What is solicitors run-off insurance?
Solicitors run-off insurance is there to protect clients who have a claim against a law firm that has closed down.
It provides continued cover for six years after the firm has closed.
The cover is built into every solicitors professional indemnity insurance (PII) policy. Insurers have to sign up to the SRA Minimum Terms policy wording, which includes the run-off provisions.
See the SRA Indemnity Insurance Rules Annex 1.
When and how to trigger run-off cover
If you are considering closing your law firm you should work closely with your insurance broker. They are the experts and will be able to liaise directly with the insurers on your behalf.
Assuming there is no successor practice (i.e. no other firm has agreed to take over your insurance liability – see below), the run-off policy will start from the date the firm formally closes.
How much does the run-off policy cost?
Even though the run-off insurance is included in your current PII policy, it is not free.
The average cost is 3-4 times the annual PII premium. Check your policy documentation. It can sometimes be financed, although not with all insurers.
Insurers expect the excess to be paid if a claim arises while in run-off. Some Insurers insist on personal guarantees before confirming renewal.
What happens after the six year run-off period?
Some claims take longer than six years to come to light. Property and private client claims may only arise long after the run-off policy has ended.
As things stand, the fall back position is the Solicitors Indemnity Fund (SIF), which is a scheme run by the SRA. It acts as an insurer of last resort and protects both clients and retired solicitors. There is no additional premium for SIF cover.
However, the SIF’s days are numbered. It is likely that it will close to new claims from September 2022.
There are currently no alternative arrangements in place. The regulators hope that the insurance industry will step in with optional policies available at additional premiums.
If no alternatives to SIF are found, clients with valid claims will have to find out whether there is a viable defendant to sue. This is likely to depend on whether the closed firm was an incorporated practice (if so, bad luck) or if the solicitor/their estate has any assets.
Is there any way for solicitors to avoid run-off costs?
This is where the successor practice comes into play. And it’s why most retiring solicitors would much rather sell or give away their firm, rather than trigger the run-off provisions.
In short, a firm which has a successor practice does not need to purchase run-off insurance. This relieves the retired solicitor of a significant cost and liability.
The obvious option is to sell the firm. You might consider converting it to an alternative business structure (ABS) first – this will give you the option for non-lawyers to buy in.
You might also consider bringing in new partners (recruiting or promoting from within).
There are specialist law firm brokers who will have a pool of potential buyers they can approach. They will also be able to advise you on the best deal structure.
The successor practice rules are complex and you should take legal advice if you are considering this route.
We can help
If you are considering closing or selling your practice, we have a network of contacts to help you understand your position and help with the transition. Feel free to contact us for a free chat.