Section 37 Solicitors Act 1974 gave the Law Society broad powers to set the type of professional indemnity cover required for solicitors, and whether to utilise a mutual, a master policy or an open market approach.
But there are some gaps which can be filled, especially in relation to costs. The obligation to provide costs cover in relation to disciplinary proceedings was removed from the MTC some years ago, although there is a prescribed cover for the costs of an investigation or enquiry where it arises from any claim–related situation. The purpose of this is to ensure that any client-facing issue does not go by default.
But the SRA has pursued a more interventionist role in relation to both large and small firms on professional conduct issues, and there are an increasing number of decisions on the Solicitors Disciplinary Tribunal website. The fines have increased, although not to the scale imposed by the Financial Conduct Authority. Conduct and regulation are minefields where stepping correctly all the time is increasingly difficult. It may not be possible to avoid all the pitfalls but you will be far better placed if your insurance includes defence costs cover.
There are two main approaches: an extension to your professional indemnity cover or a separate management liability policy. The first is perhaps easier and includes an endorsement to the policy providing cover to the firm and prescribed office holders (principally, the Compliance Officer for Legal Practice, the Compliance Officer for Finance and Administration and the Money-Laundering Reporting Officer) in respect of reasonable costs and expenses incurred in responding to any investigations and enquiries arising out of their performance of these non-client facing roles. The policy can also extend to cover internal partner time at prescribed hourly rates and can embrace early stage preparatory advice. Some wordings may provide for insurers to pay any regulatory fines. In general, insurance against criminal fines is prohibited as being contrary to public policy. The position in relation to regulatory fines is not clear but it would in our view be unwise to assume that insurers can or will meet such a liability.
A management liability policy is, in effect, a directors and officers insurance for professional services partnerships. The cover is available for partners of the firm who incur liabilities (primarily costs for this purpose) in relation to disciplinary proceedings or regulatory investigations. There is no cover for professional services activities but there can sometimes be an overlap with the professional indemnity policy. There are advantages to having these types of costs addressed separately from those related to professional indemnity claims if an individual requires advice for their own benefit rather than that of the firm. On the other hand, having two different insurers with different policy provisions and information requirements can increase the time and co-ordination needed.
The MTC are broad but do not cover all the risks that the business may face. Not all firms want to be as high profile as Leigh Day but they were very open, after the dismissal of the claims against them at the recent Solicitors Disciplinary Tribunal hearing, about the important role played by their additional insurance. This cover enabled them to incur significant costs with independent legal advisers to put forward a robust and ultimately successful defence.