Public protection
As any professional indemnity lawyer will tell you, there are relatively few claims against solicitors that are uninsured. That this is so is quite deliberate. It is a matter of public policy which was succinctly summarised by Sir John Vinelott in Mortgage Corporation v Solicitors Indemnity Fund (SIF) [1997] when he said: “It is plainly important for the protection of the public and to ensure that the public continues to have confidence in the integrity and standing of solicitors that claims founded on the negligence of a solicitor should be met, and if the solicitor is unable to meet his liabilities following the bankruptcy order met by the SIF.”
The Mortgage Corporation case was concerned with the SIF but the principle which it expounds holds good.
To ensure public protection, any insurer intending to underwrite solicitors business must sign up to the Qualifying Insurers’ Agreement. That agreement requires them to offer a minimum level of cover and to observe additional obligations which the agreement imposes. While we as lawyers are anxious to protect ourselves from claims, the underlying thrust of the rules is to ensure that the public should not suffer from losses caused by the fault of solicitors which might otherwise go uncompensated.
The scope of cover
Public protection being paramount, solicitors policies are, as one would expect, widely drawn. They cover civil liability arising in the course of work carried out in the course of private legal practice. There are still some exclusions.
The above said, however, it is very important for solicitors to note that while the cover may be widely drawn it may not include every activity a solicitor undertakes. If an activity falls outside normal business then it will not be covered. Some examples are obvious. The solicitor who enters into a speculative business venture would not normally be covered against claims brought by his business partner, but other instances which we come across can be less clear cut. In the context of renewal, any solicitor who engages in activities outside the ordinary may be well advised to check with his insurers that the activity in question is covered.
It is also not the case that only claims for negligence or breach of contract are covered. A solicitors’ policy will cover claims for breach of trust or for breach of fiduciary duty and even in cases of dishonesty, the innocent members of the practice will still be entitled to cover. Moreover, it is not just claims pursued in the courts, compensation claims before the Solicitors Regulation Authority may also be covered.
Where solicitors’ policies stand apart from some commercial policies of insurance is in the extent to which the underwriter is entitled to avoid or limit cover notwithstanding material non-disclosure or breach of policy condition. In many spheres of commercial life, policy breaches may result in claims going unpaid. While other professionals have policies which contain provisions limiting the rights of the insurer in cases of policy non-compliance, it is a widely-held view that solicitors’ policies are the most generous in the catch-all nature of the cover provided.
Non-avoidance
Solicitors’ policies, like other professional indemnity policies, are written on a ‘claims made’ basis. This means that the claim is covered by the policy in force when it is made or when the circumstances are reported to the insurer. The obvious consequence for any professional indemnity insurer is the need to know whether there are circumstances of which their insured may be aware which have not already been reported and which may bring about a claim.
Often in the course of our practice as professional indemnity lawyers we come across cases where a claim has been made, but where it is apparent on investigation that the circumstances were known much earlier. If the insurer can maintain that it would have approached the risk differently there is likely to have been a material non-disclosure. In the case of most commercial policies, that would enable the insurer to avoid the policy, but that option is not available to those who insure solicitors. Under the solicitors’ minimum terms the insurer cannot avoid even if a non-disclosure is fraudulent.
Nonetheless, there may be recourse against the individual responsible. Some solicitors’ policies contain provisions for an increased excess when there has been non-disclosure while other policies may entitle the insurer to charge additional premium. Furthermore, if the insurer is prejudiced by the non-disclosure there may be a right of recovery from the person responsible. While the insurers’ inability to avoid is undoubtedly generous, a slip in failing to provide full disclosure at the point of renewal or in failing to raise enquiry of employees may still prove costly.
Where we do find circumstances which should have been reported earlier, the explanation that is given can sometimes be unsatisfactory to the insurer. Often, due to the particular nature of the client, the solicitor did not think that any claim would actually be made. It is very important to bear in mind that a decision as to whether to report any particular circumstance (either on renewal or while the policy is current) will be judged objectively.
If the proposal form asks for details of circumstances which may give rise to a claim then the onus to report is even greater than the more normal request for details of circumstances likely to give rise to a claim. In the latter case, the court has previously found that to be anything in excess of a 50% chance.
Successor practices
Among the more difficult concepts with which solicitors have had grapple in respect of their own cover since the move to the open market has been that of the successor practice. In the same way as the policy will cover many types of claims, there may well be individuals entitled to cover over and above the partners and employees of the practice which took out the policy. This is yet another aspect of the drive for public protection which, for some solicitors, can produce surprising results.
Those who practised in a firm that has ceased, but to which the current firm is a successor, will be covered. The definition of prior and successor practices has been pored over in recent years but, in short, where one practice comes to an end and another emerges, then if certain criteria are fulfilled that second firm becomes the successor and its policy will cover the acts or omissions of the first, no matter how historic.
Topping all of the criteria is the concept of holding out. If a firm holds itself out as a successor then it is likely to be one, no matter what other criteria other practices may fulfil. From time to time we come across firms that are caught unaware by this. Even if the majority of the partners from the first firm are still all practising together elsewhere, then if there has been holding out that will be the successor practice even if there is no individual left who had any connection with the original firm.
Another provision which can cause surprises is when a firm decides to take on an individual who has been operating as a sole practitioner as an employee rather than a partner. The new employer may become the successor of the ceased practice for insurance purposes.
The market for solicitors’ professional indemnity insurance is said to be soft. Most insurers and brokers consider that it is currently underpriced. While rates may be competitive for the time being, that may not always remain the case . As the market hardens it will be the firms with the more attractive risk profiles as well as those with the best claims record that will continue to do well.
While the renewal period will always be the time when solicitors will focus on their own professional indemnity insurance arrangements, those who will do better in the future may well prove to be those who have their professional indemnity arrangements in mind for the whole of the year.
Clive Brett is a partner in the professional indemnity department of Henmans.