The subject of regulation is never one to excite most solicitors, never mind the general public, but the evolution of Solicitors' Professional Indemnity Regulations (the "Regulations") since the start of the economic downturn is a timely reminder of the path we have travelled in a relatively short period of time, both in terms of insurance generally and the solicitors' profession in particular.
Late 1990's and 2000's
Like most professions, the late 1990's and 2000's brought unprecedented growth to the legal industry. The period was characterised by large scale property deals and even sole practitioners in rural Ireland were involved in multi-million euro transactions, facilitated by undertakings given to lending institutions. The Minimum Terms and Conditions (MTC), which form the basis for a solicitor's policy with his/her insurers are fundamental to the insurance, and thus operation, of the solicitors' profession. The MTC in the 2007 Regulations, relatively accessible on four A4 size pages, represented the relative lack of regulation in the profession at the time. The limit of indemnity of cover was €2.5m each and every claim and the run-off insurance cover was to be provided by the firm's last insurer, for a period of six years. The Solicitors Mutual Defence Fund (SMDF) was lead insurer with nearly two-thirds of the market by premium share and there was a basic underwriting approach, generally on a "per solicitor" basis.
In 2007 and 2008, the economic slowdown resulted in the eventual collapse of the property market. A steady flow of breach of undertaking claims being notified to insurers became a tsunami in 2009. The 2009 Regulations were the first broadening of exclusions in the MTC and the run-off insurance cover was to be provided by the firm's last insurer, for a reduced period of two years. The Law Society of Ireland amended policy wording requirements for the first time in respect of undertakings to financial institutions relating to commercial property.
These changes were insufficient to deal with the crisis – essentially the regulatory environment that had served the profession and the public well in previous times, was no longer fit for purpose and the very essence of the legal profession was under threat. Insurers were unwilling to provide cover and there was a risk that the public would be left unprotected if there was no insurance to meet their claims.
The 2011 Regulations
The result was a bail out of the SMDF by the Law Society, which would be paid for by a levy on solicitors' practising certificate for a number of years into the future and changes to MTC via the 2011 Regulations. The 2011 Regulations represented a seismic shift in the rules governing solicitors, their insurers and other stakeholders in the regulation of the profession.
Two examples of the changes in the MTC in the 2011 Regulations were the reduction of the limit of indemnity of cover to €1.5m each and every claim and the specific exclusion of undertakings to financial institutions in respect of commercial property transactions. For insurers, these changes, designed to reduce the exposure to breach of undertaking claims, represented a case of closing the stable door after the horse has bolted.
The 2011 Regulations also created the Special Purpose Fund (SPF) which incorporated the old Assigned Risk Pool (ARP), the previous insurer of last resort and the new Run-off Fund (ROF). The SPF would be funded by the participating insurers through solicitors' premiums and operated by an independent SPF Manager. The ROF was designed to assist firms intending to cease practice and provide incentives for solicitors ceasing practice to do so in an orderly manner. The goal was greater protection to the public. Insurers in the market were no longer required to provide run-off cover.
Solicitors' professional indemnity premiums soared during this period and the insurers in the market and their relative shares were constantly evolving. There was a natural wastage of firms, particularly of sole practitioners. Eventually the market and the level of claims stabilised after an extremely difficult period for solicitors and their insurers.
The Regulations in 2013, 2014 and 2016 represented less severe changes to the profession, with any changes mainly relating to the SPF and its operation. The 2016 Regulations introduces "Compliant ROF Firms" and "Non-Compliant ROF Firms" for the first time from 1 December 2017. Essentially the designation between the two will be the ROF firm's compliance, or otherwise, with the relevant Regulations and the co-operation of the firm with the SPF Manager. The main result of the designation would be the exclusion of cover to "Non-Compliant ROF Firms" in respect of claims by financial institutions – a move which will be welcomed by insurers and represents the latest evolution of the MTC with regard to breach of undertaking claims.
An interesting proposal by the Law Society of Ireland's Professional Indemnity Insurance (PII) Committee in respect of the draft 2016 Regulations was in relation to the definition of a "Claim". Currently the MTC prescribe that policies should respond, where appropriate, to a loss to a client due to an event and the client making or intimating a claim. The proposed change to the definition of a "Claim" would have brought this into line with the definition under the MTC in England & Wales and would have covered a situation whereby a firm steps in to rectify a problem by repaying misappropriated funds from a client account, typically by Cybercrime. In this situation, a firm replaces the funds before the client is aware the monies are missing. There would be no claim by a third party which would trigger the third party civil liability, a key characteristic of professional indemnity policies. Such action avoids any impact to the clients, reputational damage to the firm and any potential consequential loss to the client.
The proposed change to the definition of a "Claim" was not ultimately contained in the 2016 Regulations but will be something to look out for in future Regulations, given the topical nature of Cybercrime and potentially devastating consequences to solicitors and their clients. However, what it does demonstrate is the need for a regulatory environment to be fit for purpose and to respond to the present needs of and current threats to the profession. The evolution of the Regulations from the late 2000's until now is evidence of the need to keep pace with such threats, from breach of undertakings to Cybercrime. There is no doubt that further threats will emerge in the coming years that will require proactive changes to the Regulations to protect the best interest of solicitors, their profession, the public and their insurers.