With many solicitors' professional indemnity renewals falling due in October, Peter Dobie looks at a questionable practice which could have serious implications for solicitors, their clients and their insurers
Let's start with a definition - what, exactly, do we mean by speccing? Speccing occurs when a solicitor decides not to insure - with an after-the-event (ATE) legal expenses
policy - the outcome of a particular personal injury case taken on a conditional fee agreement, because the solicitor is confident the outcome of that case will be a win and does not therefore see the need for ATE insurance to cover the risk of paying the other side's costs.
These cases will be thought by the solicitor to be straightforward, sure fire winners.
So why is that a bad thing? Surely the solicitor is merely taking a sensible view on the need for insurance and exercising professional choice? Unfortunately, while the behaviour may look harmless enough, it is opening up both solicitor and client to real financial risk.
Effectively, by speccing a solicitor is taking on the financial risk attaching to the outcome of the personal injury case. In other words, should (despite the solicitors expectation) the case lose rather than win then someone - presumably the solicitor - has to pick up the other side's costs.
Extremely serious
This behaviour by a solicitor could be considered as self insurance. If so then, as solicitors are not (usually) authorised by the relevant bodies to insure, this is an extremely serious matter - the transaction of unregulated insurance.
There is increasing evidence that many solicitors are speccing and only insuring with their ATE providers the riskier PI cases while running the "easy" or "straightforward" cases without insurance. Anecdotally, over half of solicitors involved in PI litigation are in favour of or involved in the speccing of their cases.
This opens up those solicitors to real, continuing and long term financial risk, because even the best solicitor can get it wrong in predicting the outcome of a case.
A sure fire winner then becomes a loss and a bill that someone has to pay.
This then begs the question: who pays? Presumably not the solicitor's client. Unless, of course, the client was made fully aware of the risks by the solicitor and decided not to insure with an ATE policy. But then, what exactly are solicitors explaining to their clients in these circumstances? Is the client really being brought into the decision making? And if so, is it a complete and fully informed decision?
If a solicitor pays the other side's costs then arguably this is self insurance. Unless the solicitor is also a regulated insurer, then he does not have the necessary regulated financial security to carry financial risk of this sort. In fact, the potential risks presented by speccing can undermine the solvency of the solicitor's very existence.
It may not be the one-off large loss that does the damage because they are relatively few and far between. It is more the accumulation of small losses and over a period of time that aggregate to cause financial embarrassment - and perhaps, failure.
Speccing can also affect the solicitor's client. There is a real possibility that a solicitor will loses the appetite to run a 'self insured' case (or cases) because the prospects of winning have dropped and the potential costs exposure is rising. So, they might decide to protect their own financial position by compromising the legal action, persuading their client to settle for less than they might be entitled to, and close the cases down. Clearly such behaviour cannot be in the client's best interests.
There are rules to protect clients against this sort of thing. Solicitors owe their clients a duty of care under Law Society rules and speccing would not appear to be behaviour that is in a client's best interests. So why do solicitors do it?
Personal injury
One reason may be linked to the availability of ATE insurance. While there is an insurance market for most types of personal injury cases some solicitors may have a problem obtaining cover for their clients because of, say, the size or the experience of their practice. In addition, there is not a market for all types of PI cases. For example, clinical negligence cases can be difficult to place with ATE cover.
The cost of ATE insurance may be another reason that leads solicitors to speccing. The well publicised premium recoverability challenges brought (on the whole) by liability insurers have acted as a deterrent to solicitors who simply don't want to find themselves caught up in the fringes of so called satellite litigation.
Some solicitors cite the increased administration connected with insurance. Perhaps this is a factor (or is it an excuse?) as solicitors try to reduce frictional cost in their processes and there in no doubt that issuing an insurance policy requires some (minimal) effort. So, if speccing is a problem, what can be done?
It would help if the Law Society clarified its position on the practice of speccing, ensured there are very clear rules as to what is and is not acceptable, and then enforced those rules with vigour.
The FSA should also take a look at what is going on. On one view there is a mass of unregulated insurance being transacted right under its nose.
At the very least there is a question over, say, ICOB 7.4 (for those solicitors who are regulated as an insurance intermediary) and conflicts of interest?
ATE insurers should take a hard line to ensure that solicitors stick to the terms of their business agreements and insure all of their personal injury cases. The practice of speccing damages the ATE insurer as he is being denied the apparently less risky cases and this distorts the underwriting pool through selection.
Finally, perhaps it is time for professional indemnity insurers and brokers alike to wake up to what is going on.
In the lead up to the 2006 renewal season, are they asking the right questions about speccing and how does the practice of speccing affect the PI cover? Where does speccing leave a solicitor's practice - potentially without PI insurance? Where does that leave a client - potentially without a financial remedy if the solicitor's practice fails under the pressure of attritional financial risk?
The speccing of personal injury cases by solicitors is a real problem. Not only is it questionable from a legal and regulatory perspective, but also it cannot be said to be in the best interests of clients.
And, it further undermines the already fragile ATE market which is a situation all stakeholders in that market should address. It is not a harmless dilemma of choice or exercise of freedom. It is a potentially serious business with potentially serious consequences. IT
' Peter Dobie is the underwriting manager for Allianz Cornhill Legal Protection