Protecting partner assets: insurance is not enough (Part 3)
This is the third article in a short series looking at situations where even the best insurance cover enjoyed by solicitors in England & Wales may not protect law firms, their partners or staff.
The first two articles looked at the scope of cover and some exclusions. This article looks at the some aspects of the duration of cover, including retirement.
Policies cover solicitors on a ‘claims made basis’, so the relevant policy is the one in force when the claim is received or, if earlier, when circumstances were notified to insurers. So, if a claim is made in a few years’ time, will you have cover in place?
When a firm closes or is taken over by another practice, the Solicitors Regulation Authority Mini-mum Terms and Conditions (MTC) ensure that there is continuity of cover for at least six years: if there is no ‘successor practice’ (a complex, defined term), the firm’s run-off cover will be triggered, and if there is a successor practice, it will be covered by the successor firm’s cover will apply, but only for the minimum cover required by the MTC – £3m for incorporated practices and licensed bodies (Alternative Business Structures or ABSs), £2m for sole practitioners and partnerships. These sums are per claim, but include claimants’ costs.
If there is a successor practice, then the firm which is closing can elect for claims to be covered under its run off policy. There are formalities which must be followed closely.
If the firm or a successor continues to provide cover, that might protect you, but circumstances may change with restructuring or collapse of the firm, or change of regulator, e.g. solicitors taken over by accountants with different insurance requirements, or solicitors moving to regulation as licensed conveyancers. Or the firm might hit a problem continuing to buy its previous level of cover, perhaps due to adverse claims experience after you leave.
If the firm ceases to exist, you may be able to buy run off cover, and your regulator may require it. Some compulsory schemes have some complex stings in the tail with successor practice provisions which have kept me busy over the years. That is particularly so with solicitors, but I had a firm of chartered accountants recently which was looking to sell out to a firm of certified accountants which would have triggered a liability to buy run off insurance costing a five figure sum and caused ongoing costs.
Note that the MTC only apply to the standard compulsory cover, and the position in relation to any additional cover needs to be looked at separately. This may be particularly important if claims are aggregated and subject to a single policy limit, as discussed in Part 2 of this series.
Finally, if the practice is relying on run-off cover, rather than the insurance of a successor practice, once it expires, there may be cover for £1m from Solicitors Indemnity Fund Ltd. However, this is currently the subject of a Solicitors Regulation Authority consultation, and the future is far from certain.
Frank Maher is a partner in Legal Risk LLP, solicitors specialising in professional indemnity insurance and professional regulation. The firm acts for law firms in policy coverage disputes and in relation to their mergers and acquisitions.
This article is a general guide. It is not a substitute for professional advice which takes account of your specific circumstances and any changes in the law and practice. For previous articles in the series and other articles on law firm risk and compliance, see our website.
19 July 2022