Brokers have raised fresh concerns over the Solicitors Regulation Authority’s (SRA) handling of the professional indemnity insurance (PII) renewal process after the regulator admitted it had lost track of some uninsured firms.
An SRA spokesperson said that firms had not been co-operating since the extended policy period (EPP) ended on the 29 December. Consequently, the spokesperson said, it was not possible to confirm whether all those that should have ceased trading have done so.
“We’ve come back and expected the same level of engagement that we had before Christmas and we haven’t got it,” the spokesperson said.
The comment was made following a statement by the watchdog that urged firms to confirm their insurance status or risk intervention by the SRA.
Last month the SRA confirmed it had identified 117 firms at risk of closure because they had been able to obtain cover (19 December 2013).
Firms that failed to renew or secure a new PII policy by 1 October 2013 were automatically entered into an extended policy period (EPP), which provided a 90-day extension to their policy.
During the first 30 days firms were able to operate as usual but in the final 60 days firms were not permitted to accept new instructions and were told to begin an orderly wind down process under the SRA’s direction.
The EPP ended on 29 December, at which point firms were obligated to inform the SRA either that they had secured a policy or closed.
The SRA wrote to firms without insurance on 23 December warning them of potential enforcement action with cost implications should they fail to get an adequate policy in the market.
Firms have since been informed of the penalties they faced should they fail to get in touch with the regulator, but how the intervention would be handled remains unclear. It also remains unclear how many firms may still be trading without insurance and how the SRA would track those firms.
QBE portfolio manager Mark Casady said the process had come across as “shambolic”, adding: “If the SRA can’t manage one date, how will they cope with renewals throughout the year?”
Casady said the key issue to emerge from the 2013 renewals would be when the run-off cover would kick in.
“There are bound to be firms that are still open irrespective of whether they have insurance or not. What you’d have there is a bit of a bunfight between the SRA and the insurers. I would say the last insurers are liable but that is a grey area”, he said.
Casady was unconvinced that the compensation fund would be a resort for claims arising from any firm that closed within the EPP. The EPP was introduced last year following the SRA’s decision to scrap the assigned risks pool (ARP). It was also the last year that there would be a single renewal date (14 April 2011).
“I don’t see that the introduction of the EEP has changed much, it just extends the time before six years run off starts. I don’t think the compensation fund will replace insurers run off,” he said.
He added that the only situation in which he could see the compensation fund stepping in is if the SRA had failed to enforce closure on an uninsured firm.
Lockton solicitors practice group manager Steve Holland raised concerns over not only the discretionary nature of the compensation fund but also the amount of cover available.
The SRA’s rules state that the maximum grant that may be made from the fund is £2m, which would cover sole practitioners but represents a £1m shortfall on the statutory cover required for ABSs and LLPs.
“It is a worrying situation that you potentially have firms out there that are effectively without PII cover and that if there was a claim against them it would be down to the discretion of the compensation fund as to whether they would provide that protection”, said Holland.
The way the legal profession is insured will be examined in the High Court this year in a major test case that could have implications for how all firms obtain indemnity cover (7 January 2014).