Post six year run-off cover
We explore the importance of the SIF and why it is an issue that solicitors ignore at their peril.
Where are we now?
The much-anticipated SRA consultation about the future of post six-year run-off cover (“PSYROC”) is now open and will run until 15 February 2022. Essentially, the SRA is seeking views on whether its regulatory arrangements should include PSYROC and what that means for the future of the Solicitors Indemnity Fund (“SIF”). This article considers the detail of the SRA’s preferred option for PSYROC, the analysis underpinning it and the questions that remain unasked.
What is the current position?
SIF, managed by SIF Ltd, currently provides cover to firms that cease without a successor firm, once their six-year mandatory cover, provided by their last insurer, has expired. So, why the need for change? To put the consultation into context, we need to look at SIF’s history.
Established in 1987, SIF operated as a mutual indemnity insurance fund until 1 September 2000, when the profession switched to open market insurers and SIF was placed into run-off. Since 1 September 2007, it has been used, in part, to provide PSYROC or supplementary run-off cover to firms closing without a successor and its cost is met out of the SIF surplus. Initially intended to apply to claims notified before 30 September 2017, it was then extended to cover claims notified before 30 September 2020. In June 2021, in response to lobbying by the Law Society, the profession and other interested parties, the SRA Board agreed to a further one-year extension, subject to an affordability test.
It is now crunch time. The SIF surplus is finite and, based upon actuarial advice, SIF Ltd has indicated that a further extension is not prudent without additional funding.
Why do we need PSYROC?
In our article below, “Post six-year run-off cover — what does the future hold?”, we explained that owing to extensions to primary limitation periods, claims are sometimes made more than six years after the cessation of the relevant firm. SRA figures show that, between 1987 and 2016, 9% of all claims for negligence were made between six and 15 years after the work was completed. These claims were worth £217 million in total. (Passmore C. Executive Director, Policy (2017) Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historic claims data). Such “long-tail” claims typically (but not exclusively) occur in areas such as conveyancing, wills & trusts and probate.
If the SIF closes, as planned, in September 2022, without alternative arrangements being made for PSYROC, firms that have closed without a successor practice will be left uninsured for claims made after their mandatory six-year run-off cover has expired.
What is proposed?
The consultation explores various options, including the discontinuance of PSYROC, continuing PSYROC through the SIF supported by new funding arrangements and arranging cover through another vehicle or through insurance on the open market. However, the SRA has nailed its colours to the mast. The consultation paper states that its preferred option is not to continue its involvement with PSYROC. Its rationale is superficially simple: the costs of PSYROC are disproportionate to the volume and value of claims.
In the wake of the consultation’s publication, the Law Society of England and Wales made clear its concerns in a press release entitled, “SIF consultation: Consumers could be left high and dry by solicitors’ regulator”. President Stephanie Boyce opined that the SRA’s preferred option would “…make the marketplace less safe for consumers…” The press release went on to say that the Law Society would be responding to the consultation in full and that, “…the SRA could benefit from any further insights that members or former members might see fit to provide.” Practitioners are urged to respond to this call to arms from our representative body.
The SRA’s analysis
In understanding the SRA’s approach to the consultation, it is important to remember that, pursuant to the Legal Services Act 2007, it works for the wider benefit of consumers. It is not the profession’s representative body. The SRA is constrained by law from acting outside its remit to support or protect members of the profession. As such, whilst it recognises that its proposal would “… remove the ‘sleep easy’ factor…” for retired/retiring solicitors, the SRA describes that issue as “…a more appropriate matter for the representative body.”
The consultation paper is underpinned by analysis from Willis Towers Watson, actuaries and insurance experts familiar with SIF. They have analysed claims patterns and assessed impacts on consumers and on solicitors/firms of terminating PSYROC. They predict that going forward, there are likely to be an average of 31 claims notified each year that will result in a payment (including a payment only of defence costs). Over a ten-year period from 2023, the average claim cost is forecast to be £34,600 — a not insignificant sum for both consumers and legal professionals. Having set out anticipated claim volumes, the consultation paper goes on to recognise that there will be “…a small number…” of consumers that will not receive redress if there is no PSYROC in the future.
The consultation paper also includes an estimate of requirements for ongoing PSYROC funding of £2.4 million per annum. The SRA makes it clear that this would require further funding from the profession, possibly by way of a levy or an insurance premium charge direct to firms/practitioners. The consultation paper reads as follows:
“ WTW has forecast the cost of any annual levy should be in the region of £16 per solicitor or £240 per firm on a flat fee basis. This additional cost would likely be passed on to consumers by at least some regulated providers. Therefore, any obligation that would benefit a very small number of consumers may have a negative impact on a larger number of consumers.”
Pausing there, the consultation does not actually ask solicitors/firms if they plan to pass on any levy to consumers but respondents may wish to include that information in their responses. However, even if firms passed on the entire cost, it would likely work out at a few pence per client per year — arguably a better option than a client remaining uncompensated for a valid claim.
The consultation paper focuses upon the above figures and hammers home the SRA’s points about proportionality and the spectre of increased legal services costs. However, scratch the surface of the consultation paper and it appears that other consumer-related issues have not been investigated to the same extent. By way of example, the SRA recognises the following issues in their consultation paper:
- the proposed termination of PSYROC through the SIF has affected the acquisition of firms because potential vendors are concerned about their liability for new claims if certain parts of their businesses are placed in run-off;
- disorderly closure of firms can arise when solicitors carry on practising solely because of perceived barriers to them exiting when they want to.
Notwithstanding its recognition of the above, the SRA does not indicate the numbers of firms likely to be affected or include any detailed analysis as to the projected impact of these issues upon consumers. This ought to be bottomed out, given that an abandoned merger might well impact the availability of certain legal services in a particular geographical area. Likewise, disorderly closures are known to create consumer misery. Respondents to the survey may wish to fill in some of the blanks for the SRA, by highlighting whether PSYROC uncertainty has impeded their firm’s merger or closure.
The consultation paper also says the following, about the effect of the SRA’s proposal on the availability of lawyers to deal with long-tail claim areas:
“We do not consider that there will be significant market impacts on supply if we do not provide ongoing PSYROC. There is evidence that the main long-tail claim areas (conveyancing, wills, trusts and probate) are relatively competitive and without significant supply shortages.”
This is another area where the SRA’s assumptions need stress testing. There might well not be a shortage of lawyers in long-tail claim areas now. However, it does not automatically follow that the position will remain the same if PSYROC is abolished. The risk of having to pay a substantial claim out of their own funds might well persuade some practitioners to change tack. Those dealing with long-tail claim areas now may wish to comment upon whether the abolition of PSYROC would affect the likelihood of their continuing to practise in that area.
The consultation does not specifically ask the questions highlighted above. However, the information could be provided in response to its question one: “Do you have any views on our analysis in relation to continuing to provide PSYROC through the SIF on an ongoing basis?”
At first glance, some practitioners might feel that they have nothing useful to add to the debate about PSYROC, particularly as the SRA’s focus is consumer protection rather than protecting the profession. However, many can contribute meaningfully by responding with the type of details mentioned above.
The results of the current consultation will shape the PSYROC debate for the foreseeable future. The time to act is now. If we do nothing, PSYROC will become a thing of the past.
What does the future hold?
Published 28 October 2021
In 1987, the Solicitors’ Indemnity Fund (“SIF”) was created to provide compulsory professional indemnity cover to all solicitors in private practice in England and Wales. By 1999, however, it was generally felt that the SIF premiums were too high and that larger firms were making up the shortfall for smaller practices. As a result, the profession opted to move away from a statutory fund and towards an open market scheme. The SIF subsequently entered a period of run-off which marked the beginning of the end for the SIF.
The SIF currently provides protection to firms that cease practicing without a successor firm in that it provides them with post six-year run-off indemnity cover (“PSYROC”) once their six-year mandatory cover has expired. There have been various dates scheduled for the closure of the SIF but on 15 June 2021, the Solicitors’ Regulation Authority (“SRA”) announced its decision to extend the deadline for the closure of the SIF again to 30 September 2022. If the SIF closes on that date, as planned, firms which have closed without a successor practice will effectively be left uninsured in respect of any claims made against them/ them former employees after their mandatory six-year run off cover has expired.
As the SRA prepares to launch a consultation about PSYROC, this article explores the importance of the SIF and why it is an issue that solicitors ignore at their peril. Can you afford not to be involved in the consultation and have your say?
What is the consultation about?
The SIF was placed into run-off on 1 September 2000. However, it continued to offer a vital safety net to firms that ceased without a successor firm. Since 1 September 2007, it has provided them with indemnity after their mandatory six-year run off insurance has elapsed. This is known as PSYROC or supplementary run-off cover and its cost is met out of the SIF surplus.
Initially intended to apply to claims notified before 30 September 2017, it was then extended to cover claims notified before 30 September 2020. In June 2021, in response to lobbying by the Law Society, the profession and other interested parties, the SRA Board agreed a further one-year extension, subject to an affordability test.
Amid concerns about the affordability of the SIF and in a hardening professional indemnity insurance market, the SRA has now announced a full public consultation on next steps, including “…alternative indemnity and discretionary uses for any SIF residual surplus, for example through a hardship fund.” The formal consultation is due to be launched straight after the October 2021 professional indemnity renewal season. It will be followed by a second, more targeted consultation in early 2022.
A problem for retired solicitors?
The future of PSYROC may not seem terribly pressing for those just embarking on their legal careers or for whom retirement is a distant dream. Make no mistake — it is.
After September 2022, firms that have closed without a successor practice and whose former principals have not purchased PSYROC will be uninsured in respect of claims made after the expiry of their six-year run-off cover. By the time that a firm has been closed for six years, many of the claims that could be successfully pursued against it/its former employees will be statute-barred. Therefore, are the risks more theoretical than real? The answer is no.
There are lots of scenarios where a six-year cut-off period will not suffice. Whilst the primary limitation period for professional negligence claims (tort and contract) is six years, claimants do bring claims outside of that period based on a later date of knowledge — the long stop period under the Limitation Act 1980 is 15 years. Furthermore, it is not uncommon for claimants to rely on section 32 of the Act — deliberate concealment — and limitation in respect of claimants who are minors does not start to run until they attain majority. To put this into context, figures from the SRA suggest that, between 1987 and 2016, 9% of all claims for negligence were made within 6-15 years after the work was completed. These claims were worth £217m in total. (Passmore, C. Executive Director, Policy. (2017) Reflecting on Solicitors Professional Indemnity Insurance (PII): market trends and analysis of historic claims data)
The absence of cover in the post-six-year period is a risk for both the solicitor and the consumer: the solicitor risks being pursued in their personal capacity; the consumer risks being undercompensated. Not only will solicitors’ personal assets be at stake but also the continuing confidence the public places in the profession.
Many solicitors still in practice have worked at firms that have closed without successor practices. In terms of the scale of the issue, figures from the SRA indicate that over a 12-month period to the end of June 2021, 556 firms closed, 365 of which simply ceased trading without a successor practice. More firms are closing than opening. For many practitioners, the PSYROC timebomb is already ticking.
Little wonder, given the above, that the Law Society now describes the issue of PSYROC as one of its top priorities. It ought to be for any solicitor who has ever worked in private practice.
The way forward
The SRA consultation offers the opportunity for all interested parties to engage with the issue of PSYROC and to influence what happens next. There are no easy solutions. Absent a further injection of funds, the SIF will have to close. A working group set up by the Law Society has expressed concern that solicitors left to seek PSYROC in the open market will encounter serious difficulties. However, after many years of letting the issue drift, the profession and key stakeholders are now having the right conversations.
The Law Society has established a working group comprised of elected members and senior management. To prepare for the consultation, they held several member engagement meetings and made pre-consultation submissions to the SRA, setting out the key objectives that they hoped the SRA’s long-term solution would achieve. However, there is more to be done.
Many busy practitioners will have never responded to an SRA consultation before. It is possible to do so in different ways. Local Law Society meetings offer an opportunity to discuss the consultation with other members and agree upon a composite response on behalf of the group. Alternatively, individuals may prefer to submit their own responses. All consultations appear on the Law Society website and it enables people to subscribe to consultation alerts.
Ultimately, it does not matter whether you respond alone or as part of a group — the main thing is to get involved. Those who have been in private practice cannot afford to do nothing. The findings of the consultation will shape the PSYROC debate for years to come. It is essential that all those who have an interest in PSYROC take part. For those who do not, there will be no point crying over spilt milk when the new arrangements are in place.