Until recently, the Solicitors Indemnity Fund (SIF) must have considered itself to be in a strong position to continue providing indemnity cover to the legal profession.
Despite the barrage of criticism over blunders that led to its £454m shortfall, the Law Society expressed no intention of getting rid of the mutual fund.
When pressed to reform the system, the Law Society came up with two limited options: either keep SIF, or opt for SIF alongside an open market insurance scheme.
But on the eve of a council meeting to determine the future of indemnity insurance, the Law Society has suddenly produced a third option – scrapping SIF in favour of a master policy.
And there has been a notable change of tone from society officials, who are now openly predicting the demise of SIF, the erstwhile “puppet of the Law Society”.
Speaking before last Wednesday's council meeting, David McNeill, head of press relations at the Law Society, said: “A mutual fund looks unlikely now, but the master policy has the weight of the council behind it.”
Why has there been a sudden about-turn?
No one seriously believes that council will vote to retain the status quo. This left the second option – retaining SIF alongside open-market insurance.
But SIF itself admits it would struggle to co-exist alongside an approved open-market scheme.
And, under the proposal, all solicitors, regardless of whether or not they opted out of the mutual fund, would be required to pay a supplementary levy to it as a buffer in case the commercial market withdrew in the future.
It is understood that this concept was deeply unpopular with council members, prompting the society to ask its external insurance consultants, Aon Risk Services, to look at alternatives.
A more cynical view is that the Law Society has spotted an opportunity for profit in the third proposal.
Aon's latest report on the issue states that a master policy could have “beneficial arrangements for dealing with the current SIF shortfall”.
The Law Society believes insurance firms would be prepared to pay a substantial amount of money to be its chosen indemnity provider. This money could go towards making up the SIF shortfall. In other words, the Law Society may be buying itself out of trouble.
Under the touted master policy, the Law Society would act as a middleman between the insurance market and the profession.
McNeill explains: “A master policy operates like a single insurance policy which is bought on behalf of the whole profession from commercial insurers. The Law Society would be the customer.”
One proposal being considered is the possibility of creating a five-year “comfort zone”, in which master policy premiums could not be hiked by much, and which leaves the option of returning to a mutual fund at the end of the period.
He says solicitors would still have the option of seeking indemnity insurance on the open market.
“Solicitors would be free to choose any insurance policy they wanted, so long as it conformed with criteria set out by the Law Society.”
But some critics are questioning the validity of returning to a system that did not work in the past.
Before SIF was created in 1987, professional indemnity insurance was offered on a master policy.
Inflated premiums, and concern that the Law Society was not in control of the situation, resulted in the creation of a mutual fund, SIF.
McNeill stresses that the current proposal for a master policy differs from the one that was offered to the profession 12 years ago.
He says the proposed master policy would not be a monopoly and that the level of solicitor's contributions would be linked to risk.
But he was vague about the advantages for solicitors of using the master policy, simply stating: “It might be cheaper and it might be safer.”
According to McNeill, another advantage is that the master policy may be administered by the “machinery of SIF”.
“Aon envisages keeping the structure of SIF as a claims handling service. The mechanics would be kept in place.”
The Lawyer understands that many within the Law Society feel SIF's know-how is a valuable resource. They also rate SIF's managing director, Elizabeth Mullins, highly.
But whether solicitors, and indeed insurers, will think the blunder-prone SIF is an ideal mechanism for running the insurance scheme is a moot point.
For her part, Mullins says the Law Society is playing a dangerous game. SIF argues that solicitors should pay a levy because there may come a time when the market hardens and premiums on the open market rocket.
But SIF is reportedly co-operating with the developments, and it looks as though SIF as an organisation may survive, albeit under a new name.
Within the profession, the reaction to the new proposal is mixed.
Frank Maher, divisional managing partner of professional indemnity at Liverpool firm Weightmans, describes the master policy as “the worst of both worlds”.
“If the master policy had been running at the same time as SIF, it also would have underestimated claims and upped premiums after 1993/94,” says Maher.
“Insurers under the master policy would have wanted to cover claims and make a profit,” he says.
Michael Dalton, the solicitor who is taking the Law Society to judicial review over its monopoly on indemnity insurance, says: “I think the Law Society has got itself into a dreadful hole over the whole subject of indemnity insurance and, as the saying goes, 'if you are in a hole, you've got to stop digging'.”
He says the devil will be found in the detail of the new proposal, which has yet to be published.
“The Law Society says it will allow solicitors to go to open-market insurers so long as those insurers meet certain conditions. I question the right of the Law Society to impose that obligation.”
He points out that the conditions could be so onerous, that it would make it virtually impossible for open-market insurers to compete. This would result in yet another monopoly situation.
Trevor Moss, director at insurance broker Nelson Hurst & Marsh, says: “A master policy is again a monopoly by arrangement and would mean a transfer of solicitors' primary cover from one monopoly to another.”
But council member David McIntosh, senior partner at Davies Arnold Cooper, says that the proposal is a welcome surprise which merits very close consideration.
“The profession should be looking at a long-term solution. If the master policy proposal becomes tangible and not theoretical, it has the potential to provide a solution which will be pleasing to most of the profession,” he says.
“The problem with taking a snapshot of today is that the open market is seductively attractive at the moment, but it might not remain so.”
Michael Olmer, treasurer of the Millennium Law Group which campaigns against SIF, says he welcomes any proposal which would end SIF's monopoly, but points out that he has yet to see any details of how the policy would work.
Christopher Hales, chairman of the November Group which also campaigns against SIF's monopoly, says: “I don't care if it is SIF or a master
policy as long as firms can arrange their own insurance.”
There are no surprises for guessing that this additional option of a master policy will mean yet another delay in the already long overdue solution to SIF. Aon points out that a “further test of the profession's opinion should be carried out” before a final decision is made, and the society policy committee considers that a “small additional delay would be in the best interest of the profession”.
So SIF will remain unresolved at least until the next council meeting in March.
As the debate drags on, the focus seems to be moving further and further away from those who indemnity insurance was set up to protect – the consumer.
One insurance solicitor stands alone when he comments: “What concerns me during all this it that there has been no mention of the client.”