Law: Our Learned Friend - Splits in the profession

THE SOLICITORS' profession is currently riven by disputes over the cost of negligence insurance. But this is not just a problem for lawyers; there are also implications for their clients, as shown by the stories appearing in the business pages of the broadsheets.

In brief, in 1987, the Law Society set up the Solicitors Indemnity Fund (SIF) as a mutual insurance scheme. The fund was designed to insulate solicitors from general market conditions and reduce premiums by removing the need to make a profit - both worthy objectives. The scheme insures the first pounds 1m of every claim; premiums are calculated by the size of the firm.

So what went wrong? In 1996, it emerged that there would be a shortfall on SIF; the amount now exceeds pounds 400m. As there is no reinsurance in place, this burden falls on those solicitors who are now partners or sole practitioners - and it is estimated that the top 10 firms face payment in excess of pounds 1m.

In addition, under the scheme little regard could be paid to claims history or the relative risk of different types of work; and cover was guaranteed, irrespective of claims history. A substantial part of the shortfall may arise from claims by building societies and others as a result of falling property prices in the early Nineties. Consumer and professional pressure has already reduced conveyancing fees - and this price-cutting can lead to sloppy work. In most parts of the country, it is simply not possible to convey a house efficiently and profitably for a fee of pounds 200.

Buying a house is not like buying a can of beans - it is the largest financial transaction for most people, filled with personal worry, and every case is different. Clients need personal service.

Clearly, conveyancing charges by the cheapest firms will have to rise, making it even more difficult for them to compete against bigger firms. As a result, many will disappear and, in the end, consumers will suffer, with less choice, less personal service, and higher prices.

Conveyancers are aggrieved at their loadings and efficient solicitors are angry that they seem to be over-subsidising the incompetent. Some large firms are paying more than pounds 1m for pounds 1m-worth of cover. The vast majority of competent solicitors would now like to take their chance in the commercial market - as they already do for cover in excess of pounds 1m.

A final decision will be made in January. Either SIF will continue as the sole insurer or as an optional insurer alongside the insurance market, or market insurance will be used and SIF will be wound down. Pending this decision, members are threatening the Law Society with legal proceedings or special general meetings - hence the news coverage.

So what emerges from this sad tale? One way or another, it is the clients who will, in the end, finish up paying for the pounds 400m-plus shortfall - with more expensive legal services in the future.

The Law Society has suffered a blow to its credibility which makes its job more difficult, if not impossible, and it faces the risk of a permanently divided profession if it gets the answer wrong.

And finally, the whole sorry saga demonstrates the dangers of over-regulation. What started out as a worthy attempt to protect the public and the profession has , through a combination of poor management and interference, finished up causing major dissent within the profession and satisfying no one.

The writer is chairman of the City of London Law Society and a partner at the law firm Kingsley Napley