Many law firms renewing their professional indemnity insurance (PII) on 1 October this year were faced with higher premiums and a reduced choice of insurer. This would have been unwelcome news given that the profitability of many of these firms would have declined over the past seven months or so due to the current pandemic. However, the solicitors' PII market was hardening well before the emergence of Covid-19. This article examines:
- The causes of the hardening market over the past couple of years; and
- What law firms and insurers are doing to keep premiums down
What has caused the hardening market in recent years?
Significant changes in the PII market occurred two years ago when a thematic review by Lloyd's of London highlighted the poor performance of International PII and called for remedial action across their syndicates. This then filtered across to the company markets. As a result, many underwriters withdrew from the solicitors' PII market and some increased premiums. This in itself caused a lack of competition leading to market conditions deteriorating, increasingly challenging renewals and further increasing costs.
A rise in the volume of negligence claims has also caused the market to harden. Losses from conveyancing work have always been a problem and in recent years, a significant number of claims have arisen as a result of conveyancers working on what the Solicitors Regulation Authority (SRA) describe as, "dubious investment schemes", most frequently buyer-funded developments. The number of claims involving lawyers working on complex probate and family matters has also increased.
What are insurers currently concerned about?
There is concern that the effect of the Covid-19 pandemic will cause an increase in claims. Insurers are always concerned about a recession because economic downturns often coincide with a risk in claims – this was seen after the financial crisis in 2008/9. A further cause for an increase in claims could be the constraints caused by home working. It is expected that many employees will have been working at home with limited supervision and limited IT services. Those IT services could also have been more prone to cyber-attacks.
What steps are law firms taking to keep premiums down?
We are learning that some law firms are starting to outsource their back office function and in particular, their accounts team. The intention behind this (apart from some costs savings) is to remove the risk of client account fraud which insurers are currently viewing as a heavy risk making up a significant proportion of the overall solicitors' PII premium.
Furthermore, some law firms are placing their full aggregate excess into an escrow account in advance of policy inception, which is giving the insurer the confidence, that if claims do arise, the excess will not fall back on them. This is not sufficient comfort for some insurers, however, who have insisted at renewal that the individual partners of firms with a particularly significant risk profile provide them with personal guarantees to ensure that any future financial commitments (premium payments, excess liabilities, run-off premiums) are honoured.
We are also seeing some law firms pay for independent risk audits to be carried out, with the resulting report being given to insurers as a way of enhancing confidence with the insurer, maintaining curb appeal and thereby keeping premiums in check.
What steps are insurers taking to keep premiums down?
Underwriters are now looking at renewals with increased scrutiny by exploring ways to lessen their exposure. This has resulted in the request for reduced limits and an increase in self-insured excesses.
The International Underwriting Association (IUA), whose members underwrite most of the indemnity insurance cover for law firms, have recently published two open letters: one to the industry and the other to solicitors firms.
The IUA explain that they have been talking to the SRA about the non-cancellable cover provided by the minimum terms and conditions (MTCs) to which insurers have to sign up – in particular run-off cover. The IUA said that it had proposed changes to the MTCs that would mean that policies could be cancelled in the event of non-payment, payments of excesses could become mandatory and would be deducted from claims, and payment for run-off cover would become compulsory at inception. The IUA considers that these changes are necessary because of the effects of the current pandemic, and that the credit risk taken on by insurers for the nonpayment of premiums and excesses could become "commercially unacceptable", leading to "a restriction in the availability and affordability of PII across the board".
The SRA have recently undertaken a two-year period of consultation on insurance issues, including looking at a fundamental review of the MTCs. However, their overregulator, the Legal Services Board (LSB), ultimately decided that in light of feedback from the profession and consumers, the risk of dilution to client protection meant that there should be no changes to the MTCs at the current time.
There is, therefore, an ongoing stand-off between the SRA and the LSB; one arguing that consumer protection is absolutely fundamental at all costs, and the other arguing that 'all costs' might just mean the end of a significant number of the firms they represent.
The Law Society have offered to work with the SRA and the IUA to reach a mutually acceptable solution and have suggested that as an interim measure the SRA should be more willing to take regulatory action against solicitors who do not make the requisite payments.
The Law Society have responded to the IUA with president Simon Davis explaining that the Law Society:
"understands the concerns of insurers and is sympathetic towards their request but is mindful that the primary purpose of professional indemnity insurance is to protect solicitors' clients and the wider public".
There is therefore also a difficult battle to be fought here, with consumer protection currently continuing to trump the interests of the profession in maintaining financial viability. Insurers are in an impossible situation and, in a free market, their only option is to raise the price of the 'giltedged' cover they provide to ensure that it covers the cost of the almost limitless range of claims it is required to indemnify.
The IUA's proposed changes to the MTCs are sensible and need to be implemented if the cost of solicitors' PII is to return to anything like a long-term affordable level. It cannot be right that the insurance market is expected to insure law firms for free.
The insurance market has suffered operating losses across solicitors' professional indemnity since the demise of the Solicitors Indemnity Fund and the return to the open market in 2000. Insurers are now seeking to redress the balance, with the withdrawal from the sector being seen as the next step if the MTCs are not brought into line with commercial reality. Until that happens, sadly more firms will struggle to continue trading due to the expense of the cover that the SRA require them to obtain.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.