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SRA's compensation fund to provide cover for negligence claims against uninsured firms

29 September 2014

A recent article in Legal Futures suggests that it will cost contributors to the SRA's compensation fund £2.5m in the 2014/15 year in order to cover negligence claims against uninsured firms following the ARP's closure last September.

Since the ARP's closure, the fund, which has only received £1m in contributions to cover such claims over the last two years, has only responded in one instance to the tune of £750. Nevertheless, with the number and value of claims against uninsured firms on the rise, the SRA has applied to the LSB for the change in dynamic from the market to members of the SRA providing cover to become a permanent fixture. 

This should be considered in context. The fund has already been nominated to meet demands for run-off cover against PI insurers that have been unable to survive over the past year, typically unrated insurers which modelled themselves on offering affordable premiums to meet minimum terms such as Balva. Furthermore, the LSB has approved proposals to lower individuals' and firms' contributions to the fund by nearly 50 per cent, albeit this should be understood against a backdrop of anticipated reductions in the SRA's interventions and archiving costs.

RPC'S article in The Lawyer in July 2013 predicted that the Fund would struggle to meet the mass influx of claims. It should be remembered that the reason the Fund was set up was entirely separate from its current role, so the contributions it receives (largely from the practising certificate levy) are not geared up to cope with demands of the type and amount that are starting to roll in.  We learned earlier this year that the SRA wish to cut contributions to the compensation fund, which seems at odds with the current situation unless another means of funding can be found.  If they do go ahead with their plans, a more intrinsic shake-up of the PI market may be necessary, possibly moving away from putting consumer protection at the forefront, removing the unrated sector and/or alleviating minimum PI terms to ease pressure on the fund in meeting run-off claims.  The other option may be to consider another separate fund for run-off claims along the lines of the ARP, albeit this would surely be a backward step. 

It is a perilously difficult balancing exercise between the interests of the consumer and the interests of firms in keeping their PI outlay down and the SRA are not showing any signs of having struck that balance just yet.

Article in Legal Futures