CONSULTATION RESPONSE TO THE SOLICITORS REGULATION AUTHORITY:
PROTECTING THE USERS OF LEGAL SERVICES: BALANCING COSTS AND ACCESS TO LEGAL SERVICES
8 June 2018
The typical PNLA member is a solicitor whose sense of justice demands protection for those whose trust and confidence have been betrayed. This consultation is at the heart of this issue. The SRA are asking for responses regarding the proper scope for solicitors
professional indemnity insurance and the solicitors compensation fund.
Solicitors place their trust and confidence in the SRA and the Law Society to protect the profession as a whole. The responsibility assumed by the SRA is to negotiate the best possible arrangements for the minimum terms of cover with the participating professional
indemnity insurers and the compensation fund to maximise public confidence in solicitors.
The consultation comes at a time when there have been changes affecting the relationship between solicitors and their clients. These changes have come about from different sources:
- Legislation – the Government has reformed civil litigation funding so that it is much harder for clients to afford to bring claims against solicitors (The Legal Aid Sentencing and Punishment of Offenders Act 2012 – Part 2 – LASPO). The Ministry of Justice are conducting a review of the operation of LASPO Part 2 concurrently with this consultation.
- Case law – there has been a surge of recent case law redefining the scope of the duty of solicitors to their clients. Key recent cases include the Supreme Court in BPE Solicitors & Anor v Hughes-Holland (in substitution for Gabriel) (Rev 1)  UKSC 21 (22 March 2017), and the Court of Appeal in P&P Property Ltd v Owen White & Catlin LLP  EWCA Civ 1082 (15 May 2018). The upshot of this surge is to muddy the waters because all of them create confusion as to where the boundary of the duty of care for solicitors lies in negligence, warranty of authority, breach of trust and fiduciary duty.
- Regulatory changes – the Solicitors Code and the wider regulatory framework – eg the GDPR – create more risks of liability for solicitors.
Reports of solicitor’s practices becoming insolvent are commonplace in the Law Society Gazette with more looming particularly in the personal injury sector.
Five SRA approved participating professional indemnity insurers have become insolvent - Quinn, Lemma, Balva, ERIC and Enterpise the latest being Alpha Insurance A/S announced within the last few weeks.
The SRA consultation seeks to find a solution by reducing the amount of the minimum terms of insurance for solicitors from £2million (£3million for limited companies) (MTC clause 2.1) to £500,000 and to reduce the scope and amount of the payments from the compensation fund. If the SRA implement the proposals then the key risks are:
1. Increasing the claims on insurers and the compensation fund due to insolvency of solicitors
To be clear, the £500,000 proposed minimum cover includes damages and the claimant client’s legal costs, defence costs (insurers appoint a solicitors panel to defend claims) are in addition and unlimited (MTC clause 2.2) save for an option for a proportion to be paid
by the insured if they are underinsured (MTC clause 2.3).
As to costs - if a dispute is defended then it is not unusual for the costs of the litigation itself to exceed £500,000. As an example the case of BPE Solicitors & Anor v HughesHolland (in substitution for Gabriel) (Rev 1)  UKSC 21 (22 March 2017) which arose from a routine private loan of £200,000. The case was subject to two appeals and two Supreme Court decisions. If BPE solicitors had insurance cover for this claim limited to £500,000 then the claim including the claimant’s costs (which will have exceeded the £300,000 balance) would not have been covered by their insurance.
As to damages – quantification of financial loss is very difficult. The basic rule is that the client is entitled to be put back in the hypothetical position as if correct advice had been given in negligence claims, or to restore the trust if there is a breach. The amount of the damages bears no relationship to the fees charged for the matter. As an example P&P Property Ltd v Owen White & Catlin LLP  EWCA Civ 1082 (15 May 2018) relates to two cases both routine conveyancing transactions. The vendor in both cases was an imposter. This decision means that the vendor’s solicitor is obliged to repay the entire cost of the property to the purchaser.
Solicitors who have a claim which exceeds their insurance cover will be forced to settle as cheaply and quickly as possible. If they are unable to do that, then many will face claims which they cannot afford to pay. If the solicitor and/or their practice become insolvent and have to cease then this will cost indemnity insurers far more due to the 6 year run-off cover and create more risk to the compensation fund.
2. Premiums for professional indemnity insurance will not reduce enough to address the risk to solicitors of inadequate insurance
Solicitors rely upon the SRA and the Law Society to provide advice and information about the minimum terms of cover. The SRA have assumed responsibility for negotiating with the participating insurers and the compensation fund.
The SRA cannot guarantee that premiums would be cheaper if these proposals are implemented because the premiums and compensation fund payments are affected by many factors year on year. It is therefore impossible for the SRA to give any assurance at all that premiums would be reduced if the proposals go ahead.
The SRA is potentially trying to help solicitors who say that they cannot afford to practice profitably because of the premium/compensation fund contribution for the existing minimum terms.
If that is the case, it must be those same solicitors who are most vulnerable to an unexpectedly high value professional negligence claim exceeding their minimum amount of cover. Cautious advice from the SRA would therefore be to advise them to increase
their insurance cover, not to reduce it.
The SRA cannot reduce claims arising. By their nature professional negligence and liability claims arise from unexpected and unpredictable situations. The SRA should regard the premium cost (which is affected year on year by many factors) as secondary.
To comply with their responsibility to the profession the SRA should negotiate the best possible minimum terms of cover with participating professional indemnity insurers to enhance long term trust and confidence for clients. Adequate insurance cover will
inevitably reduce exposure to the compensation fund.
The risk that a claim is not covered by the FSCS, the insolvent Insurer and the Compensation Fund is real. Why should the Compensation Fund cover a dishonest solicitor but not an honest solicitor whose insurer goes bust and who does not qualify under the FSCS turnover rules.
Furthermore proper exercise of the SRA’s duty may involve increasing the minimum terms and amount of cover and premium costs. This may be a small price to pay to ensure the adequate continuity of the reputation of the profession by reputable and solvent insurers. This at a time when trust and confidence has been shattered for many solicitors and their clients who have been let down by the six insolvent SRA approved participating insurers.
President – Professional Negligence Lawyers Association