Solicitors indemnity fund. Shopping around for insurance
14 October 1997
Wendy Gray finds that SIF rules raise more questions than answers and suggests looking to the open market for insurance. Wendy Gray is a sole practitioner based in London. As a sole practitioner I had accepted without question that I must obtain my professional indemnity cover through the Solicitors Indemnity Fund (SIF). However on 7 August 1997 I received my annual "contribution" quotation from SIF which more than doubled my annual contribution.
A little arithmetic showed that more than 12 per cent of my gross fees would go to SIF. I simply cannot afford this. But worse was the alarming statement by the then chairman of SIF, Andrew Kennedy, in his letter to all practitioners, that "this year's contribution does not include any amount towards payment of the anticipated shortfall". What did this mean?
My enquiries to SIF confirmed that my contribution had been properly determined according to the Professional Indemnity Rules. SIF suggested that if I was not happy then I should contact Andrew Darby, head of the Law Society's professional indemnity section as, to quote, "all SIF was doing was interpreting the rules as determined by the Law Society".
I referred to the current rules which gave no answers and read the published material about the "shortfall of £454m" which only raised more questions. For example, it was reported in July that a 50-80 per cent increase in contributions was to be set by the Law Society on the advice of SIF and its consulting actuary Tillinghast Towers Perrin in order to make up the estimated shortfall.
Now, in my practice, I neither handle clients' money nor do any conveyancing business. I have been told that a leading insurance market maker has commented that I am "no risk whatsoever". So, with a clean claims record, why must I now pay more than twice the amount I paid last year?
Does this contradict Kennedy's letter that "this year's contribution does not include any amount towards the anticipated shortfall"?
The SIF notice was issued in the middle of the holiday period when I was about to visit Uzbekistan for three weeks' work, so I had a difficult decision to make because the renewal would occur during my absence. Commercially and professionally there were issues to be determined. On one hand I had to ensure that my clients' interests would be properly covered. But on the other, until I had satisfactory answers to my enquiries, I could not just accept the status quo.
In order to cover my clients' interests I set about finding my own insurance on the "open" market. I obtained it on exactly the same terms that SIF offered but with a more favourable deductible of £1,500 instead of the £3,000 offered by SIF and a premium of only £1,500 instead of the £3,990 demanded by SIF. Obtaining the insurance was not difficult. I also wrote to Andrew Darby, applying under r10 of the Professional Indemnity Rules 1995 for a waiver from the requirement to obtain insurance through SIF and enclosing copies of my correspondence with SIF and a copy of my professional indemnity cover note. I believe that my application is reasonable given the four circumstances provided by the Law Society's waiver policy:
to remedy a serious injustice resulting from an anomaly created by the operation of the Indemnity Rules;
to alleviate serious hardship arising out of exceptional circumstances;
where the absence of a waiver would involve a breach of the Indemnity Rules which would be no more than technical in character; and
in any other case that is wholly exceptional in character.
My clients have supported my actions. I wrote to Kennedy for clarification but the response raised more issues:
All practitioners are liable to pay further contributions to make up the "shortfall". Does this mean that we are exposed to unlimited liability (just like Lloyd's names) by our membership of this scheme?
If the fund is in severe financial difficulties, it would seem to raise the question of whether lawyers' clients are protected.
SIF does not appear to apply normal insurance principles in levying members for the shortfall or for future risks. One aspect is the disproportionately large exposure caused to SIF by current conveyancing practice in which it is not unusual for a firm to act for both bank and client. If market principles were applied such practice should face a proper risk loading.
There has been no explanation of how the "shortfall" has arisen, and the report of consulting actuary Tillinghast Towers Perrin is confidential to SIF and not even available to the Law Society working party studying the shortfall.
SIF is a "self" insurance scheme or "captive". A captive uses structured insurance, called reinsurance, and various top-up insurances, to protect its "fund" from claims. The only information I can find refers to "investment" and insurances which seem to have failed to cover the losses.
Has SIF relied only on "investment of the fund" and insurances which appear to be inadequate to protect the fund?
Currently the professional indemnity insurance market is "soft"(meaning, premiums are low). The market is likely to remain soft for at least another year. Therefore, one option would be to allow solicitors to take advantage of the current market and obtain their professional indemnity insurance on the open market. The SIF liability for the shortfall remains and will have to be paid. It would therefore be prudent to prepare for that by lightening solicitors' burdens by allowing them into the open market for their indemnity insurance. SIF could remain for those who are bad risks and otherwise uninsurable. This gives two years for the whole debate to run, to achieve a commercial and fair solution to the shortfall, and the future of SIF to be clarified.