Market conditions have produced something of a ‘perfect storm’ around the October professional indemnity insurance (PII) renewals this year.
There is a high level of conveyancing claims in the system, essentially generated by problems in the property market; the assigned risk pool will shut, but with the insurer-funded pool still costing insurers significant sums, there is no benefit to this reflected in 2011/12 premiums; the legal services economy remains difficult; and many firms are investing in preparation for more competition from alternative business structures, to be licensed within days of the PII renewals deadline.
According to the Law Society, PII premiums could be higher for 2011-12 compared with 2010. It is estimated that 2010-11 also saw typical increases of 15%-20%. So cover is more expensive, and with the rises attributable to an increase in claims, it is unlikely that significant new capacity has been attracted to the market.
All this is of particular concern to new practices, smaller practices and sole practitioners, and is an unfortunate context for black and minority ethnic-led practices which have reported in the past that cover can be proportionately harder to obtain than for many other practices.
Sum of the parts
The premium may be calculated on such basis as the insurer determines and the firm accepts including, without limitation, a basis which recognises:
- claims history;
- categories of work performed by the firm;
- number of principals and employees;
- revenue derived from the practice, and
- other risk factors determined by the insurer. In 2010, responding to research conducted by the Law Society into cover for BME-led firms, the Association of British Insurers (ABI) published a report last August, Addressing concerns about the operation of the market for solicitors professional indemnity insurance for Black and Minority Ethnic firms
The report was a robust defence of insurers’ record on direct discrimination. It concluded: ‘We believe that the evidence shows that the problems they have experienced stem from the typical make-up and issues associated with BME firms and can thereby be objectively justified, and do not amount to any form of unlawful discrimination.’
That was not the end of the story, though. Legal advice obtained by the Law Society and its BME Forum noted that BME firms tend to have smaller turnovers than non-BME firms. ‘Therefore,’ its most recent update notes, ‘differential treatment by insurers in terms of level of premium or availability of insurance cover at all will be prima facie indirect discrimination.’
That should mean that insurers will need to show an objective justification for the differential requirement they apply in respect of turnover.
As a final step, after discussions with the Law Society, the SRA advised qualifying insurers of the addition of an ‘equality rider’ to the Qualified Insurers Agreement. The purpose of the rider is to ensure that insurers are in a position to satisfy the SRA that the arrangements for facilitating solicitors gaining professional indemnity insurance is free from discrimination and will promote equality and good race relations.
It is not yet clear whether the equality rider has had an impact, but if greater focus on this issue has had an effect, it would move attention to the way that a claims history, or a business case, is presented to insurers by smaller practices, including new startups.
Law Society PII Survey
The Law Society’s Professional Indemnity Insurance Survey: Renewals 2010 has found that more firms had difficulty renewing their PII in 2010 than in 2009, and more reported an increase in premiums.
The survey revealed that 63.5% reported no renewal difficulties in 2010, compared with 79% in 2009, while 69.3% experienced a premium increase in 2010, compared with 62% in 2009.
The report also revealed that there was no evidence of discrimination by insurers to black and minority ethnic law firms in the renewal process. Law Society chief executive Desmond Hudson has written to the Financial Services Authority, Association of British Insurers and the Equality and Human Rights Commission, reiterating the need to maintain the drive for a more open and transparent renewals process.
Hudson says: ‘It is encouraging to see that the survey findings shows only 4.4 per cent of BME firms felt that their ethnicity had an impact on the premium they paid and that the size of a firm, its claims history and in-year changes to the number of fee-earners have the biggest effect the firms’ PII premium.’
The Law Society, EHRC and others including the SRA have worked together to attempt to ensure that any potential for any form of discrimination is removed.
The ABI and the FSA have also undertaken some work in this area. Hudson adds: ‘However, collectively, we must continue to work to ensure insurers continue to move towards a PII process that is transparent and that risk factors are properly understood by firms.
‘We have requested to be informed of the ongoing progress in this respect so that any differences in treatment between groups of our members can be seen to have legitimate objective justification.’
A like-for-like comparison in the survey of BME and non-BME small firms found no significant differences in outcomes or premiums paid, suggesting that any difficulty in the renewal process experienced by BME firms were likely to be related to the size of those firms rather than the ethnicity of the firm.
However, there was a disproportionate number of BME firms in the assigned risks pool according to the survey’s findings. The small number of ARP firms in the sample means this is not a statistically a reliable analysis to explain this finding.
The Law Society is again planning to provide a PII Helpline in the build up to the renewal period. This will supplement the other support and guidance the Law Society provides to members. The Society’s suite of PII focused support includes the free Insurance Matters magazine, PII Buyers and Brokers guides, PII Practice Note and a PII Online Seminar.
The business case
After a relevant claims history, the business plan for a practice will be of key interest to an insurer, especially when the firm in question is a startup, and even at the height of the recession, figures show a high number of new firms being founded.
A sound business plan should clearly underline to insurers that the business understands the main risks of starting up, that it has an understanding of the regulatory requirements of setting up, and that members of the new firm have relevant experience. It is worth being explicit if the new firm’s members will bring a client following with them, underlining professional links that will be relied on for recommendations where these have worked in the past.
A clear understanding of the market context in which the firm will operate should also help, including the business development initiatives that will generate new client work.
The claims history of a law firm, and also the personal record of the solicitors working for the firm, is evidently one of the most important points an insurer will want to consider. A worse claims record will, of course, result in a higher premium for a new or legacy firm.
In this case, as with well-established firms, there may be an opportunity to ‘clean-up’ a reputation with the help of specialist advice. Frank Maher, founder of niche firm Legal Risk Solicitors, regularly writes ‘risk reports’, to be shown to insurers, for firms that have faced severe or multiple claims.
In such reports, costing typically £2,500-£5,000, an assessment is made as to whether the underlying problem has been eliminated, or if more steps need to be taken to ‘root it out’. ‘Insurers attach a lot of weight to a prospective insured’s claims history,’ he tells the Gazette, as ‘even a single claim may point to a systemic problem’.
In one instance, he cites a £500,000 saving on a premium from using reports as a tool.
Insurers may not immediately recognise new efforts made by a firm to manage risk better, but firms of all sizes can take significant steps to manage risk better in a way that should pay dividends in the long-run.
Nigel Plant, a partner at Plexus Law, acts for many law firms facing negligence claims - he estimates 700 claims at any one time, mostly against practices in the 1-10 partner range. ‘You see the same problems time after time,’ Plant tells the Gazette.
The last 10 cases concluded by his firm were, he says, a typical range of claims. These cases included the failure to register a charge; planning problems; failure to advise on a restrictive covenant; no advice on a lease break clause; failing to protect one half of a joint capital investment; a fraudulent remortgage; and failure to advise on a public right of way across land.
‘Better training, and better supervision would have avoided so many of these problems,’ Plant notes. He believes that five key steps would have kept most of these firms from a position where claims were made against them.
The first is to have fee-earners audited more regularly. In a small practice, that would mean reviewing the files of a different fee-earner each month. Second, Plant recommends a file-and-case management ‘best practice policy’, that sets out in clear terms an acceptable level of risk.
Third, he notes, time spent on money laundering checks is hugely important: ‘In the latest cases, we are seeing a lot of mortgage fraud.’ Fourth, Plant stresses the need for good communication. ‘Communication is basic stuff, but if attention hasn’t been paid to whether or not a client is keeping up with you, problems can arise.’
Finally, he stresses the importance of an audit or accreditation process that makes a practice focus on its processes and standards. ‘Lexcel accreditation is how we do this,’ he notes, ‘but anything that makes the practice focus on doing things right the first time, and improving delivery of service, is helpful.’
Tips for new firms
Insurers and brokers advise start-up law firms to include the following information in their business plans.
- Be clear on how the new firm will be funded, including realistic financial targets;
- Identify the overheads, checking the list against a peer’s overheads list;
- Set out where clients and new business will come from;
- Include a marketing and business development plan;
- Demonstrate that you have understood the new firm’s regulatory requirements;
- Set out the risk management procedures;
- Include the career profiles for all solicitors who will work in the new firm;
- Clearly explain any investigations, previous claims or past liabilities. An independent report may assist here;
- Seek professional help that may be needed to support the submission early, so it can shape the proposal; and
- Be clear that the new firm is properly integrated not a ‘sham partnership’ designed to achieve a lower premium, but is to be a properly integrated firm.
In better times, some practices found that submitting a proposal just before the renewal deadline secured the best quotes. This approach is much riskier in the current ‘hard’ market. The advice in this year’s ‘hard’ market is to submit, well, pretty much now. A timely submission is especially important where a firm needs insurers to look at information that requires any sort of explanation.
In general, it may seem as if events are coinciding to make this another tough year for renewals. Certainly there is plenty to focus on. But Maher is one of those predicting a less dramatic renewal season than last year.
‘Overall – I think that there will be another tranche of firms, but not an enormous number, who go out of business this time, perhaps because they have had a few bad claims this year,’ he notes, but adds: ‘There will be premium increases for the smaller firms, but they won’t be enormous, and no real increase for large firms unless anything dramatic has happened to them.’
Eduardo Reyes is Gazette features editor
High risk practice areas
A firm's areas of practice and the amount of income it derives from each of those areas may affect the firm's premium, and whether it is offered PII.
Certain areas are designated as high risk because they generate more claims than others. If a firm derives a significant amount of income from these areas, the firm's premiums or difficulties in obtaining PII may increase.
High-risk areas include:
- residential and/or commercial conveyancing;
- wills and probate;
- personal injury;
- some forms of litigation; and
- niche areas of law with which insurers are unfamiliar.Source: The Law Society, professional indemnity insurance practice note.