Why law firms should check insurance against regulatory action

Why law firms should check insurance against regulatory action
Law firms may be less insured against regulatory action than they think.

Law firms should check whether they are really insured against regulatory action.

A recent court case revealed how professional indemnity (PI) insurance may not always cover firms against investigations brought by the Solicitors Regulation Authority (SRA).

A human rights law firm – and three of its solicitors (including two partners) – was cleared of 19 charges of professional misconduct brought by the SRA at the Solicitors Disciplinary Tribunal in June.

The allegations related to the handling of claims – which proved to be unfounded – against the Ministry of Defence on behalf of Iraqi civilians.

It was recommended that all law firms check whether their insurances covers them against similar actions from the SRA.

The law firm, Leigh Day, discovered that its PI insurance policy did not cover regulatory action. One of its senior partners and defendants, Martyn Day, said the firm would have been ‘knackered’ by the prosecution without the directors’ and officers’ insurance it had taken out several years ago.

In light of the court case ruling, Day recommended that all law firms check whether their insurances cover them against similar actions from the SRA.

The case presented by the SRA included charges in relation to Leigh Day endorsing its clients’ case in circumstances where it was improper to do so, late disclosure of a document and destroying a document that would have been important to the public inquiry into the Iraq claims.

Day said the firm will take steps to scrutinise cases more closely in future and has also improved staff training and guidelines for how to handle documents.

Insurance considerations

It was only in 2011 that the SRA removed cover for this sort of action for solicitors from PI insurance in the Minimum Terms and Conditions, following pressure from insurers due to the losses they were experiencing.

Inexpensive regulatory defence or management liability products have been developed to provide for just this type of scenario, as defending SRA or other regulatory actions can be extremely costly, even if defended successfully. Some PI insurance policy wordings for solicitors have been adapted to include this cover but PI insurers are reluctant to include it, except for the very largest firms.

We recommend that firms carefully check the scope of cover under regulatory defence or management liability policies because the ‘professional service’ exclusion, which these products typically include, may mean SRA investigations are excluded.

Lockton have a specialist team who can advise and bespoke policy coverage under full management liability or specific regulatory defence policies.




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