Wharton: Solicitors should keep a detailed record of the closed firm’s claims history
Partners and fee-earners in law firms which have closed should give “careful thought” to buying additional run-off cover to protect them when the Solicitors Indemnity Fund (SIF) closes next year, specialist lawyers have warned.
Under the minimum terms and conditions (MTCs), solicitors are required to buy six years of run-off cover when closing a firm with no successor practice, and up to now the SIF has covered any claims which arise thereafter.
However, the 2016 decision of the Solicitors Regulation Authority (SRA) to close the SIF in September 2020 – and not 2023 as many, including the Law Society, argued for – is now close to becoming reality.
Once it closes to new notifications, solicitors of closed firms will be personally liable for any claims.
Suzanne Wharton, partner at DAC Beachcroft in Leeds, and senior associate James Hazlett wrote on the firm’s website that many professional negligence claims did not “emerge until some years later” and would potentially fall between the end of the six-year run-off period and the 15-year “long-stop date” under section 14(b) of the Limitation Act 1980.
Whilst in most instances the time limit runs from the date of the negligence becoming known, when it comes to wills, it runs from the date of the testator’s death. Solicitors are insured on the basis that it is the insurer at the time of the claim, rather than of the negligent act, who is liable.
Research has previously suggested that 11% of claims arise 15 years or more after a firm’s closure.
The solicitors wrote: “All of this means that partners and employees of firms that closed without a successor practice should give careful thought to obtaining post six-year run-off cover after 2020, to avoid the danger of being held personally liable for any historical claims.
“We are aware of at least two insurers having expressed an interest in providing such cover, although the actual products have not yet been developed and will likely only emerge once they are needed next year.”
They advised solicitors to keep a “detailed record” of the closed firm’s “historical data and claims history” to present to underwriters.
“It is not clear what they will look like or how they will be priced, but policies are predicted to be underwritten on an individual basis with a careful consideration of the risk, and the ability to refuse to quote.
“It is also anticipated that, unlike under the constraints of the MTCs, the premium will have to be paid before cover is confirmed, hence an additional expense that it would be prudent to budget for as part of the closure process.”
In the same article, Ms Wharton and Mr Hazlett said the introduction of freelance solicitors in November this year, and the requirement on them only to obtain “adequate and appropriate” indemnity insurance for reserved activities, increased potential risks for clients, who would not have access to the Compensation Fund.
The solicitors said it “remained to be seen” how this would work in practice and whether insurers would have the appetite to write “adequate and appropriate” cover acceptable to the SRA.
“Having witnessed what can go wrong on seemingly the simplest of matters, the consequences of inadequate or no insurance could be devastating, which clients will need to appreciate before embracing the changing models of legal representation.
“Equally, and with only three months to go, far greater clarification will have to follow from the SRA before it can be expected that there will be any significant adoption of these new methods, and whether the reforms have in turn achieved the desired aims of improving access to justice, promoting competition, and helping to increase consumer protection.
“Without careful control and guidance, the potential variations in quality of cover have the danger of confusing consumers and leaving them exposed in the unfortunate event that something goes wrong.”
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