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LONDON -- British law firms soon may be allowed to take greater control of their professional liability risk financing.

The Law Society of England & Wales is exploring the option of allowing law firms to directly purchase their primary professional liability insurance from the commercial insurance market.

Currently, all law firms operating in England and Wales must purchase coverage of L1 million ($1.7 million) per loss from the Solicitors Indemnity Fund, a mutual fund set up by the society in 1987. However, huge losses and rate increases in recent years have led to steep increases in premiums paid to the fund.

Law firms with effective risk management and few claims have argued they are subsidizing companies with poor track records. Many law firms, particularly larger ones, have sought to have the choice of directly accessing the commercial market or self-insuring (BI, Jan. 19).

A poll among the Law Society's members found that, while the majority of law firms would prefer to stay with the SIF, a "significant and important minority, especially larger firms, opted for the commercial market option," a Law Society spokesman noted.

As a result, members of the Law Society's Council intend to appoint a committee, composed of senior lawyers and insurance experts, to examine whether the SIF could remain a viable pool if large members were allowed to leave and seek coverage elsewhere, the spokesman said. A final decision will be made in January.

Whatever the outcome, the Council has agreed to a strategy to introduce "far tougher controls to deal with those firms which have poor claims records. This will range from helping firms to develop better management systems to withdrawing indemnity cover altogether if no improvement is made within a specified timescale," according to a statement released by the Law Society after the Council meeting.

Better risk management is a crucial factor underpinning the legal profession's future insurance arrangements, the Law Society spokesman noted.

Currently, the SIF has no authority to deny coverage for firms that are poor risks. As a result, there "are some firms with appalling claims records that can still get cover," the spokesman said. However, he noted that, whatever the final decision about allowing firms to exit the pool, the SIF will be given the authority to refuse coverage if firms do not improve their risk management in the same way that commercial insurers can refuse to underwrite poor risks.

Meanwhile, Elizabeth Mullins, the SIF's managing director, pointed out that while the idea of the SIF operating alongside commercial insurers appears an attractive option, several obstacles stand in the way.

For example, because the SIF sets its premiums in advance, "it would be very easy for insurers, once they know the SIF rates, to offer more attractive premiums to those firms who present the better risks," she said.

As a result, "attractive risks would transfer to the market, and there would be a danger of SIF being the dumping ground for the firms which were far less attractive to insurers," said Ms. Mullins.

"Even the prospect of SIF being allowed to remove cover from the very worst risks and a requirement being imposed on the market to share equitably the funding of any assigned risk pool would not eliminate the problem for SIF of losing the balancing effect of the very best risks. It is this that would damage the SIF's cost-effectiveness, even for the average firms," she explained.

Despite those concerns, SIF Chairman Peter Williamson recognizes that a significant number of law firms remain in favor of the open market.

"We must continue to seek ways in which a reformed SIF can be more attractive to the entire profession. Over the coming months, we will work with groups opposed to SIF to find out to what extent their concerns can be overcome," said Mr. Williamson.

Professional indemnity broker Trevor Moss, a director of Nelson Hurst & Marsh Ltd., called the Council's decision a "step in the right direction."

Mr. Moss, who co-authored a report earlier this year calling for law firms to be given the right to buy primary coverage from the commercial market (BI, March 30), believes that the largest law firms will increasingly turn to self-insurance, captives and alternative risk transfer mechanisms, as well as the traditional market, if no longer required to buy primary insurance from SIF.

He also agrees that law firms must beef up their risk management.

"What the whole profession needs is realistic risk management," he said, adding that this likely will increase if law firms are able to use commercial insurers or self-insurance.

"The history of the SIF and risk management is not good," said Mr. Moss, pointing out that, for example, commercial insurers writing excess insurance for law firms have taken "a lot of time and effort scrutinizing firms' exposure to the Year 2000, which SIF has not done."