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Lenders at risk of serious exposure with incoming legal change – Shoosmiths

by: Emma Lowe, senior associate at Shoosmiths
  • 18/10/2019
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Mortgage lenders could be exposed to serious financial penalties when a forthcoming change to the legal landscape, concerning run-off indemnity cover for solicitors, comes into effect next year.


In September 2020 the Solicitors Indemnity Fund (SIF) will cease to exist.  

Currently, the fund acts as an invaluable source of supplementary run-off professional indemnity cover for solicitors who worked at firms that have closed down and thus anyone who may have claims against them. 


What is run-off cover?

Run-off cover is a regulatory requirement imposed by the Solicitors Regulation Authority (SRA) to make sure consumers can still recover compensation for professional negligence claims that are brought after a firm has shut up shop.  

Solicitors are obliged to have six years of run-off cover in place when a firm closes and, once that six-year period ends, the SIF covers any claims that subsequently transpire.  

But all of that will change next year when solicitors will no longer be able to rely on the SIF for extended run-off protection which may impact on any potential recovery made should the insurance cover no longer be there.  


How might it affect mortgage lenders?

This has obvious risk implications for lender legal panels.  

If your panel is not insured against any historic negligence claims that arise once the six-year run-off period expires, there could be serious financial consequences.   

Six years may seem like plenty of time to account for potential claims, but the risk can remain long after this period lapses.  

By law, claimants have six years from the date of loss or wrongdoing to bring a professional negligence claim, but in certain cases if the negligence is not discovered until a later point, claimants may have three years from the date of discovery to bring a claim, up to a 15 year ‘long stop’ or final cut-off date.   

In the mortgage lending sector, it is not unusual for claims to take a long time to materialise – with negligent legal advice given at the point of purchase, for instance, often not being discovered until the property owner comes to sell their home.  

In this case, without the SIF safety net and its insurance backing for any professional indemnity claim to fall back on, lenders could be at significant risk of exposure.  


What can be done about it?

For all of these reasons, lenders would be well advised to seek legal advice and ensure that the solicitors currently on their legal panels have adequate run-off cover in place and to consider whether they have any potential claims in negligence against historical (from the past 14 years) panel member firms who no longer exist.  

Given that the SIF will disappear in less than 12 months’ time, the sooner investigations and precautions are taken, the better. 

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