Tag: professional indemnity insurance

Perils of learner permits: make sure you observe the conditions

Traditionally people have referred to green driving licences as “provisional licences” but in 2006 they were rebranded as “learner permits”. The change in name is, no doubt, intended to suggest a key difference between a driving licence and a learner permit: the latter “has effect in accordance with its terms and conditions“. This simple statement is important and has continually raised a question: if the terms and conditions of a learner permit are not observed, is the driver unlicensed?

There are a number of specific offences which a learner driver can commit, such as not displaying L plates or driving unaccompanied. These offences are frequently committed and drivers are often prosecuted for them. However, there is also an offence which anyone can commit of driving without a driving licence. Just as people have traditionally referred to the “provisional licence”, it has traditionally been thought that if one holds a learner permit one is licensed, whether or not one observes the terms and conditions applicable to it.

Gardaí and solicitors have argued this point repeatedly but it has recently been clarified in the High Court: if you hold a learner permit and drive in breach of its terms and conditions it is temporarily ineffective and you are guilty of driving without a driving licence.

The penalties for driving without a licence are not overly severe, in that you do not face automatic disqualification from driving for example, but a follow-on issue arises: if your policy of insurance requires that you are a licensed driver, and you drive in breach of the terms and conditions attaching to a learner permit, are you still insured? A conviction for driving without insurance is more serious than one for driving without a licence and carries a disqualification.

This was the second element to the case and, fortunately for learner drivers, the outcome was that the fact that a learner permit might be temporarily ineffective does not necessarily invalidate the insurance policy. The wording of the policy, as ever, is crucial. In this case, the policy certificate provided that the defendant’s driving was covered “provided that [he] holds a licence to drive such a vehicle or, having held such a licence, is not disqualified from holding such a licence.” The terms and conditions apply to the learner permit, not the driver, and so he held a licence entitling him to drive the vehicle. The insurance “was not made conditional in its terms on the accused complying with the terms of a learner permit licence.”

This settles a question which has been arising quite frequently in District Courts over the past few years. It is also a reminder that drivers should familiarise themselves both with the terms and conditions of a learner permit and an insurance certificate before driving.

Stop the madness

The Sunday Independent reported yesterday on the infamous “Kilkenny trust” that supposedly allows you to scrub a property free of bank debt, as if by magic. It was reported earlier in the Summer that certain business people, including Bill Cullen, were using the mechanism.

Given the privacy of the operation it is difficult to ascertain from news reports what has been going on but, helpfully, Karl Deeter attended a presentation about the scheme and has blogged about it here. I am not a trust specialist but, in my professional opinion, it looks mad.

I had a few questions of my own reading the post:

Why are they recruiting people to enter into the trust? Usually, legal and accounting mechanisms are put in place by a combination of accountants and solicitors to help their clients achieve a certain goal. It is unusual for non-professionals to go about recruiting people to join a scheme like this and, as Karl points out, the don’t seem to have professional indemnity insurance to protect clients when things go wrong. However, I note that they charge a fee themselves.
They get you to set up “a private trust in private”. What does the second use of the word private achieve?
What is meant by getting a notary to create a “Court of Record”? I’ll tell you: nothing. It makes no sense. A court of record is a court, and notaries don’t “create” courts. In fact, the only notaries in Ireland are notaries public who are only involved in transactions with an international dimension. There is no international dimension to these transactions so a notary should not be involved. The most an Irish notary public might do is verify some document or signature but, again, a notary public only does this for use abroad and a solicitor or commissioner for oaths would suffice.
They say that only your folio number goes into the trust. This makes no sense. A folio number is a record number for registered property and has no life or value apart from the property. You couldn’t sell or rent your folio number separately from the property, so how could you transfer it into a trust on its own?

Most of the rest of what they say involves banking and mortgages and Karl has pointed out that it doesn’t add up. I’m sure other solicitors and barristers would notice flaws in the proposal by reading his post (comments welcome here too). Karl reaches the sad but unavoidable conclusion:

This has all of the hallmarks of something that is either ‘too good to be true’ or perhaps ill thought out and where the absence of a challenge to date is being taken as evidence that ‘it works’ which is not how the legal system operates. The moving of an asset to a trust doesn’t mean a legal charge suddenly doesn’t exist, it doesn’t mean that there was never a lien or a contract between two parties, if using trusts to stop creditors was that simple we probably would have heard of it before now.

Of the people at the meeting none of them seemed highly literate financially, several disclosed that they were borrowers of sub-prime lenders and the common thread was that they were all vulnerable and perhaps willing to believe something too easily, because I have learned from experience that when a person is drowning that even if you throw them a rock and say it will float that they are willing to give it a try.

What?!

The slow and painful collapse of the SMDF continues to surprise, if not delight. Today, a letter from the Chairman of the SMDF raises more questions than it answers. Three sentences jump off the page:

We embarked on a strategic review during 2010, with the assistance of significant outside expertise. It was recommended that we provide indemnity in 2010/11 and then sell our book of business.

When the London insurance market became aware, earlier this year, of the possibility of a Master Policy being introduced for Irish solicitors, any interest in the [SMDF]’s book evaporated.

What the letter diplomatically omits is the identity of the party who made the London insurance market aware of the possibility of a master policy being introduced. It was, of course, the Law Society.

The result? The Law Society now proposes to impose a €200 annual levy on all solicitors, not just members of the SMDF, for at least 10 years. (The SMDF letter raises the prospect of a 15 year bailout.)

The Law Society and the SMDF have already been criticised for seeking a bailout from Society members rather than SMDF members. But, it now transpires, the SMDF found a solution to its problems which might not have involved calling on all solicitors to bail it out.

The Law Society went public with its (still!) undeveloped idea of a master policy, depriving the SMDF of the opportunity to sell its book. The Law Society will now impose a new solution, at significant cost to its own members.

I might not be the only recipient of this letter to have exclaimed: “What?!”

Aftershock: legal profession

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.

Solicitors await a “deluge of legislation” from the next Minister for Justice

© Alan Shatter and/or licensors — "He needs your No 1 vote or he may resort to his phaser weapons."

Fine Gael will probably have the choice of Minister for Justice & Equality and the position is expected by many to go to Alan Shatter, veteran solicitor, politician and publisher of colourful pamphlets.

Shatter was recently interviewed by Stuart Gilhooly for The Parchment and made the following comment, which is either exciting or terrifying depending on your outlook:

He wants a legacy. He wants to change the way the country works. He wants to make a difference. And you get the feeling that if he gets his chance, three decades of frustration will be released by a deluge of legislation.

Much of this deluge may be to the benefit of solicitors. For example, traditions that tend to afford barristers a higher professional status could be done away with: “silly nonsense such as wigs and position in court is treated in contempt” by Shatter. However, given his views on solicitor advocacy and the traditions of the bar, he is surprisingly reticent to offer a definitive view on whether the professions should be amalgamated.

If we are to have modern legal services, there are a few sacred cows that need to be dealt with. The differentiation between solicitors and barristers is going to become more clouded. The question of whether it will be a piecemeal evolution or a structured evolution that is effected by agreement in legislation is an interesting issue.

He goes on to say that solicitors should be admitted to the bar, that changes to solicitors’ costs are on the way but might not be drastic and that the Law Society does a reasonably good job of regulating solicitors. He also “believes that [the] proposed Legal Services Ombudsman who will shortly be appointed may well be sufficient in terms of independent regulation”.

The elephant in the interview room was, of course, the IMF. The agreement reached between the Irish Government and the IMF for financial support requires the following structural reforms of the legal professions:

establishment of an independent regulator;
implementation of the Legal Costs Working Group report; and
implementation of the Competition Authority report.

These high-level items provide little detail of what might actually be implemented, unless one assumes that the reports mentioned are implemented in full with no tailoring. Whether or not individual members of the professions agree with the proposed reforms, it is likely that all Irish lawyers would agree that reforms are necessary. As argued by Eoin O’Dell:

It is sad that our governments have not implemented these recommendations of the Legal Costs Working Group and the Competition Authority; indeed, it is doubly sad that it takes an external agency like IMF to insist that these recommendations are in fact implemented.

These reforms must be implemented before the end of 2011 but there has been little news and, as far as I am aware, no communications from the Law Society about the changes since they were announced.

Shatter offers a view on reform of the professions which is quite different than that often aired in the media.

Outside the profession, there is talk of non-solicitors doing this work without realising the complexities to be addressed, the level of training you need or the insurance implications. If you want competition, you don’t want work of lesser quality. It is too easy for politicians who are non-lawyers to talk about competition without understanding the necessity to ensure that professional work is properly done. No one has suggested to the medical profession that non-qualified doctors undertake appendectomies because the perception is that removing someone’s appendix is a relatively simple operation.

Of course, many will dismiss such sentiments as tainted by vested interest. Part of the difficulty for solicitors at present is that their views are rarely given any weight due to the public perception of the profession.

Allied to the disruption facing solicitors when the above reforms are implemented are the ongoing difficulties with solicitors’ insurance. On that topic, Shatter says:

It’s hugely important that consumers are compensated for the negligence of solicitors. Insurance must remain mandatory. The conveyancing area is where a lot of problems arose. Solicitors who were less than expert in conveyancing were charging fees that had no economic reality and short-circuited the work they were doing.

From anecdotal evidence, 2011 will be a horrific year for many solicitors with rumours that a number of successful practices will close. Given that job protection and creation is a core aim of all parties, one hopes that any regulatory changes introduced will not add to the large proportion of the profession which is already unemployed.

Unclear whether solicitors’ PI insurance storm has passed

[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.

From George Eastman House (Flickr) — 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.

Another storm brewing for the legal profession?

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.

SMDF 2009 annual report shows €14.3 million investment loss

[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.

DoJ documents on solicitors’ insurance silent on bailout by Law Society

The solicitors’ profession faced a situation in late 2009 which was not dissimilar to that faced by the Irish banking sector in September 2008. I wrote about it in January 2010, outlining the chain of events that led to the Law Society guaranteeing a commercial loan to an insurance broker. The guarantee was conditional on the Law Society receiving counsel’s opinion to the effect that they could give such a guarantee and that opinion was obtained. Some of us wondered if there were not legal or regulatory issues which could affect this guarantee, given by a de facto State agency to a private company with more than half of the PI market.

So, I submitted freedom of information requests to the Department of Justice and the Department of Finance. To my surprise, the Financial Regulator is not subject to the Freedom of Information Acts 1997 and 2003 (FOIA), so no application could be made to it. The requests sought all records relating to:

the difficulties experienced in the market for professional indemnity insurance for solicitors in 2009;
the resolution of the Law Society to guarantee repayment of a loan facility to be obtained by the Solicitors Mutual Defence Fund (SMDF) from a commercial lender; and
all communications to and from the Law Society, the SMDF and other insurance companies, underwriters and brokers in relation to same.

The Department of Finance had nothing. Some weeks after a decision was due I received 10 documents, all falling with the third category sought (the Department does not hold any records under categories 1 and 2).

View this document on Scribd

The documents primarily consist of briefing notes for internal use within the Department of Justice, most of which reproduce or paraphrase the contents of the first note. They suggest that the Law Society, which sets the rules for the professional indemnity insurance (PII) scheme, operates independently of Government. Changes to the PII regulations do not require the Minister’s agreement but he can direct the Law Society to amend the regulations. For example, one note for the Minister says that although the Council of the Law Society met to consider the issue in August 2009 “we have no information on what transpired.”

The following points are of interest:

Ken Murphy, Director General of the Law Society, sought a meeting with the Minister for Justice in October 2009. This request is referred to in internal Department communications as relating to a briefing “on the looming ‘crisis'” in the PII scheme. The meeting took place on 15 October 2009.
The Minister indicated that the then Minister for Enterprise, Trade and Employment should be notified of the situation. A draft letter was prepared, but it is not clear if the letter was sent. The draft letter stated:

In the event that the measures already taken by the Society, and the additional measures planned, do not sufficiently address the concerns of insurers, there may be proposals to suspend or abolish the compulsory nature of the PII scheme for solicitors. I have indicated to the Society that, in the interest of protecting clients, I would not support such a proposal.

A later briefing note says that solicitors who have difficulty in paying their premium were told by insurance companies that they would “source the money for them (presumably involving a commission).” It also says that solicitors were being told that conveyancing should not make up more than 30% of their practice (hardly an issue for most solicitors at present).
The last document, from February 2010, states that 18 firms had failed to notify the Law Society of their insurers by 1 February. “This is 0.8% of the 2,249 firms on record and is on a par with previous years.”

The documents are interesting in that they show the extent to which the Law Society runs the show for PII, with the Government taking a detached role. They also show that the Minister is firmly of the view that abolishing compulsory PII is not an option.

However, the most interesting aspect of the documents is the lack of any reference to the Law Society’s provision of a guarantee in favour of the SMDF. Therefore, it remains unknown what the attitude of the Department of Justice and other insurance companies is to that arrangement.

Update

One of the measures adopted by the Law Society last year was to exclude from PII cover the giving of undertakings by solicitors to financial institutions in commercial property transactions. However, additional top-up insurance could be purchased to cover such transactions. This morning, the Law Society announced the expected ban on giving such undertakings, to come into effect on 1 December 2010 (the first day of the new insurance year).

According to Gerard Doherty, President of the Law Society:

[T]he experience of the Society’s regulatory committees, in particular the Professional Indemnity Insurance Committee, in recent years is that the banks’ ad hoc ‘system’ (with no agreed basis or consistent usage) under which solicitors gave certain types of undertakings in order to complete commercial property transactions exposed the public interest to an unacceptable level of risk. It was essentially flawed and beyond regulatory control with a range of damaging consequences for the public interest, as experience has demonstrated.

The frailties of the commercial undertakings ‘system’, which has been the subject of critical comment by members of the judiciary, has been reviewed by the Society in the light of its capacity to facilitate reckless lending and fraud – with massive losses to lenders as in the Lynn and Byrne cases. The conflict of interest in which solicitors can find themselves, acting for both the borrower and the lender in the same transaction, is at the heart of the problem.

During the boom years solicitors were pressurised, both by borrowers and by lenders, to give letters of undertaking to lenders in commercial property transactions. This frequently led to situations where the undertakings were not complied with and many substantial loans were not properly secured.

An essential part of any banking system is to ensure that proper security is in place where loans, particularly of a substantial nature, are advanced. The risk of failure in this regard is greatly reduced if lenders retain their own solicitors to take responsibility for ensuring the security is put in place.

Paper losses don’t bother 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.

The then-President of the Law Society said at the time of the purchase:

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.