We received a letter from the SMDF about its financial affairs.
According to the letter, everything appeared hunky dory in the garden until receipt by the SMDF of an actuary’s report on 23rd March 2011. The report seems to have been received by the directors of SMDF with mixed emotions. It showed that SMDF was “not under immediate stress” but it “might not have sufficient reserves to pay claims into the long term future”.
This benign prospect was offset by advice in the report that SMDF should seek appointment of a liquidator. This course could only be avoided by closing down promptly AND getting new capital of €14 to €16 million to carry on for 15 years [still closed down].
Well, hats off to SMDF, not to feel immediate stress from this prospect.
Interestingly, SMDF, unlike the Law Society, sees no threat to its reinsurance contracts. This makes sense; liquidators may sometimes repudiate onerous contracts but they are not known to repudiate beneficial contracts very often.
Again, interestingly, SMDF reinsured 100% of its business for the “current period”, meaning January 2011 to December 2011. That can only mean that the SMDF members finally got something like real insurance cover against claims of negligence. It also means that any claim arising in 2011 will cost SMDF nothing; the risk is laid off elsewhere.
So where have the claims come from, that the SMDF needs “re-capitalisation”? From previous years it seems. Where else?
Bear in mind that SMDF operated on a “claims made” basis. That meant that it “accepted” a claim made now, even though the negligence long predated the claim, possibly occurring in some previous year, when the solicitor was insured in the normal way with an insurance company. As a consequence of this, SMDF has known of the financial problems the relevant claims represent since dates long preceding March 2011.
In fact we knew that; SMDF had asked for and got a loan facility of €8.4 million from the Law Society in 2009. [Here, for “Law Society” read “the Council of the Law Society”].
All of this should be taken with a grain of salt. It is very possible to mismanage an insurance claim after it has been lodged. It is necessary to estimate the extent of the claim in money terms and set aside sufficient reserves of that amount. If SMDF failed to make the necessary estimate accurately, the maturing claims might prove unmanageable.
Possibly, that is what happened. But did it happen twice, firstly in 2008-2009, and again in 2010? No wonder the Law Society is talking about the insolvency of the SMDF, even though SMDF is prohibited from making payments, the effect of which would be to make it insolvent.
While the Law Society characterisation of the SMDF position may be understandable, it is misleading to speak of insolvency when there is not and cannot be an insolvency. This is all the more so given that the Council of the Law Society, in establishing SMDF, ensured that SMDF COULD NOT make a payment leading to its insolvency.
As for the directors of SMDF, there are two questions.
A) Do you accept responsibility for the mis-management of SMDF, resulting in its insolvency?
B) If you deny SMDF is (or will be) insolvent how do you think you can persuade a court to appoint a liquidator to a solvent company, as your letter seems to suggest?