A Clatter of the Law

I’ve been blogging about the legal profession’s own private economic crisis since January 2010 but haven’t had time lately to write any updates. Luckily, Flor McCarthy has an excellent blog post on the recent developments. He accurately sums up the frustration felt by many solicitors on the issue:

So for as long as the music kept playing [the SMDF, "run by solicitors for solicitors"] was a great system for all participants. Those paying the premiums felt that they would be looked after by their own in the event of a claim and the lucrative negligence defence work that flowed from this activity was passed out to well connected firms.

But then the music stopped and it turns out the SMDF is the fat kid without a chair. It’s broke. And now it’s looking for the rest of the professional to bail it out.

Effectively, to draw an analogy with the problems affecting the Irish economy over the past few years, the crisis with the SMDF has moved from bank guarantee territory to recapitalisation territory. Solicitors are now faced with a levy of €200 per solicitor per year for at least 10 years in order to avoid a doomsday scenario whereby a large number of negligence claims would not be covered by insurance. This could result in a significant number of bankruptcies on the part of solicitors and unpaid damages on the part of clients.

The justification for the levy is that the reputation of the profession would be damaged if this were allowed to happen. There is also the internal justification of “standing by” fellow colleagues who might otherwise go to the wall. For many solicitors, it has come as quite a surprise to learn that the SMDF wasn’t really providing insurance at all, just a form of quasi-insurance by which cover might be available. Hard to swallow for solicitors who have paid tens of thousands annually for that cover.

The latest news is that an EGM was held last night. It was initially called for the purpose of voting on the levy proposal but a spot of solicitor activism meant that a postal vote of the entire profession must now be held. The proposal will probably be carried, despite grumbles.

Once the SMDF is out of the way, the profession faces a proposal from the Law Society to impose a weird “global policy” where all solicitors will be offered cover at set rates and will not be able to arrange their own cover (or get competing quotes). This system is, in general terms, good for firms who have difficulty getting insurance and bad for firms that don’t. Apparently there will be consultation but the timeframe is narrow. The Law Society’s track record on providing information on these issues has not been great (even where the Government is concerned).

Between the changes expected from the Government as part of the IMF/ECB deal and whatever insurance changes are made by the Law Society, the profession will remain in flux for the forseeable future.

[Updated] This time last year was not a happy one for many solicitors, with huge uncertainty in the insurance market delaying renewals. Insurance must be in place on 1 December 2010 and it seems that this year the market has been calmer, though many solicitors apparently have not been able to renew yet. Publicly, at least, there doesn’t appear to be any of the frenzied activity by the Law Society that accompanied last year’s renewal season.

Unlucky solicitor reacts to his 2011 insurance premium

Some major insurers, like Quinn and RSA, have left the market this year. The former was forced to leave the UK solicitors’ market earlier in the year as a result of its administration by the Irish Financial Regulator. However, in the past few days, two new entrants have been approved by the Law Society, suggesting that competition still exists and UK insurers see an opportunity to pick up new business. The full list of approved providers, including those not renewing cover this year, is available here.

Until last year, the SMDF was the largest insurer of solicitors and is a “for solicitors, by solicitors” organisation. However, it emerged in 2009 that the organisation suffered huge financial losses and subsequently lost around half of its customers. The SMDF benefits from a loan guaranteed by the Law Society, but that guarantee runs out next year so it remains to be seen what will happen if more customers are lost, as seems likely.

The rumour mill suggests that the huge surge in premiums has not ended for all solicitors. The premium for many firms, even small ones, can be the equivalent of an annual wage, or more.

• 29 November 2010: Existing insurance cover for all solicitors expires tomorrow (30 November 2010). As solicitors are required to have insurance in place as a condition of practice, this should mean that anyone without cover on 1 December 2010 has to close their doors. The Assigned Risks Pool (ARP) provides insurance to any solicitor unable to obtain cover on the open market, but the cover obtained is more limited than the minimum terms and conditions of insurance for solicitors and, obviously, significantly more expensive. Last year, many were faced with the theoretical prospect of closing the doors as insurance companies had not processed all applications and supplied quotes in advance of the renewal deadline and, to further add to the sense of crisis, the ARP was suspended. However, such solicitors were assured that insurance would be backdated to 1 December 2009 (ignoring the regulatory requirement to have it in place). This year, the ARP has been renewed and it would seem from this email that anyone without renewed cover tomorrow should apply to enter the ARP, even if as a temporary measure.

Solicitors in the UK appear to be going through a similar insurance crisis to that which hit their Irish colleagues last year. The Lawyer reports that this year’s renewal process, now in its final stages, will be “tougher than ever.” Ironically, it seems part of the difficulty has stemmed from the Irish Financial Regulator’s administration of Quinn Insurance, which had been aggressive in its attempts to into capture some of the UK market.

Meanwhile, the SMDF recently reported a deficit of €15.9 million for 2009. Last year, the Law Society told solicitors that the SMDF insured over 60% of the market. Accordingly, emergency measures were taken to support the SMDF and to avoid the bulk of the profession facing a lack of cover.

Today, the Law Society informed solicitors that XL, a new entrant to the insurance market in 2009, captured 28% of the market for 2010 (1% more than the SMDF). Therefore, it would seem that the SMDF has lost over half of its customer base in one year, most of them being lost to XL.

It had been hoped that the changes made to the PI insurance system last year would lead to greater stability this year, but it remains to be seen what effect the dramatic loss in customers will have on the SMDF.

[Update: link to report now included] The ongoing travails of the Irish legal profession is a subject of minority interest and, perhaps, one which I have already devoted too much time to.

Nevertheless, the 2009 annual report of the Solicitors’ Mutual Defence Fund Limited arrived in this morning’s post and, to throw some further light on previous posts, here are some highlights:

• In relation to the SMDF’s case against Bloxham Stockbrokers, pleadings have closed and discovery is being finalised. It is expected that the case will be listed for hearing in late 2010 or early 2011. A similar case taken against Bloxham by a former director of the SMDF has been settled.
• The accounts show a deficit of €15.9 million. This amount primarily consists of a realised loss on disposal of investments of €14.3 million. While the SMDF’s losses on the Saturn bond obtained from Bloxham were known, less known was the fact that, in addition to realising a loss on that bond, “the company disposed of Irish equities, which resulted in a net realised loss of €6,195,182.” The accounts record a further unrealised loss on financial assets of €228,720.
• Over 70% of claims against solicitors covered by the SMDF arose from property transactions.

• The company’s auditors were unable to form an opinion as to whether the company’s financial statements give a true and fair view of the company’s affairs or whether they had been properly prepared in accordance with the Companies Acts. This is due to uncertainty caused by the availability of funding, notwithstanding the assistance provided by the Law Society.

I wrote in January about the Law Society’s secret arrangement to guarantee a loan in favour of a private insurance company, the SMDF, to make up for huge losses suffered by that company as a result of a disastrous investment. The Society has now released its 2009 financial statements and only one, brief reference is made to the guarantee, including the news that it has not yet been finalised.

That January post also mentioned massive losses suffered by the Society in a disastrous invesment of its own and the summary of the 2009 statements distributed to solicitors inlcludes the following disclosure:

[The Society's after tax surplus for 2009] includes an exceptional loss of €480k, representing a further write down of the value of the Benburb Street site in 2009. The write down required by our auditors in 2008 was €14.7m.

In 2006 the Society appears to have been gripped by the property mania affecting the nation and this property was bought for unspecified and unexplored development purposes, at a cost of €22.4m. In 2009 it was revalued at around €7.7m and the 2010 write down brings it to €7.22m.

I believe that the great majority of solicitors today, and in the future, will view the purchase of this Benburb Street site, like the purchase of Blackhall Place, as a wise and practical decision made in the long-term interests of the profession.

In 2010, the Society says of the €15.2 million lost:

These write downs must be put in the context of the Society never planning to sell the site. Importantly, the site is free of debt.

I don’t know which one of those sentences is worse.

I wrote previously about the professional indemnity insurance crisis that hit the solicitors’ profession in late 2009. The solution adopted was a guarantee by the Law Society in favour of a specialist insurance broker, the SMDF.

Before the deadline for renewal of insurance, many speculated that the crisis was a result of the economic turmoil generally or the actions of a very small number of solicitors. The guarantee was kept secret until well after that deadline passed. The Society then emailed its members outlining the real reason for the crisis: the SMDF could not offer insurance without plugging a hole that had emerged in its finances when one of its financial investments lost between 97-100% of its value. The Society’s guarantee would allow the SMDF to borrow the sum lost.

Many members of the Society (ie. solicitors) were incensed to learn the details of this rather shocking development and of the similarly disastrous investment by the Society in a property neighbouring its Blackhall Place headquarters, purchased for €22.4 million in 2006 and valued at €7 million in 2009. An EGM was called to discuss both incidents and various motions were to be debated seeking to limit the ability of the Society to enter into such transactions.

The motions were strongly defeated at the EGM. More than 100 signatories called for the convening of the EGM, yet each motion received the support of only 21 – 39 votes. The motions were soundly defeated, though that does not quite equate to the guarantee being “endorsed”, as reported by the Irish Times.

The votes have put an end to the story for now, but further detail is sure to emerge if the proceedings arising from the Saturn bond go to trial.

Endnote: The Society communicated details of the upcoming EGM by post. Solicitors receive a large volume of correspondence from the Society during the course of a year, most of it consisting of magazines, promotional brochures and the like. Much of it is binned or shelved, unread. Recently, however, the Society has made greater use of email to communicate urgent or important messages; indeed, the outcome of the EGM was communicated the next day by email. It appears quite odd that the letter notifying solicitors of the upcoming EGM was not also emailed, though it should be noted that the EGM was comparatively heavily attended.

On 22nd September, 2009, the directors of the SMDF had the first of a series of meetings with the Society. The directors informed the Society that, as a result of [the Saturn bond] losses, the SMDF would not be in a position to write indemnity business for the new insurance year beginning 1st December, 2009 …

The delays and damage, with human and commercial consequences, resulting from this dislocation of the entire Irish legal system could be incalculable.

“[O]ne Council member seemed to sum up the view of most when he said that ‘very few purchasers ever regret acquiring the site next door’”.