The SRA has recently published a consultation on changes to the Minimum Terms and Conditions (MTCs). We have been expecting this for some time. The SRA has been steadily gathering evidence to support changes since the Legal Services Board rejected its application to reduce the limit back in 2014. Increasing access to justice is one of the main drivers for the proposals. The SRA believes that the changes will achieve premium savings that could be passed on to consumers. They also argue that lower premiums could remove barriers to entry to the legal profession and encourage new firms, increasing competition and the opportunity for people to access more affordable legal services.
Howden is not convinced that the changes will result in any meaningful reduction in premium. We are also concerned that some of the proposed changes will:
- Create uncertainty.
- Lead to claims that will not be covered either in whole or in part, compromising the “solicitor brand” in the legal services market place.
- Increase the incidence of coverage disputes, which will increase costs.
- Make the PII purchase more complex.
In this article we examine each of the proposed changes and highlight some of the concerns and questions we have. Howden will be responding to the consultation and we will make a copy of that document available to anyone who is interested in reviewing it.
Reducing the minimum cover from £3m for incorporated practices and £2M for sole practitioners and partnerships to £500,000 or £1m for firms undertaking conveyancing work.
a) The SRA’s evidence to support the reduction in limit comes from claims data that was collected from insurers in 2015. Claims data covering the ten year period from 2004 to 2014 was analysed by a third party and a report provided to the SRA. We are not aware that the report is publicly available. The SRA’s initial commentary on the report stated that 98% of claims were under £580,000. The consultation document claims that 98% are under £500,000. There is quite a considerable gap between the two that would be uninsured for firms that only purchase £500k. We are keen to understand more about these figures.
b) Claims data was not supplied by all insurers involved in solicitors’ PII in the 2004 to 2014 years. A separate report issued with the consultation and completed for the SRA by EPC Ltd entitled “Potential Options for SRA PII Requirements” (The EPC report), now tells us that data was provided by insurers with a total average market share of 74%. We anticipate that the list of insurers that did not provide data is likely to include those that experienced significant claims and left the market having suffered an insolvency-related event. We therefore caution that the claims data could be significantly under-stated.
c) The data covers the period 2004 to 2014. It is now 2018. The EPC report tells us that RPI was applied to the figures to update them as at 2016. But we will still be three years on from that before any changes are likely to become effective. In addition, claims against solicitors develop slowly and the claims experience for the later years in the 10 year period would be significantly under-developed. The documentation we have seen is quiet on whether any allowance has been made for that.
d) We question the impact that the reduction in the limit will have on premium. It was at the 2005/6 renewal that the limit doubled from £1m to £2m (or £3m for incorporated practices), however the total market premium as a percentage of gross fees dropped slightly in that year (refer Review of Client Financial Protection Arrangements by Charles River Associates, 2010, Figure 16). The reason for this is that insurers knew the increased limit would not significantly increase the claims they were required to meet – the converse is also true. If any reduction in premium is achieved we challenge whether this will be of such significance that it will enable solicitors to discount their fees – or encourage new entrants to the market.
£1m limit for conveyancing
a) It is important to note that the £1m limit proposed for conveyancing services is not a minimum limit that insurers must provide by default for conveyancing claims. Under current proposals firms will need to “opt in” and specifically purchase cover for conveyancing work and the increased limit. If they do not, then a conveyancing claim will not be covered at all – even up to the £500k mandatory limit.
b) If a firm has undertaken conveyancing in the past there is a serious question as to how long it will need to maintain cover at £1m. The consultation paper acknowledges that the cover would need to continue for a period, but no time frame has been proposed. In our experience there are many conveyancing claims that take advantage of the date of knowledge extension and 15 year long stop available under the Limitation Act 1980. If the cover is not maintained for a significant period, then some claims will be uninsured. Cases where an innocent consumer does not receive any redress will inevitably attract media attention and the “solicitor brand” will be impacted accordingly.
c) We are also concerned that the definition of “conveyancing” is likely to lead to coverage disputes. The proposed definition is very broad and circumstances could arise where work undertaken in the context of a separate area of practice is classified as a “conveyancing service” – for example a family law solicitor registering a notice to sever a joint tenancy.
No MTC cover for financial institutions, corporates and other large business – the draft of the proposed MTC exclusions defines this as “the provision of services to an insured's client if that client's turnover for its most recent financial year exceeds £2 million”
a) While the definition is quite simple, there is uncertainty as to when the qualifying turnover is to be assessed. This is not addressed in the draft MTC changes. Is it at the time the work was undertaken? At the time the notification is made to insurers? At the time the client makes or intimates a claim? Each scenario has its own disadvantages, but for now we do not know what is proposed.
b) If the client is a corporate then accounts will be available via Companies House to verify turnover and whether the insured has cover – on whatever the relevant date is. However what if the client is a partnership or a sole trader? While they could be amenable to providing information at the time of engagement, they might not be inclined to do so when matters have gone wrong and they are making a claim. They will not be under any obligation to provide information regarding turnover so that the position regarding cover can be established. They will have an interest in doing so if a law firm could not meet the claim from its own resources – but that will not always be the case.
c) As with conveyancing services, there is a question as to how long an endorsement for the cover should be maintained if a firm no longer has clients falling within this exclusion, but has done in the past.
Introducing a cap on run-off cover - £3m for firms that need cover for conveyancing services and £1.5m for other firms
a) The rationale for the change is to reduce the cost of run off that is proving to be a barrier for some firms (particularly sole practitioners) wishing to close their practice. It is acknowledged in the consultation document (page 36) that the SRA does “not have robust data on the total settled claims for individual firms over the six-year run-off policies”. It is accordingly something of a leap of faith to suggest that this change will bring about a reduction in premiums. In our experience it is unusual for a firm in run-off to have total claims activity within six years that exceeds £3m – or £1.5m for firms that do not undertake conveyancing services. If insurers are likely to be covering the same level of claims it is unrealistic to expect that this change will result in run-off premiums being discounted to a level that would remove the barrier to closure.
b) As explained above, the proposed changes to the MTCs suggest that cover for conveyancing services is excluded unless a firm has obtained an endorsement for cover. However when it comes to run-off the proposed wording change to the MTCs provides that both the cover for conveyancing services and the £3m limit will be automatic – whatever the terms of the prior policy. We believe insurers are unlikely to be very enthusiastic about reducing run-off premiums given this scenario.
c) We agree that run off is proving to be a barrier to closure for some practitioners wishing to retire. We believe there could be other solutions to this issue, including the possibility of a capped multiplier for the run off premium. We will be exploring alternative options further in our consultation response.
Flexible arrangements for defence costs so that they can be subject to the firm’s excess and/or subject to a limit.
a) The consultation is somewhat misguided in that it suggests that the current arrangements in relation to defence costs result in claims being defended unnecessarily, increasing costs for insurers. That is certainly not our experience. In practice there is a very good level of co-operation between insurers and the profession with regard to the defence and settlement of claims. Where that does not happen, many insurers have a “control clause” in their policy that enables them to take over and settle a claim.
b) While the primary objective of the proposed changes is to lower the cost of insurance for law firms, this change has the potential to increase cost. There are many occasions where insurers successfully defend claims and no claim payment is made. Under the current rules where defence costs cannot be subject to an excess, the law firm makes no payment at all. If that were to change any potential premium saving could easily be negated, or exceeded.
c) It will be interesting to see how much enthusiasm insurers have for the proposal that defence costs can be subject to a limit. If the claim is one that should be defended, then insurers would want the defence to continue despite the fact that it has reached the limit of its responsibility for defence costs. If the insured firm cannot afford to pay then the insurer will have to. Discounting premium on one hand and still paying defence costs on the other, is unlikely to be an attractive proposition.
The SRA’s pursuit of these changes is disappointing and we consider that there are some serious issues with the proposals that are being made. While we believe this is a concern, we do want to assure clients that we are confident that insurers will continue to offer cover on the current basis, even if the changes are made. As a broker it is our role to ensure you get the cover you need. We will keep you advised as this matter progresses.