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Run-off cover: practical implications of SRA’s planned changes to indemnity insurance rules

At the start of July, the Solicitors Regulation Authority (SRA) announced plans to change its indemnity insurance rules to make it easier for firms to switch their regulator for the purposes of professional indemnity insurance. The aim of this change, which follows a period of consultation, is to improve competition in the market, whilst ensuring that the public remain protected.

The old rules provide that where a firm switches to another Legal Services Board approved regulator (for example, the Council for Licensed Conveyancers or Association of Costs Lawyers), it is treated as if it has ceased to practise. Therefore, it must maintain run-off cover for six years. This is because professional indemnity insurance operates on a “claims made” basis. This means that the policy is triggered when a claim is made, rather than when the negligent act or omission actually occurred.

The announced changes would scrap the requirement for run-off cover in circumstances where a firm is simply switching its regulator. The new regulator would then be responsible for ensuring that there is sufficient indemnity insurance in place to meet any future claims.

In practical terms, the changes are unlikely to affect larger firms, which provide a range of services and are likely to hold a level of indemnity insurance higher than that required by any regulator. However, it could have important implications for smaller, more specialist, firms. For these firms, changing regulator for insurance purposes may allow them to significantly reduce their regulatory costs, with savings potentially being passed on to consumers. However, the high cost of run-off cover can present a barrier to switching, preventing them from seeking the most appropriate regulator for their business.

At present, the rules also mean that a situation may arise where a firm is required to have dual cover in place if their new regulator has its own indemnity insurance requirements. This is an undesirable position, both in terms of cost and due to potential policy issues that may arise if a claim is made.

Whilst these changes will increase flexibility for firms, it will be crucial for regulators and practitioners to adopt an approach which ensures that consumers remain protected. For instance, a potential pitfall may arise if a new regulator has lower indemnity insurance requirements than those set out in the SRA’s minimum terms. This could give rise to a situation where there is insufficient cover in place. Therefore, it will be important for firms, and their brokers, to give close consideration to their insurance after a regulatory change.

It is always important for firms to ensure that they are familiar with their professional indemnity policy provisions. This will take on even greater importance where they choose to change regulator. For example, the SRA’s minimum terms, with which all insurers offering cover to solicitors must comply, include a clause which provides that the insurer is not entitled to avoid or repudiate the insurance on any grounds. If a firm switches regulator, although the new regulator may have its own insurance requirements, it is unlikely that the cover offered will be as generous as that required for SRA-regulated firms. Therefore, firms should be aware of their obligations under the policy.

The SRA proposes that the rule change will be effected by adopting an amendment to the minimum terms, so that run-off cover is not automatically triggered when a firm switches regulator. The changes will come into effect from 1 October 2017, if approved by the Legal Services Board.

Kennedys Arran Roberts

2 thoughts on “Run-off cover: practical implications of SRA’s planned changes to indemnity insurance rules

  1. Your article fails to consider that firms involved in “high risk” work will be required by their clients to effect and to maintain significantly higher limits of indemnity than any minimum level stipulated by a regulator and so any change will not affect them at all due to such contractual stipulations.

  2. I mentioned that larger firms are unlikely to be affected by the changes, as they are more likely to hold higher levels of indemnity insurance than required by any regulator. However, you are right that there are other instances where firms may hold more than the minimum required level of insurance, including where clients demand more cover and/or where the firm undertakes high value transactions. Another example may be where a firm anticipates a significant change in the value or nature of the work they carry out. This reinforces the fact that it is crucial for firms, and their brokers, to carefully consider what level of cover is appropriate for their individual circumstances.

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