Sweet sixteen?

Solicitors have been at loggerheads following the decision by Ireland’s Law Society to bail out the Solicitors Mutual Defence Fund. Joanne Harris reports

Financial downturns are often the cause of a rise in professional negligence cases, and unfortunately for many solicitors in ­Ireland, they are no exception. Many claims in Ireland have centred around real estate work following the country’s ­property sector crash.

The number of claims, as well as separate issues with the country’s insurance sector, have played havoc with Ireland’s solicitors’ professional indemnity (PI) market. Quinn Insurance, which previously insured ­solicitors, has gone into administration and has consequently withdrawn from the ­market.

There are now just seven insurers left for Ireland’s 9,500 solicitors: Allianz ­Insurance, Axis Insurance, Chartis, Liberty Mutual Insurance, UK General Insurance Group, XL Insurance and the Solicitors Mutual Defence Fund (SMDF). As of December there will in practice be only six, with the SMDF having run out of cash.

Defensive measures

The fund says it does not have the reserves to meet outstanding claims – reportedly e308m (£273.6m) – although the bulk of the claims are reinsured. The Law Society of Ireland (LSI) is proposing to bail out the SMDF to the tune of e16m as a levy of approximately e200 on each solicitor’s practising certificate for the next 10 years.

The SMDF is an unusual business. It was established as a non-profit mutual fund to provide indemnity insurance. The SMDF declares on its website that it wants to be “the standard-bearer of quality and ­excellence”. It adds that its members “have the power to stabilise the PI market if we achieve higher standards in managing risk”.

The SMDF’s last annual report, for the year ending 30 November 2009, shows that over 90 per cent of the firms insured by the fund employed five or fewer solicitors. Only three firms with more than 21 lawyers used the SMDF for insurance purposes, and the managing partners of Ireland’s largest firms all say they are insured elsewhere.

In the report SMDF chairman Laurence Shields says claims had been rising at an “alarming rate” to “an unacceptable level”. He also says the fund had borrowed e8.4m from the Bank of Ireland, guaranteed by the LSI, after its reserves moved into ­negative for the first time since its inception.

Things got worse in 2010, resulting in the need for a bailout. A May meeting organised by the LSI was designed to pass the bailout, but opposition forced a postal vote instead.

The result was a narrow victory for the ’yes’ campaign, with the vote splitting 62/38 per cent in favour of the bailout.

Large firms are split over the bailout, with several criticising the way the LSI has dealt with the problem.

“They panicked, they tried to do it at short notice,” asserts one managing partner.

“There are probably other ways of dealing with it,” agrees another. “There’s concern purely among the bigger firms that this is the start of a process. There’s a payment made now, but where do we go from there?”

Nobody is quite certain that the e16m will be sufficient, with several partners ­questioning whether this will cover the SMDF’s shortfall. Vincent Crowley, a partner at niche ­immigration firm Collins Crowley, who led the calls for a postal vote and who has argued the case against the bailout, says unreleased reports from accountancy firm Deloitte show that the total value of claims is now more than e300m. Crowley also points to the 2009 annual report, in which the SMDF notes that reinsurers have reserved their rights in relation to claims.

Crowley’s other arguments against the bailout are numerous. He says members of the LSI Council who are insured by the SMDF are conflicted, also arguing that SMDF member firms should all have had a say in the fund’s decision to seek LSI aid.

Several partners at leading firms point to the Irish experience with banking bailouts, noting that initial bailouts were followed by further funding.

Rep batter

Those arguing for the bailout are concerned that not passing it will result in the collapse of many small firms and that the ­reputational damage for the profession could be severe. One managing partner notes that the LSI accepted the SMDF as a valid ­insurer. “I think we as a profession have a responsibility in relation to that,” he adds.

However, even those in favour of the bailout are concerned that the full extent of the problems have not yet been revealed.

It seems clear that claims against ­professions have not bottomed out. “There’ll certainly be an increase in claims for the next few years,” contends Kennedys Dublin managing partner James Staines. “Solicitors have already been hit and that will continue to be the case.”

Staines also predicts continued increases in premiums – something backed up by firms. Some say that premiums have more than doubled in the past two years, even where claims records are relatively clean.

The end of the SMDF saga has certainly not yet come and renewing PI is likely to cause headaches for Irish solicitors for a few years yet.