The 2013 Professional Indemnity Insurance renewal was never going to be an easy one.
The ending of the Assigned Risks Pool (ARP) for indemnity periods beginning on or after 1 October 2013 left many firms in a vulnerable position.
The collapse in April of unrated Latvian insurers Balva left many smaller practices potentially without insurance. Some, although not all, would have breathed a sigh of relief when the news that they could be insured through another unrated insurer – Berliner Versicherung Aktiengesellschaft. However, many were beginning to realise that unrated insurers can be problematical for firms – as the Balva experience proved.
However, few expected the further bombshell that would come when Apro Management, which manages Berliner, and which was due to take on most of Balva’s business, decided not to accept any renewals at 1st October 2013. This effectively left as many as 1,300 firms facing a race against time to find alternative insurers before the end of September.
Some, no doubt, will have gone to the Law Society’s new PII scheme. Others may find insurance elsewhere. However, there is still a chance that a large number will fail to find insurance. With the untimely removal of the ARP, those firms are going to need to give some serious thought as to what they are going to do and how they are going to do it.
Firms with no insurance
If a firm remains uninsured at the end of this indemnity year (30 September 2013) then its last qualifying insurer will have to provide that firm with 90 days indemnity insurance cover. That 90 days is made up of two parts:
- 30 days of an extended indemnity period – during which the firm can continue to operate as before whilst no doubt looking around for cover – and
- a 60 day cessation period – during which time the firm, if it has still not secured insurance cover, should be looking to close down and can only deal with existing instructions.
Clearly, any firm that has failed to obtain cover as at the 30 September needs to face up to some fairly stark facts – namely that there is every chance that they will not succeed in obtaining cover and that, as a result, they will need to close down their practice in an orderly manner and face up to the fact of run-off cover and the potential for some fairly major financial problems.
The sooner the firm read the writing on the wall and acts accordingly, the easier it is likely to find the process of closing down. Those who continue to trade during the extended indemnity period are likely to find that the 60 days of the cessation period are not going to be long enough.
So what can firms do?
Firms who have been unable to obtain cover have a rather limited number of options open to them.
They may still have a viable business and as a result may prove to be attractive to other firms wishing to take them over. However, three months is not very long in which to do this and firms should not rely on this as their only option.
You must also bear in mind that even if you sell your practice as a going concern you will still have to inform all of your clients of the change in ownership in advance of the sale.
Bear in mind also that many firms do not want to take on the liabilities of your practice and so may still not wish to become a successor practice. They may, therefore, still require you to take run-off cover before they take on the business of the firm. Only you can decide if that is something that is worthwhile – although clearly if you fail to find a buyer then you will have the run-off cover to pay for anyway.
If the individuals in the firm have a good following then they may be able to close down the practice and join another firm – taking their clients with them (with the informed consent of the client of course). This will not avoid the costs of the closure or the costs of the run-off cover – especially as the firms to whom they move will again be wary of becoming a successor practice.
There is, however, a further alternative to closure and that is to continue practice, in some cases with staff still in place, but under the aegis of another firm. This can give an element of independence but the reassurance of practising from within a firm. Whilst the firm will still need to take run off cover (its future practice would be under the insurance of the umbrella firm) having taken this step it could continue to practise – in some cases almost as before. This will have the benefit of enabling the partners in the firm to earn fees over the ensuing years and thus help to defray the costs of the closure over a period. Ultimately those involved with the firm can later retire from practice knowing that problems such as run-off cover and continued representation for clients has been dealt with. Firms offering opportunities of this nature to the right candidates include Richard Nelson LLP (www.richardnelsonllp.co.uk) .
If there is no alternative to closure then the sooner the decision is made the sooner the firm can get on with the process. Chapter 10 of the SRA Code of Conduct, at outcome O(10.13) requires that firms close down in an orderly and transparent fashion. Failure to do so can result in disciplinary action, an intervention or an ombudsman’s decision against the firm. If you are to avoid unnecessary expense then we would urge you to avoid all three.
There are various requirements and processes involved in practice closure – all of which must be observed if disciplinary action is to be avoided.
The Lawyers Defence Group can assist you with that closure and help you to ensure that you do close down in an orderly and regulation friendly way. With offices in most of the major centres in England and Wales we are well placed to be able to assist you.
Because of the costs involved (for example run-off cover rates running at a minimum usually of 225% of the annual indemnity premium for the firm), it is possible that you may be looking at insolvency or bankruptcy. If you are declared bankrupt then your practising certificate or registration will automatically be suspended by virtue of section 15(1) of the Solicitors Act 1974. You can apply to the SRA although you may find that as a condition of that your practising certificate acquires conditions limiting you to employment in an approved practice.
It is advisable to contact the SRA as soon as bankruptcy becomes inevitable. They cannot do anything until the bankruptcy occurs but at least they are put on notice and the period of the suspension may therefore be shorter.
Bear in mind that once you become bankrupt, you will be unable to continue practising or operate your client account until the suspension is lifted. You may, however, ask another solicitor or REL to authorise withdrawals or transfers on your behalf.
Again the Lawyers Defence Group may be able to assist you – both before bankruptcy occurs and in dealing with the closure of the firm and client accounts.
Practice closure is not something which anyone wishes to countenance – especially a closure which is in effect forced upon the practitioner by something such as failure to renew indemnity insurance. However a voluntary closure is always preferable to an intervention of only on account of the cost.
However, if insurance is not going to be, or is unlikely to be, forthcoming then the sooner the decision to close the practice is made the easier it will be to deal with the ramifications of that closure.
For further information, contact the Lawyers Defence Group by:
- telephoning during office hours – 0333 888 4070,
- requesting a call-back using the call-back request form on our web site at www.lawyersdefencegroup.org.uk,
- telephoning our out of hours number (but please only in an emergency – for example if you believe that your firm might be about to be intervened in) 07952 861 868,
- emailing us at email@example.com .