The SRA requires all law firms it regulates to take out Professional Indemnity Insurance which complies with its Minimum Terms and Conditions (MTC). As the Insurance Act 2015 (the Act) is due to come into force on 12 August 2016, the SRA is proposing to update the MTC to bring them in line with the Act, and has started a consultation with its stakeholders including law firms, consumers and their representatives.
We note the changes to the wording of the MTC will not change its effect, and they simply update the language to ensure it is in line with the Act. However, the consultation also asks stakeholders for their views on the SRA’s assessment of the impact of the Act, including whether to contract out of the Act to allow a more favourable standard of disclosure on a law firm obtaining insurance.
The SRA’s proposed changes to the wording of the MTC
The current wording of the MTC ensures that insurers cannot avoid or repudiate cover for a non-disclosure (i.e. a failure to disclose facts that would influence a prudent insurer) or a misrepresentation (i.e. a false statement of fact inducing the other party to contract). Instead, the remedy provided for a non-disclosure or misrepresentation is for the insurer to seek reimbursement from the insured. The reason for the different remedy is to protect consumers and ensure that anyone with a successful claim for damages arising out of a law firm’s negligence is compensated.
The proposed changes to the wording of the MTC (in question 2 and the annex of the consultation) do not affect the above position. The sole proposed amendment is to update the reference to a “non-disclosure” to refer to a failure to satisfy the new duty to make a fair presentation. This has no appreciable effect, as the remedy for both under the MTC is the same i.e. the insurer can only seek reimbursement from the insured.
New requirements on the insured’s standard of disclosure introduced by the Act
The other two questions in the consultation deal with a more fundamental point. Although the Act has tipped the balance in favour of insureds in many respects, the SRA notes that the Act also increases the disclosure obligations of the law firms it regulates. These disclosure obligations now require the insured to present the information in a manner that is “clear and accessible” to a prudent insurer. The SRA considers that this is likely to require insureds to be more selective about information provided.
Question 1 considers contracting out of the Act in order to reduce the burden on those insureds, and question 3 asks for views about the impact of the proposed changes. The SRA’s view is that it is fair to ask law firms to meet the higher standard as they are already benefitting from the fact that avoidance and repudiation are not possible under the MTC. The SRA recognises that the law has changed, and does not propose to increase the level of consumer protection.
What is the timeline for the consultation?
The changes proposed are included in the SRA’s consultation which started on the 12 February 2016 and lasts for six weeks. The last day for stakeholders to submit a response is 24 March 2016. Although the SRA has asked for views, and these will be considered, it appears from the tone of the consultation that, in the absence of a convincing argument against their proposals, the SRA will proceed to implement them allowing the Act and the higher standards required of the insured law firms to apply.
Link to the consultation: http://www.sra.org.uk/documents/SRA/consultations/insurance-act-consultation.pdf