With a target date of 1st October 2006 for the introduction of a new open market scheme for insuring solicitors in Hong Kong, this is likely to be the hot-topic for the Hong Kong professional indemnity market in the year ahead. As such, at the risk of the accusation of self-obsession, we have decided to dedicate this issue of the Asia-Pacific Insurance & Reinsurance Bulletin to those seeking to insure solicitors in Hong Kong.
With the Hong Kong PI insurance market suffering from a combination of over-capacity and low premium rates, the Hong Kong Law Society's decision to replace the existing mutual scheme for insuring Hong Kong solicitors with a Qualifying Insurers Scheme (QIS) by 1st October 2006 has been cautiously welcomed. Yet with so much to accomplish for everything to be in place by the 1st October 2006, only those insurers that go into the scheme with their eyes wide open are likely to reap rewards from the experience. Later in this bulletin we will examine some of the recent judgments on solicitors negligence in the last two years which highlight the way in which solicitors continue to become unstuck, so that those insurers interested in QIS can see just what they are in for. In this article, however, we concentrate on examining what the new scheme is and how it aims to improve things.
The genesis of the QIS
Under the current solicitor's professional indemnity scheme, indemnity is provided to solicitors by a mutual fund, similar to the old Solicitors Indemnity Fund in England & Wales. The fund (made up of contributions from all member solicitors) provides solicitors with cover up to a limit of HK$10 million per claim (inclusive of Defence Costs).
One of the fund's re-insurers, HIH, went into liquidation in March 2001, and as a result the insured solicitors firms were asked to make additional contributions to the fund to fill in the gap left by HIH being unable to meet its obligations. This process highlighted that under the current scheme, solicitors themselves were their own insurers of the last resort, a situation which had never been intended. In response to this situation, therefore, the Law Society was asked to re-examine the entire basis of the current scheme and as a result of this process, on 16th November 2004 the members of the Law Society resolved to establish a new scheme consisting of a Qualifying Insurers Scheme and an Assigned Risk Pool.
Details of the New Scheme
Under the proposed new scheme, in place of the fund, solicitors will be allowed to purchase the same cover as before (HK$10 million per claim) from any "qualifying" insurer who will be allowed to issue policies. The terms of the cover can be negotiated between a specific firm and a "qualifying" insurer, as long as the terms include certain Minimum Terms and Conditions provided by the Law Society. Subject to these limitations, therefore, qualifying insurers will be able to rate risks individually, on a firm by firm basis (as they can with any other insurance). In order to become a "qualifying" insurer, an insurer will have to demonstrate that it is able to meet certain set criteria (which are currently being developed). In effect, therefore, rather than being self-insured through a mutual, the insurance of solicitors in Hong Kong is going open-market.
Those firms unable to obtain insurance from a qualifying insurer, however, will have to obtain cover from a default Assigned Risk Pool (ARP). The ARP will be funded by contributions from all the qualifying insurers. If a firm ends up being insured through the ARP, then it will have to comply with certain special measures and limitations on eligibility. Firms will not be able to remain insured through the ARP for more than 24 months in any 5 year period, and will therefore be forced to seek insurance in the open market with a qualifying insurer if they exceed these time-limits. If a firm no longer becomes eligible for insurance through the ARP because of this time limitation and is unable to obtain insurance with a qualifying insurer in the open market, then it will be forced to cease practising.
The aim of QIS
Aside from ensuring that the profession is not hit again by "another HIH", it is hoped that the discipline of open-market insurance will impose stricter risk-management on the entire legal profession throughout Hong Kong. So far international firms, whose internal procedures have been adapted to meet the insurance requirements imposed on them in other jurisdictions stand apart from the rest and it is hoped that this culture of risk management will spread throughout the entire profession. Whether this will happen or not depends not only on the willingness of the insured firms to adopt a new "risk-aware" culture but also, in part, on the standards imposed by the qualifying insurers in order to obtain the business. Will they seek to ensure that individuals are appointed in firms to whom potential circumstances should be notified? Will they ask for the firm's standard terms and conditions of business to be adapted to limit liability where possible (particularly in non-contentious work)? Will they demand evidence of supervision processes in place? Or will this discipline simply get left behind in favour of trying to maximize premium income?
Time-table for introduction of the New Scheme
At the time of writing, the aim is to bring in QIS and the ARP in time for the next round of renewals on 1st October 2006. This date has already been postponed once from 1st October 2005 and much remains to be done in order to meet the new deadline including putting in place an appropriate run-off arrangement for the old scheme and making arrangements for the way in which claims under the new scheme will be handled.
Further, concern has been raised from some quarters regarding how much the implementation of the scheme is likely to cost. As a result of these concerns, the Law Society is currently piloting a scheme whereby 50 firms representing a spectrum of solicitors firms throughout Hong Kong are going through a mock underwriting process in order to provide an indication of the levels of premium at which QIS coverage is likely to be available.
Looking forward
Currently, PI open market insurers have been able to provide cover for firms above the HK$10 million limit where the current scheme's cover stops. But writing insurance below this top-up level is likely to be an altogether different discipline. Claims activity has to be expected. Accordingly, seeking to impose strict risk management requirements on firms is likely to go hand in hand with good underwriting discipline in order to produce a positive loss-ratio. Further, a knowledge of those areas of legal work where the claims are most likely to come from may be of use as this may assist in the rating process. The rest of this bulletin is therefore dedicated to examining the solicitors' cases in the last two years which have made it to the court, as a means of trying to ascertain the extent to which past experience can be of guidance for the future.
For more information on the featured article, please contact peter.gregoire@cms-cmck.com
