A hardening indemnity insurance market and pressure from the Law Society have persuaded the Solicitors Regulation Authority (SRA) to keep the Solicitors Indemnity Fund (SIF) open for a further year.
The SRA said the society had “expressed reservations about its ability to run a discretionary hardship fund” in the absence of SIF.
The SIF provides indemnity run-off cover for law firms beyond the mandatory six years which they are obliged to obtain by the SRA.
It is a hangover from the days of mutual insurance that used the money left in the pot to provide the supplementary run-off cover.
It was originally due to close to new claims in 2017. This was extended to last year, before the Solicitors Regulation Authority (SRA) agreed to keep it open until 30 September 2021.
This was explicitly to allow for the insurance market to develop commercial products offering supplementary cover.
But the Law Society warned in April this year that owners of law firms which had closed over the last 20 years faced a difficult task in finding insurance to replace SIF.
Once the fund closes, the principals of closed firms whose run-off cover has expired will be personally liable for any claims that arise thereafter if they do not secure their own insurance.
According to the Law Society, around 10% of claims are made beyond the usual six years of run-off cover.
The SRA said the latest extension to the timetable for closure of SIF, to September 2022, would allow consultation to take place.
The regulator said that in the past there had been “shared recognition” that the future viability of the fund to provide the extra cover was coming to an end.
“Consideration was being given to the purchase of a master insurance product to manage any remaining liabilities in a cost-effective way (and it is hoped this work will continue), and the use of residual funds.
“However, in recent weeks, as the deadline for SIF closure approached, there has been increased engagement with the issues by the Law Society, the profession and others.
“In addition, it is clear that the insurance market has hardened. As a result, options have changed; in particular, the Law Society has expressed reservations about its ability to run a discretionary hardship fund using residual funds and is instead calling for post six-year run-off cover to be maintained in the long term.”
Anna Bradley, chair of the SRA, said it was “disappointing” that the “keen interest that is now being shown by the profession and others in SIF” came “so late in the day”.
She continued: “There is now limited time available to look at what are complex matters around whether there is, in principle, a regulatory place for post six-year run-off cover.
“We will need to give careful consideration to finding the right regulatory balance between consumer protection and issues of proportionality, affordability and the wider public interest.”
This would include “reviewing comparable run-off cover arrangements, analysis of claims patterns, regulatory and equality impact assessments, close working with SIF Ltd on the affordability of the SIF in the longer term, and the viability of any possible options as they emerge”.
The SRA added that the consultation process would “create the opportunity to ensure that all stakeholders understand the issues around affordability of SIF, as it is clear from recent correspondence that there are misunderstandings about these matters”.
Law Society president I Stephanie Boyce pointed out that it has been raising concerns about the SIF for more than three years.
“It is not enough simply to delay closure again in the hope that next year the commercial indemnity insurance market will change and fill the gap in consumer protection that SIF closure will create. The SRA must move quickly to publish its consultation on future options and put a plan in place.
“We urge the SRA to work hand in hand with the Law Society, the insurance industry and others to find a long-term solution to the problem of run-off indemnity cover.
“It needs to show imagination in looking at long-term solutions that provide proper levels of consumer protection and do not expose solicitors to ruinous claims or consumers to potentially lengthy and complex litigation.”