S.4.2005.6 4
Summary
On 16 December 2004 Council agreed to the rewording of the definition of “one claim” at clause 2.5 of the Minimum Terms and Conditions appended to the Solicitors ’
Indemnity Insurance Rules (SIIR). Council also agreed to an increase in the minimum sum insured for any one claim from £1million to £2million. Subject to the Master of the
Rolls’ concurrence, these changes will come into effect from 1 October 2005. The
Indemnity Insurance Committee has reviewed the top up insurance requirements for incorporated practices which are set out in Appendix 5 to the SIIR. The Committee recommend that, with effect from 1 October 2005, the minimum level of cover for an incorpo rated practice should be £3m, i.e. £2m plus £1m (currently £1m plus £0.5m).
This change will maintain the differential in terms of the compulsory level of professional indemnity insurance as between an unincorporated practice and an incorporated practice should remain at 50%. The Committee also recommend that the top-up element should be provided in the form of a policy of qualifying insurance. This overcomes the problems associated with run-off cover and incorporated practices in the
ARP.
Recommendation
That the Standards Board note that when inviting the Council to make the Solicitors’
Indemnity Insurance Rules 2005 at its May meeting, the Indemnity Insurance Committee will propose to the Council that top-up requirements set out in Appendix 5 to the Rules be replaced by a requirement for recognised bodies that fall within the current Appendix
5 to have a policy of qualifying insurance with a sum insured for any one claim
(exclusive of defence costs) of at least £3 million..
Risk assessment
Equality and diversity strategy implications : Low.
Financial implications : The financial implications for the Law Society are low.
Reputational: Low/Moderate. The change will plug a gap in client protection.
Client interests: The change will provide clients of recognised bodies with a consistent minimum level of protection.
Human Rights: Low.
Freedom of information code
The paper is disclosable under the Freedom of Information Code.
Acting Director of Regulation Standards
Hilary Lloyd
Date 04 April 2005

S.4.2005.6 4
Introduction
1. On 16 December 2004 Council agreed to the rewording of the definition of “one claim” at clause 2.5 of the Minimum Terms and Conditions appended to the Solicitors’
Indemnity Insurance Rules (SIIR). Council also agreed to an increase in the minimum sum insured for any one claim from £1million to £2million. Subject to the Master of the
Rolls’ concurrence, these changes will come into effect from 1 October 2005. The
Indemnity Insurance Committee has reviewed the top up insurance requirements for incorporated practices which are set out in Appendix 5 to the SIIR (see Annex 1 ).
The Current Requirement
2. Appendix 5 to the SIIR 2004 requires a recognised body to carry compulsory top up insurance. The requirement is for additional cover of £500,000 on an each and every claim basis , or £2million per annum on an aggregated basis, to sit on top of the minimum compulsory cover of (currently) £1million for each and every claim. The topup element does not have to be written in accordance with the Minimum Terms and
Conditions and can be provided by any insurer authorised to conduct that class of insurance business in the UK.
3. The difference between the two bases of cover can be illustrated by way of an example. Let us assume that a recognised body receives three separate unrelated claims of £2m and settlement in full is made in each case.
 Each and every basis: If top-up cover had been arranged on the basis of
£0.5million each and every claim, each £2m claim would be covered by the £1m compulsory layer and £0.5m top up, with a £0.5m “shortfall” in each case.
 Aggregate cap: If top-up cover had been arranged on the basis of an aggregate cap o f £2million, the first £2m claim paid would use the £1m compulsory cover and the first £1m of top up, as it would if a second £2m claim was paid. If a third claim in excess of £1m was paid, there would be no top up cover, just the compulsory layer.
4. Most additional cover is purchased on an each and every basis.
The Regulatory Position
5. Top up insurance, like qualifying insurance, must be put in place before the recognised body applies to the Law Society for initial recognition and before it commences practice. Evidence of top up insurance (and qualifying insurance) is required in the form of insurer details, policy number and the start and expiry dates of the policy. As recognition lasts for only three years, this information must be provided again on application for renewal of recognition.
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S.4.2005.6 4
6. In addition to the SIIR requirement, a recognised body must comply with the Solicitors
Incorporated Practice Rules 2004 (SIPR). A recognised body is, for the purposes of practice, in the same position as a solicitor or a partnership of solicitors, and subject to similar legal and professional requirements. Reciprocal responsibilities are laid upon a recognised body and its directors and members to oversee each others’ compliance with the provisions of the SIPR. A solicitor who is a director, member, shareowner or employee of a recognised body must not turn a “blind eye” or otherwise connive at a breach of any of the SIPR. If false details are put on the application form, the matter will be referred to the Solicitors Practice Unit (part of the Compliance Directorate) for disciplinary action to be taken against the recognised body and/or against the individual principal. Rule 5 of the SIPR allows the Society to revoke recognition if this was granted as a result of mistake or fraud (for example false insurance details). The
Solic itors’ Disciplinary Tribunal has power to revoke recognition for misconduct.
Recognised Bodies and the Assigned Risks Pool
7. Recognised bodies in the ARP face a particular problem. A recognised body can apply to the ARP if it has failed to place its primary cover with a qualifying insurer, but it is most unlikely that any insurer will provide top-up to the recognised body whilst it is in the ARP. Consequently, the recognised body will have to cease. The SIIR are silent on issue of run-off cover for top up insurance, so as soon as a recognised body goes into administration, top-up is likely to cease.
The Increase in the Minimum Level of Compulsory Cover
8. The reasons for the top up requirement stemmed from the fact that recognised bodies have a legal personality of their own and most have limited liability. They provide a mechanism for solicitors to protect their personal assets from creditors of the firm and claimants. The Master of the Rolls at the relevant time insisted on additional indemnity cover as a quid pro quo for allowing solicitors to practice through limited liability incorporated practices. He was concerned about a possible reduction of public protection because a client of a recognised body could be in a worse position than a client of a sole principal or a partnership, because the client would not be able to recover uninsured losses from the personal assets of each of the principals.
9. A weakness of the current arrangements is that top-up insurance does not have to be in the form of a policy of Qualifying Insurance subject to the Minimum Terms and
Conditions. As such it is outside the
Society’s regulation and there is no control over the policy terms, conditions and exclusions which might allow the policy to be avoided for all sorts of reasons rendering it of little practical value. Currently there is no guarantee that run-off top-up insurance will be in place should the practice cease with no successor practice.
10. The advent of the LLP has produced many more recognised bodies than was the case when only companies were able to become recognised bodies. There are currently
223 LLP recognised bodies but this figure is likely to grow as many partnerships are exploring the possibility of converting to an LLP. Many of the current LLPs are small firms, sometimes consisting of two members being an individual practitioner and a company of which the individual practitioner is the sole shareholder.
11. The Indemnity Insurance Committee recommend that the differential in terms of the compulsory level of professional indemnity insurance as between an unincorporated practice and an incorporated practice should remain at 50%. This means that the
Committee are recommending that, with effect from 1 October 2005, the minimum level
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S.4.2005.6 4 of cover for an incorporated practice should be £3m, i.e. £2m plus £1m (currently £1m plus £0.5m). The Committee also recommend that the top-up element should be provided in the form of a policy of qualifying insurance. This overcomes the problems of run-off cover and incorporated practices in the ARP.
12. The qualifying insurer members of the Liaison Committee were concerned at the increase in their exposure for each incorporated practice from £1m to £3m each and every claim. It has been agreed with the qualifying insurers that the qualifying insurer’s agreement and the Minimum terms and Conditions should be amended to make it clear that the cover for an individual firm can be shared by a number of qualifying insurers either on a co-insurance basis (with each taking a percentage of any claim) or on a layered basis (with each insurer being responsible for a specific layer of cover (e.g. primary £1m or the next layer of £1m excess of £1m).
13. The qualifying insurers are concerned about the insolvency risk they bear when dealing with incorporated practices including LLPs. It has been clarified that the rules do not in fact distinguish between partners and the members of an LLP. Accordingly, any member of an LLP not ensuring that the premiums are paid could be subject to disciplinary proceedings in respect of the unpaid premiums. If Qualifying Insurers were in doubt as to the credit worthiness of a Recognised Body then they could request personal guarantees from the members.
14. The proposed change is likely to have little or no effect to larger incorporated firms that already purchase indemnity insurance in excess of £3m. The effect will be felt most by smaller incorporated practices which carry the minimum compulsory level of cover.
The Committee recognise this but feel that the public protection arguments for the increase are persuasive.
15. It is proposed to consult the Master of the Rolls in advance of the Council meeting in
May to give him the opportunity to raise any points before he is asked to give his formal concurrence to the necessary rule changes.
Recommendation
That the Standards Board note that when inviting the Council to make the Solicitors’
Indemnity Insurance Rules 2005 at its May meeting, the Indemnity Insurance
Committee will propose to the Council that top-up requirements set out in Appendix 5 to the Rules be replaced by a requirement for recognised bodies that fall within the current
Appendix 5 to have a policy of qualifying insurance with a sum insured for any one claim (exclusive of defence costs) of at least £3 million.
Annex 1 Appendix 5 of the Solicitors’ Indemnity Insurance Rules 2004 – Top up insurance for recognised bodies.
Author: Sharon Nightingale / Andrew Darby
Date: 04 April 2005
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(1) A recognised body must have top-up insurance from an authorised insurer to cover claims of the types that would be covered under the minimum terms and conditions and made or intimated during the period of insurance, or arising out of circumstances first notified to the insurer during the period of insurance as circumstances which might give rise to a claim, in respect of civil liability incurred in the practice of the recognised body .
(2) The top-up insurance must cover the persons listed in clauses 1.3(a), (c), (d) and (e) of the minimum terms and conditions .
(3) The top up insurance must provide a minimum cover of £500,000 on an each and every claim basis or £2,000,000 per annum on an aggregate basis over and above the minimum insurance held by the recognised body either as qualifying insurance under these rules , or by virtue of any exemption under these rules .
(4) This Appendix 5 will not apply to a recognised body if:
(a) it is an unlimited company, or an oversea company whose members’ liability for the company’s debts is not limited by its constitution or by the law of its country of incorporation; or
(b) it is a nominee company only, holding assets for clients of another practice ; and
(i) it can act only as agent for the other practice ; and
(ii) all the individuals who are principals of the recognised body are also principals of the other practice ; and
(iii) any fee or other income arising out of the recognised body accrues to the benefit of the other practice .
(5) A recognised body to which this Appendix 5 applies must provide evidence of compliance with, or exemption from, paragraphs (1)-(3) if required to do so by the
Society.
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