The Solicitors Regulation Authority (SRA) has called for the minimum level of indemnity cover firms must obtain to be cut to £500,000.
The existing limits are £2m for traditional partnerships, or £3m for incorporated practices.
In a radical shake-up of the solicitors’ insurance rules, announced yesterday, the regulator also proposed that businesses with turnovers above £2m a year would be unable to rely on compulsory indemnity insurance to sue solicitors for negligence.
Claims could only be made by businesses with a smaller annual turnover, individuals, charities with an annual income of less than £2m and trustees of trusts with a net asset value of less than £2m.
A further change put forward by the SRA to help small firms would be to halve the number of years’ run-off cover firms must obtain when they close down from six to three.
As well as reducing the minimum cover to £500,000 per claim, the SRA has also proposed a cap on insurers’ ultimate exposure through a new aggregation limit, with figures of either £1.5m or £5m suggested.
The consultation acknowledged that introducing a cap posed a risk to consumers in the event of it being exceeded, “but our assessment of claim levels and frequency mean that we consider that this is a proportionate move that will support the right balance between consumer protection and lower costs of regulation”.
Crispin Passmore, executive director of policy at the SRA, told Legal Futures: “We are hoping to push costs down for insurers and small businesses. Larger businesses don’t need a regulator to tell them what cover they need.”
Mr Passmore said it was a matter for banks, building societies and other lenders to determine the right level of cover for their conveyancing providers. “Depending on the kind of work they do, firms may need to buy more.”
The regulator is planning to introduce a requirement that all practices assess the level of cover appropriate to their firm beyond the minimum.
The SRA said in the consultation paper that an analysis of data from the Solicitors Indemnity Fund for 1988-1999 showed that only 2% of claims were above £500,000.
The regulator said it did not consider, as some had suggested, that indemnity cover should be optional. “Our proposal is therefore a middle ground between the most cost reductive option and the current very high level of protection.
“We will continue to keep the level of cover under review as we consider other aspects of the minimum terms to ensure that we have the right balance. This may lead to further reductions for the very smallest firms in the future.”
In a separate consultation paper, the SRA proposed that a similar eligibility rule should apply to claims on the Solicitors Compensation Fund for financial loss arising from misuse or misappropriation of client money. This would mean that mortgage providers, frequent claimers on the fund, would have to find other avenues of redress.
The consultation said: “Large commercial service users are better able to protect their interests and make a commercial decision on the use of legal services and the risks involved.”