One of the more valuable features of the Solicitors Regulation Authority's Minimum Terms and Conditions is the treatment of defence costs. Under the MTC, a qualifying professional indemnity policy must cover defence costs in addition to the minimum limit of indemnity, rather than eroding it. For a firm facing a substantial claim, that distinction can be the difference between a limit that absorbs the whole exposure and one that is consumed by legal fees before any damages are paid.
Professional indemnity wordings in the open market come in two broad shapes. In a costs-inclusive policy, defence costs and damages share the same limit, so every pound spent defending a claim reduces the money available to settle it. In a costs-in-addition policy, defence costs are payable on top of the limit. The MTC mandates the more protective structure for the minimum layer: defence costs are covered in addition to the minimum limit. A firm buying cover above the compulsory minimum should check how the excess-layer wording treats costs, because the MTC protection attaches to the primary layer.
Defence costs under the MTC broadly include the legal and other costs incurred with the insurer's consent in defending, investigating or settling a claim, and in dealing with proceedings connected to it. Because they are covered in addition to the limit, the firm has the benefit of a proper defence without watching its indemnity shrink in real time. This matters most in hard-fought professional negligence claims, where the costs of expert evidence and a contested trial can be very large relative to the sum in dispute.
The MTC also restricts how the self-insured excess interacts with defence costs. In broad terms, the insurer must meet defence costs as they are incurred and cannot require the firm to fund them through the excess before the insurer engages. The excess is dealt with in more detail in the related entry on excess mechanics, but the practical effect is that a firm is not left financing its own defence out of cash flow while a claim runs.
Because costs do not erode the limit, an insurer and insured can make defence decisions on the merits rather than being forced into an early settlement simply to preserve the indemnity. That protection is one of the reasons the compulsory solicitors' regime is often regarded as generous by comparison with cover other professions buy voluntarily. Surveyors, for example, contract under the RICS minimum requirements, which take a different approach in places - the contrast is drawn out in our surveyors' PI guide. For the wider picture of how a solicitor's policy fits together, see the solicitors' PI insurance guide.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.