Law Society follows emergency guarantee fashion

In late 2009 the Law Society bailed out a specialist insurance broker which provides cover to about 60% of solicitors in Ireland. The guarantee resulted from a crisis not unlike that which led to the Government bank guarantee in 2008. It caused a significant hike in premiums and was a contributing factor in the closure of a number of firms throughout the country.
Irish solicitors cannot incorporate as a company and therefore cannot avail of limited liability. Accordingly, solicitors are personally liable when sued and are required by law to have insurance (referred to as professional indemnity, or PI insurance).
In the 1980s the cost of PI insurance shot up and the profession reacted by establishing the Solicitors Mutual Defence Fund Limited, a specialist insurance broker which is separate from, but effectively a tentacle of, the Law Society. The PI insurance market came full circle in 2009 with rumours of premiums doubling and worse.
A common refrain was that the profession was paying for the mistakes of Michael Lynn and Thomas Byrne, but that assumption is incorrect. Where a client is owed money by a solicitor they may make a claim against the Law Society’s compensation fund; if the money is lost due to the fraud of a solicitor, PI insurance generally won’t cover that loss (see d-f here). The true cause of the PI insurance crisis was bad financial investment decisions made by the SMDF.
Once it became clear, to the Law Society at least, that premiums were going to rocket, the initial approach was to tweak the mandatory requirements, for example by reducing the minimum amount of cover from €2.5 million per claim to €1.5 million. Solicitors’ insurance premiums would likely still increase and they would receive less cover than in previous years unless they opted to top-up their cover.
The annual deadline for renewing insurance cover is 1 December. In Autumn 2009 most solicitors were not hearing from their insurers about renewal. Concern began to grow, as did calls to the Law Society. This resulted in regular email missives from the Law Society to its members. Some of these emails were alarming, such as that on 20 November 2009 informing solicitors that delay was due to “uncertainty until very recently over whether the insurance industry would quote at all”. Others passed the buck, like that on 25 November 2009 asking the main insurance companies to backdate policies which were not renewed on time (with no mention of the regulatory issues arising from the intervening lack of cover).
The other emails are available here: 24 November 2009; 2 December 2009; 4 December 2009; 14 December 2009.
The Law Society’s statement that there was uncertainty as to “whether the insurance industry would quote at all” was interpreted by some as a rather scary indication that the industry saw the legal profession in general as high risk. It did nothing to suggest that the problem might have resulted from the SMDF’s internal problems.
In its 2008 annual accounts published in July 2009, the SMDF revealed the near total loss of value in a Saturn bond in which it invested one third of its portfolio through Bloxham Stockbrokers. When the loss of value of the Saturn bond became known, many expected legal action to be taken and the 2008 accounts stated that Bloxham intended to do so. On 1 December 2009, coincidentally the first day of the new insurance year, the SMDF instituted proceedings against Bloxham in the High Court (2009/10863P, since transferred to the Commercial Court).
On 15 December 2009, with the deadline for renewal safely passed and most solicitors covered, the Law Society revealed to members what was really going on.
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 Law Society claimed that the SMDF held more than 60% of the PI insurance market and their withdrawal would result in either a complete market failure or a massive increase in premiums. Either consequence could result in a huge number of solicitors having no cover and having to cease practising.
The delays and damage, with human and commercial consequences, resulting from this dislocation of the entire Irish legal system could be incalculable.
The result was that the Law Society would guarantee a loan to the SMDF of €8.4 million by a commercial lender on the condition that it provide PI insurance for the year beginning 1 December 2009. This was done without informing members despite the fact, as pointed out by Vincent Crowley, that a debate on insurance issues lasting one and a half hours took place at the Law Society’s AGM on 5 November 2009.
Poor investment decisions are not new to the profession. In 2006 the Law Society paid €22.4 million for a 1.09 acre property at Benburb Street, ostensibly to provide extra space for expansion. According to a report of the purchase in the Law Society Gazette (April 2006, p.12), a lengthy debate on the proposed purchase took place at the Law Society Council, which voted unanimously to purchase the site.
“[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'”.
That appears to have been the full extent of the thinking behind the decision to purchase. Michael Irvine, president of the Law Society at the time, said:
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 2009, the value of the site was written down to €7 million (Annual Report 2008/9, p.21; Phoenix Annual 2009, p.12). A feasibility study on the potential uses of the site was carried out after the purchase was complete, concluding that, due to current economic conditions, no development will take place.
When the deadline for renewing practicing certificates arrives on 1 February 2010, the Law Society will know which solicitors are operating without insurance and will take steps to close them. It appears likely that the Law Society will seek the introduction of legislation allowing solicitors to incorporate, perhaps along the lines of the UK’s LLP system. Another proposal that has emerged to remedy the PI insurance problem, but is unlikely to attract much support, is that the obligation to hold insurance be abolished. This suggestion is accompanied by the surprising logic that the existence of the obligation to carry insurance has led some solicitors to cut corners in carrying out their work, safe in the knowledge that they can fall back on their insurance.
If nothing else, the debacle may at least cause professional representative bodies to exercise greater care in managing their investment portfolios.
  • Update (16 February 2010): Kelly J has granted Bloxham’s application to join Morgan Stanley to the proceedings.

9 thoughts on “Law Society follows emergency guarantee fashion

  1. Not wanting to engage in conspiracy theory, but isn’t it convenient that at a time when there are a lot of talented and ambitious lawyers with time on their hands, it is now become more costly, if not prohibitively expensive to establish a new practice, a new practice that might offer better service at lower costs than the incumbents?

  2. It is always very expensive to set up a new practice and certainly the increased insurance premiums adds to that. However, the SMDF is merely a broker and policies are underwritten by general insurers (ie. without any connection to the profession). Therefore I don’t believe PI insurance could effectively be used in a protectionist way even if the profession wanted to.

    Sadly, hundreds of solicitors have been left go in the past 18 months and the majority are toward the junior end of the profession. Much like a newly insured driver without a no-claims bonus, they would generally be charged massive sums to set up alone.

    Having said that, quite a lot of new practices have been set up in recent times and the market is very competitive, as it was before the economic crash.

    If I were a conspiracy theorist, or perhaps an official of the Competition Authority, my interest might lie in the insurance industry itself and its handling of PI insurance recently.

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