Many solicitors seem to be unaware that their professional indemnity cover includes “any amount paid or payable in accordance with the recommendation of the Legal Services Ombudsman or any other regulatory authority to the same extent as it indemnifies the insured against civil liability”. This is set out in clause 1.8 of the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors Registered in England and Wales 2007 (the MTCs), issued by the Solicitors Regulation Authority (SRA).

As a result, any compensatory award made by the Legal Complaints Service (the LCS) following a complaint about the level of service provided by a solicitor is covered under the policy. What are the practical implications of this for an insured?

Notifying a service-level complaint

Should a service-level complaint be reported as a matter of course, on the basis that it is a potential circumstance under the MTCs (i.e. “an incident, occurrence, fact, matter, act or omission which may give rise to a [civil liability] claim”)? There can be a considerable overlap between complaints about the standard of work provided and allegations of negligence. Indeed, often what a disgruntled client describes as a service-level complaint turns out to be a claim, for the purposes of the policy.

Under the MTCs, a claim “means a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages” (clause 8.2). There is no requirement that the demand must be meritorious – an assumption which is often made by an insured when choosing not to notify a complaint at the time that it is originally made. Failure to notify at this stage can lead to unwelcome correspondence with insurers/their representatives on coverage issues if the matter escalates, prompting what the insurer will consider to be a late notification. As a general rule, therefore, it is preferable to make a precautionary notification, rather than risk a subsequent policy dispute.

Informal settlement

A further consideration is whether an insured may set off against their aggregate excess a payment made to resolve a service-level complaint without the matter being subject to an LCS recommendation or formal adjudication. The MTCs suggest there must be some involvement by a regulatory body. However, it would seem odd to discourage the informal resolution of complaints and it is certainly not something of which the SRA would approve. It is unlikely, though, that insurers will agree in principle that such payments should always be covered. They will instead prefer to consider each case on its own facts, as they do now.

Other implications for insurers

So what are the other implications for insurers?

Where a matter has been referred to the LCS but has not been notified by the insured to their current insurer as a potential circumstance, the LCS may, if the insured fails to pay an award, approach the insurer directly, requesting payment on the basis of clause 1.8. This approach is growing in popularity and it raises significant concerns for insurers.

First, the LCS in its position statement dated 21 January 2008 treats the date of the original complaint as the date at which a claim is made. While a service-level complaint can amount to a claim for the purposes of the policy, it does not always do so. The LCS seeks to justify its standpoint on the basis that, because inadequate professional service affords a broad range of remedies for redress, there is “a significant prospect of an award being made in response to any complaint”. Accordingly, it does not think there is a specific need to articulate a claim for compensation.

Arguably, however, in the absence of a “claim” for the purposes of the policy – or the actual notification of a potential circumstance by the insured – the event giving rise to the obligation to provide an indemnity is the decision of the regulatory body making an award. That decision may well fall into a different policy period from the date of the complaint, by which time cover may be provided by a different insurer. In the ordinary course of events, one would expect the current insurer to provide an indemnity in respect of the award. However, the effect of the LCS’s approach is that a prior insurer with no notice of a potential liability will be left with the obligation to discharge the award. This hardly seems fair when adequate cover is in place elsewhere.

Extent of LCS recovery

A more worrying trend is the fact that the LCS will try to recover not only the compensatory element of any award, but also any sum referable to a reduction in an insured’s professional fees.

The indemnity in respect of awards made by the Legal Services Ombudsman (or other regulatory body) is expressed to be to “the same extent” as that applying to a civil liability (see clause 1.8). An award requiring the repayment of money received from the client amounts to a finding that an insured has taken fees to which they are not entitled. But it is a restitutionary remedy (i.e. a remedy designed to force the insured to disgorge a benefit which would otherwise amount to unjust enrichment) rather than a right to civil compensation or damages as defined by the MTCs. Moreover, a reduction of costs or a claim for them can be characterised as a trade loss or liability, which is specifically excluded from cover under the MTCs (see clause 6.6).

All in all, therefore, it is difficult to see how such awards can properly be recovered from the insurer, as they are outside the scope of cover required by the MTCs.

Conclusion

In conclusion, the practical implementation of clause 1.8 of the MTCs raises issues for the insured and insurers alike. From an insured’s perspective, the most prudent approach would be to report service-level complaints as a potential circumstance in the majority of cases.

The implications for insurers are far broader. The current economic downturn will almost inevitably lead to smaller practices encountering liquidity problems. Given that the level of awards for inadequate professional services will continue to increase, it is unlikely that the LCS’s present approach will be allowed to continue unchallenged for much longer.