ARTICLE
Extended Indemnity Period W
here partners believe their firms can trade through the recession and pay the cost of the PII cover they need -and remember it must be ‘adequate and appropriate’ to the claims exposure of the firm over its history - it is important to keep a close control of all aspects of their finances and at all times to be realistic about assessing the point at which it is prudent to close so that they can ensure an orderly wind-down. Bear in mind that the test for wrongful trading by directors (suspended for just 6 months from March 2020) is whether you knew or ought to have concluded (based on both the general knowledge, skill and experience that may reasonably be expected of directors and the actual knowledge skill and experience of those directors) that there was no reasonable prospect that the company would avoid going into insolvent winding up or administration. If managers cannot save their firms it is important that they do not risk disciplinary action that could prevent them continuing to earn a living as solicitors. For firms that are not able to obtain PII at a price they can afford or at all then if at 1 October, they do not have cover, they have 5 days to notify the SRA. www.sra.org.uk/solicitors/ resources/indemnity. Once firms notify the SRA, they will go into the extended indmenity period under their existing policy. This is made up of a 30-day extended policy period (EPP) and then a 60-day cessation period (CP) and during these periods indemnity cover is provided by the last-named insurer for the firm. The firm can use this time to secure insurance, however, after 30 days it cannot take on any new business. As a result of the pandemic, the SRA has announced that it may be possible to continue to take on new business beyond the 30 day period and to extend the CP beyond 60 days, with the agreement of insurers and if firms apply for and are granted a waiver by the SRA (www.sra.org.uk/solicitors/waivers/ apply-waiver). Once a firm enters into the CP it must be taking steps to close down. The SRA carries out a reconciliation process once the October renewal date for Practice Certificates has passed and will discover if anyone has failed to notify them. If firms cannot obtain PII or an extension of their current cover, the firm will either have to close, or merge with another firm and in either case it is likely that the payment of the run off premium will be unavoidable. Although the run-off premium under current policies is commonly between two and three and a half times the last premium (for basic level of cover), it may be possible where partners genuinely have difficulty in meeting the payment to negotiate instalment terms with insurers. Some partners in firms (and solicitors finding themselves redundant) are looking at the new structures available to see if there are viable alternatives enabling them to continue to practise and offer services having where relevant put their existing firm into run-off. One option is to become employed as a solicitor in a limited company not regulated by the SRA. This may be attractive where they are not carrying out reserved work, 24 | The Bill of Middlesex
as they are not required to hold PII at the minimum level of the minimum terms and conditions. Alternative cover with policy premiums may be lower. Other partners are considering putting their firms into run-off, thus taking advantage of lower premiums paid in 2019, and then continuing their career as freelancers. In that case there remains an obligation where freelance solicitors or employed solicitors undertake reserved activity work to hold an adequate and appropriate level of cover. From a regulatory perspective options that involve putting the firm into run-off trigger a number of important considerations. For example, client consent to transfer work to a new entity, closing off client account and dealing with residual balances, the return of deeds and storage of the records of former clients. The SRA must be given notice and have prepared guidance www.sra.org.uk/closing-down-your-practice. You can also obtain help by contacting Professional Ethics on 0370 606 2577 or email professional.ethics@sra.org.uk. www.sra.org.uk/solicitors/guidance/professional-indemnityinsurance-extended-policy-cessation-period/ On a similar theme members will be aware that the protection of SIF (Solicitors Indemnity Fund that was closed in 2000) for claims after the initial six year run-off period has been extended by SRA and now extends until September 2021. Beyond that firms who have ceased post 2000 and close from now on have no protection for claims made in years subsequent to the 6 year run off period. Neither the market nor the regulators have come up with a ready solution. Theoretically, it may be possible to negotiate with your last insurer for yearly extensions of run-off cover, but that is a less than satisfactory solution as senior solicitors move into retirement. Behind the scenes Although it is never a topic of much active interest to practitioners until the point of actual change the regulatory framework has been shifting considerably in the last year. The government has strongly signalled that it is not does not regard reform of the Legal Services Act as a priority, and accordingly the Legal Services Board are setting about making changes in the regulated sector within its current powers. It will be looking with CMA towards the outcome of a review by December this year of the measures introduced by the CMA following its Market Study in 2016. On that occasion it said regulation was not working well for consumers and set out its requirement for cost information to be more widely available and that has led to the SRA Transparency Rules. It was recently observed by the LSB that there are regional price variations and how much cheaper work can be carried out in some parts of the country than others, thus encouraging consumers to shop online and obtain services remotely. All solicitors providing their services solely online and without maintaining offices are understandably able to offer lower prices especially in areas where other costs of living costs are lower. Recommendations are likely to be made and taken up that will require further information to be provided as to the nature and quality of the service that firms are providing. The regulators were very keen on price comparison websites, but so far they have not had gained any real traction.
