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Rescue of SMDF

02 Sep 2022 / Law Society Print

Was it right to save the SMDF?

The SMDF, not without controversy, was rescued by the profession in 2011. What has happened since – and was it a good idea to save it? Patrick Dorgan does the underwriting.

The Solicitors’ Mutual Defence Fund was founded in 1987, in response to difficult market conditions for solicitors’ professional indemnity insurance (PII) at the time. It was a familiar story – high premiums and little competition between insurers. Plus ça change!

The fund had a fixed contribution from members, whether big firm or small – no matter what the practice profile or claims experience was. In fact, there were (relative to today) very few claims against solicitors.

Those who did have the misfortune to have a claim were dealt with by one of the ‘panel solicitors’ – a sympathetic and avuncular group of colleagues who acted as claims managers as well as defence solicitors.

The fund acquired a large membership, and there is no doubt that it attained its central objective of maintaining premiums at a significantly lower level than might otherwise have been the case, over a long period of years.

By 2007, it insured over 50% of the profession by number, and its reserves were in excess of €23 million, which represented no less than four times the claims exposure in that particular year.

It was in an enviably strong financial position and, in addition, had implemented a policy of reinsuring a large proportion of its potential liabilities with top-rated insurers and syndicates.

Double whammy

However, in 2008, as a direct consequence of the collapse in the Irish economy, unprecedented numbers of claims started to be made against solicitors. Up to 2008, claims numbers averaged around 200 per annum. In 2008, a total of 501 claims were notified and, in 2009, a staggering 1,109 claims came in – nearly five times the average.

As a double whammy, the fund suffered the loss of virtually all its reserves, which had (on advice) been invested in liquid securities such as, well, Irish banks.

The Law Society agreed to guarantee its liabilities up to €5 million (the purpose being to stabilise the PII market), but this facility was never called on or used.

The world and national crisis continued – this was the time when thousands of banks, and the world’s largest insurer – failed. In this forest of crashing oaks, it was unlikely that the sapling that was the fund would escape unscathed.

Further financial support was sought from the Society and, after furious debate within and outside the Council, it was agreed that the stability of the PII market and the financial and, indeed, personal wellbeing (to say the least) of approximately 3,000 affected colleagues required that support to be given.

Following an EGM of the profession and a postal ballot, the Society agreed to a support package for the fund of €16 million, funded by an annual subvention of €200 per solicitor, to continue for ten years.

Vigorous programme

At that time, the estimate of the gross liabilities of the fund was €220 million, arising from approximately 1,200 live claims against colleagues. A new board, overseen by and reporting to the Society, embarked on a vigorous programme of claim disposal and cost reduction and, over a four-year period, gross liabilities were reduced to a figure of approximately €80 million from 300 claims before reinsurance, and administration costs had been halved.

In view of this improvement, the board took the opportunity to implement an exit strategy, and agreement was reached with Randall and Quilter Investment Holdings Ltd (RQI), an insurance run-off specialist firm, to take over the fund and its remaining liabilities.

The deal with RQI involved the Society agreeing to contribute capital to the fund over a five-year period. The fund was of the view that its liabilities were reported as being worse than they actually were (the Society had, prudently, insisted on the most pessimistic, worst-case type view being taken of claims at the time of the rescue), and part of the deal was that the Society would share in any improvement.

The precise terms are commercially sensitive, but the actual outcomes were more positive than the projections, and the annual subvention of €200 per member ceased in 2019 – three years ahead of schedule.

Final bill?

So, what was the final bill? The profession had committed €16 million. This figure was premised on recovery of €4 million due to the fund by Bloxham Stockbrokers. This firm also failed, so that the Society’s potential exposure rose to €20 million.

Taking into account some recoveries from Bloxham, the improvement in the liabilities and certain other adjustments, the Society recently had the benefit of a €2.45 million repayment/release of reserves on the conclusion of its deal with RQI (who remain the owners of the fund and its outstanding liabilities).

The final cash cost of the rescue of the fund to the profession, factoring in all costs and expenses over the period, is €11.1 million – nearly €5 million less than predicted.

That is unequivocally a good result. But, you will say, we still had to pay out €11 million. What did we get for the money? The answer is – an awful lot.

Market competition

The first thing we got was competition in the market. Even if you (or your large or small firm) never had a claim, or were never a member of the fund, that made your PII a lot cheaper, not just way back in 1987, but all the way through to 2011.

The second thing this money bought was stability. If the fund had collapsed, there would have been catastrophic consequences, not just in the PII market, but likely in the whole regulatory space. It is not easy to imagine what might have been imposed on the profession by Government in the event of such a collapse.

The next one is harder to quantify, but is important. If the fund had collapsed, hundreds, if not thousands, of colleagues would likely have faced personal bankruptcy. The cost of just defending a PII claim is likely beyond the resources of most of us, let alone the cost of meeting a successful claim.

The outcomes would have been financially, professionally and personally overwhelming. As a Council member observed recently in the debate on this topic, what is the price of even one suicide?

Nine-figure sum

Finally, we have referred to the reinsurance that the fund had. Insurers look at profitability as a proposition of the premium. As a typical example, a general insurer might take a premium of €100, pay out €60, apportion €15 for their costs and the balance is profit. The ‘loss ratio’ is the ratio of loss to premium – in our example, probably 65%.

Anything over 100% is a loss. In the worst claims years, the fund’s reinsurers were reporting 400-500% loss ratios – in plain terms, they were paying out four to five times the amount they got in from the profession as premiums.

The overall cost to the market (that is, saving to the profession) over the lifetime of the fund, and particularly since 2009, is commercially sensitive, but is not very far from a nine-figure sum.

Never say never. I’m sometimes asked if a mutual would work again if market conditions deteriorated. I don’t know. All that can be said is that the fund was an unequivocal success for the profession, when viewed, not in the narrow prism of the events of 2011, but in the context of its existence from 1987 and into the future.

It is a shining example of what the profession can do – for itself and the public it serves – when it pulls together. Don’t forget, it is still in operation and paying claims against colleagues, efficiently and sympathetically, in accordance with its original ethos – ‘by solicitors, for solicitors’.

Read and print a PDF of this article here.

Patrick Dorgan
Patrick Dorgan is a partner in RDJ LLP and a past-president of the Law Society. He was tasked by the Council to oversee the run-off of the Solicitors’ Mutual Defence Fund and its eventual disposal.