Frank Maher examines the growing trend of personal guarantees in the professional indemnity insurance market, and what this means for firms
This article examines the potential personal liability of solicitors in practices which are incorporated with limited liability, whether limited liability partnerships or limited companies, for excesses on claims and run-off premiums under their professional indemnity insurance policies. Solicitors in England and Wales are required to take out insurance complying with the Solicitors Regulation Authority (SRA) Minimum Terms and Conditions (MTC). Note that these are minimum terms, not prescribed terms, though policies often follow the wording closely.
Excesses
Professional indemnity insurance policies will usually be subject to an excess. Excesses on solicitors’ policies have typically been capped, often but not invariably, at a multiple of three. Sometimes, firms with a particular problem, such as a series of claims relating to a particular fee-earner or some other known issue, have found on renewal that insurers insist on an uncapped excess for any further claims arising in those circumstances. If there is a claim, the insured must pay the excess, but if they fail to do so, the MTC require the insurers to pay it and seek reimbursement from the insured.
The MTC says:
“3.4 The insurance must provide that, if an insured fails to pay to a claimant any amount which is within the excess within 30 days of it becoming due for payment, the claimant may give notice of the insured’s default to the insurer, whereupon the insurer is liable to remedy the default on the insured’s behalf. The insurance may provide that any amount paid by the insurer to remedy such a default erodes the sum insured.
“Reimbursement of the excess 7.2 The insurance may provide for those persons who are at any time during the period of insurance principals of the insured firm, together with, in relation to a sole practitioner, any person held out as a partner of that practitioner, to reimburse the insurer for any excess paid by the insurer on an insured’s behalf. The sum insured must be reinstated to the extent of reimbursement of any amount which eroded it as contemplated by clause 3.4.”
Run-off premiums
If a firm closes without a ‘successor practice’, a term defined with some complexity in the SRA glossary, it will become liable to take out run-off insurance for six years expiring at the end of the policy year. This has to be bought from the existing insurer and the premium will typically be approximately three times the initial premium or more, sometimes substantially more. Insurers have to provide cover for the full period, even if the premium is unpaid.
Problems of non-payment
Insurers have over the years experienced widespread failure on the part of insureds to pay excesses and run-off premiums. Failure to pay run-off premiums is perhaps not surprising when firms have often closed due to insolvency. Prior to the introduction of the SRA Indemnity Insurance Rules 2019, it was a disciplinary offence to fail to pay an excess or run-off premium, but prosecutions were rare.
Insurers have therefore sought to recover payment from individual LLP members and company directors under policy provisions which followed clause 7.2 of the MTC set out above. However, there were two problems. First, clause 7.3 only addressed the issue of unpaid excesses and not the run-off premium. Second, and more importantly, the fact that the insured was incorporated meant that insurers had no obvious cause of action in contract against members or directors, though insurers fought one case strenuously against members of a large collapsed LLP for whom the writer acted. The issues raised were many and complex and there is some limited authority on the point which is unhelpful to insureds but not determinative.
Addressing the problem
As a result of these issues, some insurers have sought to secure a direct cause of action by requiring individual members or directors to sign a collateral contract making them jointly and severally liable.
The writer has, however, seen one case where insurers sought to obtain such a collateral contract after they were contractually bound to provide insurance for the year; in that case the insured resisted the request successfully.
In other cases where firms with a particularly severe claims issue have agreed to a substantial excess, the firms have agreed to make a deposit on account of the potential liability. Clearly, this is undesirable from the firm’s point of view as working capital is tied up for what may be a long period of time.
Conclusion
Insurers’ ability to obtain these protections depends largely on the balance of negotiating power between the parties and the insurance broker. When insurance is hard to obtain, such requests may be harder to resist.
