Insurance

A. Solicitors

Apart from compensation orders made as a result of complaints, regulation provides compensation for clients for losses connected with the work done by their solicitors.

i. Indemnity Insurance

Indemnity insurance used to be organised by the Law Society, but the premiums were not appropriate to all types of practice. The main cause of claims is commercial and residential conveyancing, which represents 46 per cent of claims according to one insurer, whereas litigation gives rise to only 22 per cent of claims.⁸³ After much debate, it was decided that insurance should be negotiated on an individual firm basis. This proved a sensible decision. Competition pushed average premiums down, by 14 per cent in 2006 alone.⁸⁴

⁸¹ Bar Council, Bar Code of Conduct 1981, as amended, at para 905(a)(i).

⁸² ‘Chambers monitoring pilot’ Counsel July 2013.

⁸³ Report of Zurich Professional (2005-06).

⁸⁴ Law Society Gazette 16 November 2006, at 1.

All solicitors, overseas lawyers and licensed bodies must maintain professional indemnity insurance or ‘cease practice promptly’.^[1102] The insurance must be from a qualified insurer with cover of up to £1 million. Limited companies and limited liability partnerships must normally have additional cover of £2 million. The SRA Handbook 2011 contains an outcome in Chapter 1, that clients have the benefit of a firm’s compulsory professional indemnity insurance. The outcome also contains a requirement that firms do not exclude or attempt to exclude liability below the minimum level of cover required by the SRA’s Indemnity Insurance Rules.^[1103]

Where firms had failed to acquire insurance they had to apply to an ‘assigned risk pool’ (ARP).^[1104] This was funded by the qualifying insurers in proportion to their pre­mium income to ensure that all firms were covered.

Only 17 firms were in the ARP in 2006. In 2010 this had grown to 259 firms.^[1106] The firms generally had fewer than four employees. They were concentrated in and around London, particularly the East and South East, and in Birmingham. Of the 188 firms providing details of specialisation, the main areas of work covered were immigration and conveyancing. In these firms 52 per cent had a Black and Minority Ethnic solici­tor majority and 27 per cent had a White majority. The BME firms tended to have been established for a shorter period of time. Overall, 39 per cent of the firms had a claim outstanding.

The SRA, with the support of the Law Society, decided to close the ARP to new entrants by December 2013.^[1107] Existing members would be required to leave, except in limited circumstances.^[1108] Firms unable to obtain qualifying insurance were given a 90-day policy extension from their previous insurer, the ‘extended indemnity period’ (EIP). The EIP was a period of 30 days in which a firm could continue to practise and try to obtain qualifying insurance. After this time, firms entered a cessation period of 60 days in which they could only perform work in connection with existing instructions. The Law Society claims that abolishing the ARP, with the obligation to contribute to claims through the ARP, would encourage new and smaller insurers to offer solicitors insurance cover.

ii. Solicitors’ Compensation Fund

The Solicitors’ Compensation Fund (SCF) was established in 1942. It was originally a ‘discretionary fund of last resort’ to compensate victims of defaulting solicitors.^[1109] The power to make such payments is contained in the Solicitors Act 1974.^[1110] It now covers the defaults of all those regulated by the SRA, such as managers of authorised bodies, and their employees.

R v The Law Society was a test case, with claims by lenders of up to £25 million hinging on the outcome. The facts concerned inflated valuations made of properties about which the solicitor failed to warn a mortgage lender. As a result, when the bor­rowers defaulted, the lenders lost a considerable amount of money in trying to recoup loans from the sale of property. The Law Society’s policy was to refuse compensation from the fund where the dishonest solicitor did not commit the fraud for his own benefit. This policy was upheld by the Court of Appeal. Lord Bingham considered that the profession was not called upon to make good every loss caused by a solicitor’s dishonesty. He said that ‘The Law Society has always... made clear that they regard the fund as, first and foremost, a source from which to replace money which has been taken by dishonest solicitors for their own benefit’.^[1112]

Clients may also be unable to recover if their solicitor has been reckless or negligent in relation to the loss incurred. In R v Law Society, exp Ingram Foods,^[1113] the applicants were found to be reckless. They had accepted an undertaking in relation to a $5 million deposit from a sole practitioner without any documentation or other checks. The Law Society was held to be entitled to reduce the compensation that would otherwise have been ordered by 100 per cent.

The principles established by the various cases in which claims were made against the SCF underpin the current operation of the fund. The SCF is currently adminis­tered by the SRA under the Solicitors’ Compensation Fund Rules 2011.^[1114] This means that applications are entertained only where there is no other source of compensation from insurance or elsewhere.

The SCF makes grants to those who have suffered loss as a result of a solicitor’s dishonesty or failure to account for money that is due. Claims must normally be made within 12 months of the date of the loss or the applicant’s knowledge of it.^[1115] The claimant does not necessarily have to be a client of the defaulting solicitor, but dishonesty by the solicitor must be proven. This may be by establishing that there has been a conviction for fraud, or a civil finding of fraud, or by presenting evidence lead­ing to the ‘inevitable presumption’ of theft.^[1116] Victims may also be required to pursue other remedies.^[1117]

Claimants must show one of two grounds of claim. First, they must show that they have suffered or are likely to suffer loss in consequence of the dishonesty of a default­ing practitioner or the employee or manager or owner of a defaulting practitioner.^[1118] Alternatively, they must show they suffered loss and hardship in consequence of a failure to account for money by the defaulting practitioner. Grants can also be made to practitioners who have suffered as a result of others’ default, normally by way of loan.^[1119]

The maximum grant is normally £2 million,^[1120] although this limit is subject to waiver.^[1121] Where an applicant or their servant or agent has contributed to the loss as a result of his, her or its activities, omissions or behaviour whether before, during or after the event giving rise to the application, the SRA may reduce the amount of any grant or reject the application in its entirety.^[1122]

The majority of the defaulters whose clients are compensated from this fund are sole practitioners.

The SRA has announced a ‘root and branch review’ of the compensation fund arrangements to be completed in autumn 2014.^[1124] The review will consider whether compensation is an essential part of protecting clients, what limits should be placed on entitlements, whether arrangements should distinguish between different types of legal services providers, whether calculation of contributions is appropriate, whether compensation arrangements are effective and efficient and whether there are gaps in client protection. The review will include research and public consultations.

B. Barristers

Barristers must be insured against claims for professional negligence with Bar Mutual Indemnity Fund (BMIF) in accordance with the terms approved by the Bar Council from time to time.^[1125] Barristers acting as self-employed barristers must be a member of the Bar Mutual Insurance Fund, unless they are a pupil covered by his pupil supervisor’s insurance or a Registered European Lawyer carrying separate insurance.^[1126] The new Bar code requires unregistered barristers to inform clients if they have no indemnity insurance.^[1127]

IV.