The Council of the Law Society has approved changes to the professional indemnity insurance regulations (including the minimum terms and conditions) to take effect for the next indemnity period commencing on 1 December 2010. The amending regulations are available at www.lawsociety.ie/PII. This practice note is intended as a guide to the important practical changes. There are other technical changes to clarify and improve the existing regulations and minimum terms and conditions. This practice note is not a definitive statement or interpretation of the law.

1. Commercial undertakings

The concept of ‘commercial undertaking’ refers to certain common types of solicitors’ undertakings given to financial institutions in commercial property transactions. The concept is given effect to by the definition of ‘Relevant Undertaking’ and related provisions in the minimum terms and conditions. The definition of ‘Relevant Undertaking’ is being changed slightly to clear up some ambiguities and difficulties that have been observed in practice. From 1 December 2010, the applicable definition that will apply is set out in the amending regulations. In cases of doubt, reference should be made to the text of the definition and ancillary definitions in the minimum terms and conditions contained in clause 7.16 and the applicable operative provisions in clause 7.15, both as set out in the amending regulations.

For the assistance of solicitors, the existing position (for the current 2009/2010 indemnity period ending on 30 November 2010) and the new position (for the indemnity period 2010/2011 commencing on 1 December 2010) are set out below for comparative purposes. The changes are in bold.

Existing position:

• Residential undertakings are permitted and are covered by professional indemnity insurance,
• Commercial undertakings, including commercial accountable trust receipts (ATRs), issued before 1 December 2009 were permitted and are covered if not resulting from a wrongful act or omission,
• Commercial undertakings (including commercial ATRs) issued on or after 1 December 2009 are permitted, but are not covered unless additional cover has been obtained.

New position:

• Residential undertakings will be permitted and will be covered by professional indemnity insurance, 
• Commercial undertakings (including commercial ATRs) issued before 1 December 2009 were permitted and will be covered if not resulting from a wrongful act or omission,
• Commercial undertakings (including commercial ATRs) issued on or after 1 December 2009 but before 1 December 2010 are permitted, but will not be covered unless additional cover in respect of any such undertakings is renewed.
• Important note: If your firm gave any commercial undertakings between 1 December 2009 and 30 November 2010 inclusive, due to the ‘claims made’ basis of insurance cover, additional cover for commercial undertakings should be renewed for at least six years after the last such commercial undertaking was given. ‘Claims made’ basis means that the insurance policy that will meet a claim is the policy that is in place when the claim is made and notified to the insurer, or the policy that is in place when the insurer is notified of circumstances that may give rise to a claim – not necessarily in the policy in place when the alleged negligence occurred. Your firm must notify to the insurer any claim made during an indemnity period before the end of that indemnity period; your firm’s insurer will be entitled to deny cover in respect of any claim first made against your firm during an indemnity period and only notified after the end of that indemnity period. If your firm did not, in fact, give any commercial undertakings between 1 December 2009 and 30 November 2010 inclusive, there is no need for any additional cover for commercial undertakings your firm may have taken out to be renewed.
• Commercial undertakings (excluding commercial ATRs) issued on or after 1 December 2010 will not be permitted and will not be covered.
• Commercial ATRs issued on or after 1 December 2010 will be permitted and will be covered.
• Commercial undertakings for so-called ‘de minimis loans’ with a limit of liability of up to €75,000 (intended for loans considered too small for three-way closings) will be permitted and will be covered.

As provided for in the Commercial Property Regulations (which are available at www.lawsociety.ie/PII), acting for both borrower or guarantor or indemnifier or security provider and financial institution in connection with a commercial property transaction, where the financial institution provides financial accommodation in connection with the transaction, will not be permitted. Acting in breach of this prohibition will not be covered.

‘Buy-to-let’ residential property transactions continue to be classified as commercial property transactions.

All references to a matter being covered by professional indemnity insurance or simply ‘covered’ are references to a matter being covered by professional indemnity insurance under the minimum terms and conditions.

2. Renewal deadlines for insurers

Insurers will be required to provide proposal forms at least 21 days in advance of the renewal date and to respond to properly completed proposal forms within ten working days of receipt.

3. Succeeding practices

The succeeding firm and preceding firm will be allowed to elect whether run-off cover or the succeeding practice rule will apply in their case. If they decide to make an election, such election must be made prior to merger or acquisition taking place. If they do not make an election, then the default position will be that the succeeding practice rule applies. More information on the succeeding practice rule is available at www.lawsociety.ie/PII 

4. Assigned Risks Pool

The Assigned Risks Pool (ARP), which is the safety net for firms unable to obtain cover in the market, will be reintroduced for the 2010/2011 indemnity period on the following modified terms: 

• There will be an aggregate limit for all claims of €1.5 million,
• All claims by financial institutions (regardless of whether the financial institution is a client of the firm) will be excluded,
• There will be defaulting firm status for firms for non-payment of ARP premium,
• An ARP premium pricing schedule will be published – as it is expected that in all cases the premium will exceed market rates by a substantial margin, and given the significantly reduced cover in the ARP, the ARP should be regarded in all cases as a place of last resort and not as an alternative to cover in the market,
• If a qualified insurer experiences an insolvency event, the other qualified insurers are not required to close the gap and take up the insolvent insurer’s share of the ARP. This will result in cover for the claim being reduced pro rata.

The following points (which are not changes) may be noted for purposes of clarity:

• ARP and closed firms – closed firms may only reopen by obtaining cover in the market,
• ARP defence costs – these remain unlimited,
• ARP defaulting firms will be covered in the first indemnity period of defaulting status whether or not the premium is paid. Thereafter, run-off cover will be provided by the ARP only if the premium is paid (as for compliant firms). Defaulting firms and their principals will be liable to fully indemnify the ARP for any claims. It is the policy of the Law Society to seek High Court orders for the closure of defaulting firms that do not close voluntarily. The previously planned ARP levy will not to be introduced for the 2010/2011 indemnity period.

5. Cancellation of run-off cover for non-payment of premium

The right of insurers to cancel run-off cover for non-payment of premium remains in place with the following changes:

• Insurers are required to provide 20 working days’ notice of cancellation of cover to the Law Society and the insured firm,
• The former principals of the firm will have a legal obligation to pay the run-off cover premium and the Law Society will be able to seek orders from the High Court to compel the former principals to pay the premium, and
• Insurers will be required to reinstate run-off cover back-dated to date of cancellation if payment is made in arrears. Sixty days will be allowed to pay the premium to reinstate cover. Reinstated cover will exclude any claims or circumstances the firm was aware of during the period in which the premium was unpaid.

6. Failure to cooperate with insurers

The regulations will be amended to make it clear that insurers are permitted to make complaints to the Law Society about the principals of firms for failure to cooperate in dealing with claims.

7. Failure to pay stamp duty

The regulations will be amended to make it clear that insurers are permitted to inform the Law Society regarding failure by firms to pay stamp duty.

Further information: queries relating to the PII regulations should be addressed to the Law Society PII helpline for solicitors at 01 879 8790 or piihelpline@lawsociety.ie.