firms are facing forced closure by the SRA after failing to find insurance cover, risk experts claim, amid fears that practising certificate fees could jump to deal with rising intervention costs.

The volume of potential closures has thrown questions over the ability of the watchdog to fund such a wide-ranging crackdown. But SRA officials maintain sufficient resources are allocated, with the budget for interventions being picked up by the profession’s compensation fund. 

Authority officials revealed yesterday that “a substantial number of firms” had not been able to obtain professional indemnity insurance (PII) by the regulator’s 6 November deadline. The SRA refused to specify an exact figure, with a spokesman saying it was “changing every day”. 

However, specialist indemnity lawyers suggested the number across England and Wales was worryingly high.

“An SRA official has said publicly that the figure is at least 470 firms,” Frank Maher, a partner at Liverpool-based law firm Legal Risk, told The Lawyer. 

Some 140 firms alerted the SRA to their lack of insurance cover by the November deadline, going into what the authority has described as an extended policy period until the end of the year. Maher said the authority was now being “coy” about the exact number of additional firms because it was embarrassed that so many were in such a difficult situation and it was unsure of how to finance a potentially massive intervention programme in such a short time. 

“Many firms are in denial about their financial circumstances,” commented Maher. “But a reckoning is coming the end of this month when the SRA will have to intervene in all those firms without cover. There is no option. However, there are questions over whether the SRA can afford to intervene in a large number of firms, and on the impact that large-scale interventions will have on the bigger firms that finance the compensation fund.” 

Specialist insurers are also expressed concerns that the SRA could struggle to finance a rapid closure programme.

“Mass intervention will undoubtedly be expensive,” said Trevor Moss, of Brunel Professional Risks. “The compensation fund has got some cash in it, but there is a question mark over how much of a cushion that would offer. It will be an expensive process and there is a question mark over whether the SRA is geared up to deal with it.” 

Another pointed out the regulator had no option and that practising certificate fees could rise. “The SRA can’t allow those firms to close down without some sort of orderly procedure, commented Steve Holland, solicitors practice group manager at Lockton insurance brokers. “If it hasn’t got the funds allocated then it may have to put up next year’s PC fee to cover the gap. As always, ultimately the price will be paid by the profession.” 

Moss said many smaller firms continued to struggle in the still difficult economic environment. They had not found insurance cover “invariably because of poor claims records or because insurers are concerned they are not financially solvent or are unlikely to be so for the next 12 months”. 

Indeed, the law firm insurance sector is gun shy of firms that could go bust and be placed in run off without having paid the appropriate premiums, and therefore leave insurers having to cover claims for six years. 

“Underwriters have been very cautious this year about the type of firm they will look at,” said Holland. “And likewise insurers are looking carefully at their balance sheets to decide what type of firm they want to insure. Those firms not able to find cover will be in a Catch 22 situation. Insurers are going to be wary of any firm that has not notified the SRA of its position, making it even harder for them to get cover. They will have to have a very good excuse.” 

For its part, the SRA accuses industry specialists of being alarmist. The authority acknowledges that an official did suggest after the November deadline had expired that as many as 470 additional firms had not found cover, but that the number is “nowhere near that high now”. 

According to the spokesman, the authority is considering confirming the number next week, pointing out that those firms having missed the November deadline were likely to face “strong enforcement action”, which includes fines up to £2,000 and/or referral to the Solicitors Disciplinary Tribunal.