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I see a lot of discussions about Regulatory Defence Costs Insurance in the forums of which we are members and there does seem to be a degree of confusion on what this type of insurance covers and how to obtain a competitive quotation. The cover is something we have tried to recommend over the years without much traction with our Solicitor customers, even following the introduction of the COLP/COFA roles, which we anticipated would be a wake up call to firms. Perhaps it has something to do with misunderstanding the scope of Solicitors Professional Indemnity Insurance which many firms believe is an all embracing blanket policy that will protect against every eventuality – well regrettably that is not the case.

Here our principal expert, Paul Evans ACII, advises on some of the myths surrounding Regulatory Defence Costs Insurance:

 

Paul Evans ACII

Paul Evans ACII

Director

Paul is our lead practitioner for Solicitors with over 20 years experience in the sector. You can contact Paul for further insight or advice at solicitors@butlerevans.co.uk or by completing our contact form below.

Myth number 1 – My Solicitors Professional Indemnity will cover me.

I realise the Law Society & SRA make a lot of noise about the broad scope of Solicitors Professional Indemnity Insurance as controlled by the Minimum Terms Agreement and it is true that Solicitors do benefit from perhaps the broadest insurance policy available on the market as a result. However, do not be fooled that the policy is a catchall of every risk you might face in the practice. The policy is primarily to protect the firm against claims your client makes following a professional error and insurers do stick to the core coverage in their policies to keep their policies competitive on price.

Regulatory Defence Costs cover is only included as standard if an SRA/SDT investigation flows from the initial Third Party allegations.

 

Myth number 2 – I bought the Regulatory Defence Cover extension – I am covered!

Yes some Solicitors PI Insurers are cross selling a regulatory defence cover extension to their policies, however the cover afforded varies in scope between insurers and essentially this bolt can be quite limited in application. Considering the legal costs in the Leigh Day SRA Investigations reached some £7-8m and we have seen bolt-on cover which has limits as low as £100,000 then these can be wholly inadequate to meet your needs.

 

Myth number 3 – I have a specialist Management Liability Insurance – I am definitely covered!

Management Liability Insurance (Also known as Directors & Officer Liability Insurance) policies were developed to protect individuals managing Limited company businesses. Regulatory Defence Costs Insurance is covered by this type of policy , but the definition of who is insured can vary widely when it comes to non-employees engaged in the business. Anyone who is working as a COLP/COFA on a consultancy basis to one or more firms will almost certainly fall outside the normal definition of an insured person under this type of cover. In addition we have seen cases of policies being sold to partnerships without the appropriate amendments to the Insured Person definition to cater for the nature of the company structure. Imagine, your Personal Secretary is insured but as a Partner and not an employee, you fall outside the definition!

n a Corporate Entity arising from criminal or fraudulent acts on an individual working without the knowledge of their peers could be indemnified. The same applies to any fines or penalties arising through a civil tort including Contracts signed by COLP/COFA’s with the SRA, there is no impediment on the Insurer indemnifying these other than the scope of Insurance Policy Wording.

Myth number 4 – Regulatory Defence costs Insurance  protects against ALL SRA/SDT investigations

This myth causes the most debate on threads we have read. Logically once Insurance is bought and all the above myth problems addressed, you should be covered – right?

Well if you think this through a little then you will realise there is a general Insurance principle that cover should not be available for Criminal and Fraudulent acts of the Insured Person. However, Insurers will provide defence costs cover whilst there is a reasonable element of innocence against the allegations. So if you are genuinely caught up in a bad state of affairs for which you have no criminal responsibility, you can expect to benefit from Insurance. However, if the position becomes clear that your are criminally responsible or where a criminal conviction is obtained against you, insurers would cease indemnity and even pursue you for their costs.

 

Myth number 5 – Fines & Penalties -cannot be Insured

The answer to this is complex, there is no reason why Insurers cannot indemnify a Fine or Penalty, the key question is how did these originate?

The same general Insurance principle as above applies. Therefore, fines & penalties imposed on an individual arising from Criminal or Fraudulent acts cannot be indemnified.

However, fines & penalties imposed on a Corporate Entity arising from criminal or fraudulent acts on an individual working without the knowledge of their peers could be indemnified. The same applies to any fines or penalties arising through a civil tort including Contracts signed by COLP/COFA’s with the SRA, there is no impediment on the Insurer indemnifying these other than the scope of Insurance Policy Wording.

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