The Solicitors Indemnity Fund (SIF) with a £450m shortfall, stands accused of failign in its duty to the legal profession. The Law Society's Appleby Committee Report recommended reforming SIF by splitting it up into a number of different funds. Earlier this year, the November Group commissioned brokers Nelson Hurst & Marsh and Robert Fleming Professional & Financial Risks (UK) to produce an independent report which recommended throwing indemnity insurance to the open market. SIF management maintains that the fund can be reformed. Christopher Hales, chairman of the November Group apears for the prosecution. Elizabeth Mullins, director of SIF, appears for the defence.
In essence, the November Group's case is that an Approved Insurer Scheme (AIS) would be a more equitable and commercially sustainable scheme than SIF.
The group sees SIF's attempted new look – risk banding, a proposed multi-fund and various other suggested improvements – as an unconvincing attempt to inject credibility into an expensive failure. The Appleby report has set out the advantages of an AIS with which the group agrees and which can be summarised as follows:
Underwriting will be carried out at arm's length on an individual and commercial basis without the outside political interference which contributed to the present problem.
Risk would be transferred from the profession to the market. Competition between solicitors, brokers and underwriters would bring obvious advantages.
Many firms already have top-up cover or private mutuals which could be expanded downwards to take up the compulsory primary layer.
Appleby does not mention extra benefits – particularly the market's advantage in buying reinsurance at competitive prices. According to SIF, independent studies show that it is likely to be “30 per cent cheaper for the profession as a whole than the open market”. But the group feels this figure is based on several unjustified assumptions and the Nelson Hurst/Flemings analysis shows it is exaggerated.
The words “as a whole” encapsulate SIF's underlying fallacy. While we are one profession regarding such things as admission qualifications and rules of conduct, it is unrealistic to say that we ought to be covered by a common insurance scheme. City firms and high street practitioners have different needs; you might as well say that Sainsbury's and the village store should be insured under the same policy.
Appleby does identify disadvantages in AIS, but the November Group sees them as more perceived than real. They include: the possibility of market hardening making it difficult to obtain cover; no guarantee of cover continuity; the possibility of insurer insolvency; possible rejection of claims for late notification; non-disclosure and misrepresentation; and lack of free run-off cover.
Taking the first point, the group has heard that the traditional hard/soft cycle is no more, but even if there are future fluctuations, are these likely to be worse than the past hikes suffered at the hands of SIF, not to mention a shortfall in excess of £400m?
As to continuity of cover, market advice is that, if there is an Assigned Risks Pool (ARP), insurers will likely be locked in for an initial three years. The ARP would be for firms that could not get market cover due to their claims record. They would pay a deposit premium, undergo investigation at their expense, and be given two years to “pull their socks up” or go out of business. Any shortfall between premiums and claims would be made up by underwriters.
Underwriters have also indicated a willingness to give a 30-45 day extension on an expiring term to enable alternative arrangements to be made. As to insolvency, is SIF not insolvent?
Underwriters say they are willing to pay claims where there has been innocent non-disclosure, but they will (unlike SIF) baulk at the prospect of paying where it has been deliberate. It is not in the public interest that guilty solicitors should have an insurance cushion.
As to run-off cover, this is available on the market – for a premium. However, this is not a problem at many firms where retiring partners take an indemnity from continuing partners.
Finally, turning to the mechanics of an AIS, 15 leading underwriters in this field have expressed their willingness to:
accept a policy wording on the lines of present cover to be approved by the Law Society – an indemnity limit of £1m for “any one claim”;
participate in an ARP;
possibly agree an automatic 30-45 day extension at a rate pro rata to the expiring premium, depending on the reasons for non-renewal;
only deal with approved brokers in transferring the profession out of SIF, who could usefully continue in a claims handling role.
Elizabeth Mullins is director of the Solicitors Indemnity fund.
Mutuality has advantages that can never be matched by an open market. That, in a nutshell, is why the profession should choose to keep its statutory fund.
The major benefit of the mutual fund, that of cost, has been the subject of much debate. There has been talk lately that the cost benefits of SIF – said by some to amount to savings of between 20 and 40 per cent for the profession – have been exaggerated and that too little has been made of the effects of competition. It is certainly difficult to attach an exact figure to the savings offered by mutuality and SIF has always been reluctant to do so, but those who shout “exaggeration” are clouding the issue. The cost benefits of mutuality are obvious. SIF does not have to make a profit and currently enjoys tax-free status. Its contributions do not attract insurance premium tax, and it pays no brokerage, sales or marketing costs. None of this can be said for the insurance market.
Yes, the laws of competition keep costs down, but to suggest that they are powerful enough to erode the benefits of a mutual fund is the real exaggeration. Rather less debate has taken place about the cover offered by SIF. Those solicitors approaching retirement or leaving the profession will fully appreciate the free run-off cover provided by the fund. Run-off cover may be available in the market but it will come at a price.
Under SIF cover is never in question. Policy avoidance as a result of late notification of claims and non-disclosure of material information does not arise. Nor will there ever be any dispute between insurers as to which indemnity year a claim belongs and consequently which insurer must provide cover.
I am the last to claim that everything in SIF's garden is rosy. An unacceptable subsidy level has existed in the past and too many firms have been allowed to take substantially more than they have contributed. But SIF should be judged on what it offers now and in the future.
Risk banding, introduced this year, will have a major impact on past imbalances. Future SIF contributions will closely reflect the risk attached to the type of work done by a firm. Similarly, the claims experience adjustment, taking into account paid and reserved claims over five years, will ensure that all principals' claims histories will have a direct impact upon the contribution it pays.
Some firms have seen a significant increase in contributions this year but this cannot detract from the greater fairness of the new approach. Firms which do high-risk work and which have a poor record of claims must expect very similar treatment in the open market.
Much has changed at SIF in the last two years but the programme of reform must continue. Our next challenge will be to reduce the overall cost of claims. A wide-reaching programme of risk management must be a priority in the years ahead. Much has been said about the risk management incentives of the open market. It is true that the market has a powerful weapon to encourage good practice. The discipline of fear. An insurer can compel the indemnified to adopt risk management principles by the threat of removing cover.
But surely, if the profession is prepared to submit to such a discipline being imposed from outside, it must be equally prepared to accept similar disciplines from its professional body and its own indemnity rules. Few risk management disciplines available to the market could not be adopted with equal success by SIF.
Firm treatment is needed with the worst performing firms. The profession is no longer prepared to subsidise the activities of firms who have claims records so poor that in the open market they would be uninsurable. This view is completely endorsed by SIF and measures, which may ultimately result in the removal of the right to practise, are already under consideration. Such measures may be punitive but are necessary if the profession's claims liability is to be reduced.
The results of the Law Society's recent consultation process show that the profession wants to stay with mutuality – a view I hope the council will endorse. Our aim must be to create a fund combining the advantages of mutuality with the rigorous and disciplined approach of the commercial market. We are already well on the way.