Jon Robins assesses the key changes to the professional indemnity rules

It is unlikely that many law firm partners will be packing the newly revised professional indemnity rules alongside their John Grisham novels as required beach reading this summer. But there are good reasons for lawyers to gen up on the changes.


This year, many firms will have more to consider prior to the 1 October deadline. It has been claimed that the redrafted rules could land smaller firms with 20% premium hikes as a result of a decision to double the minimum sum insured to £2 million and £3 million for limited liability partnerships (see [2005] Gazette, 27 January, 1). At least the decision to move the renewal date back a month, introduced last year, avoids the summer rush to arrange cover before jetting off on holiday.

Peter Farthing, chairman of the Law Society’s indemnity insurance committee, is taking reports of such hikes with a rather large pinch of salt. ‘That’s insurers talking up the price at the beginning of the renewal season – that’s all that is,’ he says. ‘It’s still very early days and we don’t know how the market will pan out.’


Why was cover doubled in the first place? The compulsory minimum sum had been £1 million for almost 17 years, Mr Farthing points out. ‘That’s 17 years of price inflation, claim inflation plus increasing liability, and so an increase was very much necessary,’ he explains.



Earlier in the year, the Law Society Council also agreed a rewording of the definition of ‘one claim’ in its minimum terms and conditions for professional indemnity insurance (PII), known as the ‘aggregation clause’. The move to the commercial market after the demise of the Solicitors Indemnity Fund (SIF) saw a change in the definition of ‘one claim’. Under SIF, all claims arising from the ‘same act or omission – whether or not made or intimated or rising out of circumstances notified during the same indemnity period, and whether or not involving the same or any number of different practices and/or members of such practices – shall be regarded as one claim’.



Under the minimum terms and conditions for cover afforded by qualifying insurers since the move to the commercial market, the insurance ‘may provide that all claims against any one or more insured arising from the same act or omission or from one series of related acts or omissions will be regarded as one claim’. The phraseology followed the standard commercial market wording – the main difference between the SIF and the new wording was the phrase ‘or from a series of related acts’. Insurers had assumed that the wording would allow them to treat as one claim multiple claims arising not only from a series of related acts, but also from a series of similar acts.


That assumption stood until the House of Lords’ decision in Lloyds TSB General Insurance Holdings Ltd and others v Lloyds Bank Group Insurance Co Ltd [2003] UK HL 48 which, as Mr Farthing puts it, ‘came as rather a surprise’ to the industry. Qualifying insurers were understandably alarmed that the ruling undermined the effect of the aggregation clause. ‘The change in the wording is intended to put the insurers back in the position they thought that they were in,’ adds Mr Farthing.


‘Being able to aggregate related or similar claims into one claim is a way in which insurers can manage our own risk,’ explains Jonathan Davies, director and underwriting manager at St Paul Travelers Professional Risks. ‘When we sell policies, we have limits on each and every claim, and the Lloyds TSB interpretation of similar wording in the minimum terms and conditions was of great concern.’


He calls the Law Society redraft of that provision ‘a fairly struck compromise’ between the interests of the profession and the insurance industry. The partly linked move to double the minimum sum will mean many firms will have increased cover for that single aggregated claim, but Mr Davies warns that this may still not be enough for bulk conveyancers and personal injury practices.


Last month, Mr Davies told a St Paul Travelers’ conference that statistics indicated that the number of £1 million-plus claims against smaller firms was on the rise. An analysis of those top-30 firms that are St Paul’s clients showed that they accounted for 64% of all £1 million-plus claims over the past decade but almost one quarter, 23%, were from firms with fewer than 15 partners.



More optimistic commentators reckon that smaller firms – at least those that show a commitment to risk management – could effectively get ‘two for the price of one’, with insurers offering firms the same deals for twice the cover. ‘The increase in minimum cover ought to affect premium levels, but the market is so soft and everyone is hungry for business,’ one broker comments. One recent survey by specialist law firm Legal Risk, principally aimed at top 100 law firms, suggested that firms were shopping around less. Nearly one in five firms had changed brokers in their most recent private indemnity renewal, but the number changing insurers fell from 33% to only 14%.


According to the broker, who does not want to be named, smaller firms are far more ready to jump ship. ‘The reality is that the bigger firms don’t tend to move, whereas the smaller ones – from the sole practitioner to the eight-partner firm – will move to save themselves 50p,’ he says. ‘As far as insurers are concerned it’s a nightmare, but for solicitors it’s great fun.’


There are 23 insurers approved by the Law Society under its professional indemnity rules this year, and the bulk of the market will be shared among the big three: Zurich Professional, St Paul and QBE International. They comprise some 60% of the market for the primary layer of cover.


According to Nick Pointon of broker PYV, this year law firms are being more organised than they have been in past, and many have sent their renewals back already. ‘That’s good news. However, the quotes we are getting from insurers aren’t necessarily in line with what people’s expectations are,’ he says. ‘We are seeing some increases in premiums above what people felt they should be paying.’


He reports increases of 20 to 30%, particularly for the firms specialising in residential conveyancing, and especially those having to arrange double cover. Mr Pointon says: ‘Obviously that is an extra million that people are buying, and underwriters are asking for at least the market rate – for example, to double cover, even if it wasn’t under the minimum terms and conditions, would be £2,000-£3,000 more for an average client with a £20,000 premium.’


Mr Davies reckons there is ‘a duopoly of issues’ influencing premium price. ‘On the one hand, the insurance market is softening and there is more capacity coming into it,’ he says. ‘But there are fundamental factors where pressures are pushing premiums up. One is the historical inadequacy of the insurance market at pricing the legal profession since the SIF. The profession has continuously had a better deal in terms of overall pricing – claims trends aren’t going down and claims inflation means costs are more now than they previously were.’


Nick Bird, a solicitor-advocate who specialises in professional liability claims against lawyers at City firm Reynolds Porter Chamberlain, also flags up another major rule change this year that firms are having to get their heads round. ‘Two or more insurers can now participate in insurance arrangements on that nought to £2 million cover, so you can share the insurance or split it into layers so a single insurer can take the first million and another the next million,’ he explains. ‘I’m not sure how much of that shared participation we are going to see in practice, simply because the market isn’t terribly used to it.’



Insurers and specialist lawyers report that it is the residential conveyancing sector of the profession that still bears the brunt of any increases. However, bulk personal injury firms with relationships with claims farmers are facing greater scrutiny following The Accident Group (TAG) litigation.


Earlier in the year Martin Ellis, director of Alexander Forbes Professions, told the Gazette that insurers would want to inquire about firms’ dealings with claims handlers. ‘This year, we will see more questions asked by insurers regarding a firm’s involvement with claims farmers,’ he predicted. ‘At the last renewal, we saw a greater appetite [by insurers] for firms with a personal injury bias, only to be faced with the TAG problem shortly after.’


According to Zurich Professional, the number of professional indemnity notifications against personal injury solicitors has rocketed by 60%. ‘There appear to be other insurance companies waiting in the wings to take similar action [in relation to other claims management companies],’ Andrew Nickels, risk manager for Zurich Professional recently said.


Other factors that could have an inflationary impact on premiums include the introduction of seller’s packs for conveyancers. ‘They haven’t come in yet and don’t come in until 2007,’ comments Mr Farthing. ‘But they will obviously be an issue for solicitors to take into account. If they are going to prepare seller’s packs – and many think not only that they will but they should – if they get it wrong it’s another liability that they will incur.’


Mr Bird points to Sir David Clementi’s review of regulation of the legal profession. ‘There could be a regime similar to the one under the Financial Services Authority, whereby smaller claims are dealt with by an ombudsman and he makes a determination as to what is fair and reasonable,’ he says. ‘It could be that solicitors feel frustrated about a more broad-brush approach to the way that complaints are dealt with.’ However, as Mr Bird says, it remains to be seen what the Clementi reforms will bring.


For the bigger firms, future trends are harder to discern. According to St Paul Travelers, mergers and acquisitions work accounted for the highest number of big claims among the top-30 firms (36%). Mr Davies reports a notable increase in claims emanating from overseas offices. ‘We used to talk about overseas offices being low risk, and we would discount on that basis. But we are seeing a lot of claims now,’ he says. In particular, he highlights those firms expanding into eastern Europe and becoming involved in construction and infrastructure deals.


Michael Seymour, a professional indemnity specialist at City firm Lovells, who arranges the firm’s cover, says brokers are claiming there is more capacity in the market. ‘The larger firms find there are really only a very small number of insurers who are in the market and interested in insuring them – extra capacity may have some effect at the primary layer [the compulsory minimum] but in the upper layers it can make a bigger difference,’ he says. ‘We are looking for a slightly easier run this year.’


At the other end of the profession is the assigned risks pool (ARP), which is the legal profession’s ‘sin bin’ for those law firms that cannot find insurance. Earlier in the year, the Gazette revealed that the estimated cost of the running the ARP ranged from £7.5 million to £17 million for the first three years of its operation (see [2005] Gazette, 27 January, 1).

There have been a few dozen firms in the ARP in any year, although this year it dropped to just 19. It is a condition of being a qualifying insurer that you each underwrite the cost of the ARP according to your market share, and that expense is passed on to the rest of the profession. The cost is mainly made up of claims the firms generate and premiums that are unpaid.


‘It’s a very small proportion of the profession,’ says Mr Farthing. ‘The market is insuring roughly 7,970 firms and leaving 30 firms to the pool.’


Unsurprisingly, insurers are less happy. Mr Davies says those offending firms still create a burden for the rest of the profession to bear. ‘They still generate enough claims such that the shortfall in the premiums collected from them and the claims we are paying probably equates to 2% of our total premium costs for the whole profession,’ he says.


Most of the firms are in the pool not because they are unlucky but because they are poorly managed and have a bad claims record, he says. ‘It should be taken extremely seriously if the whole insurance market has shunned them,’ he says. ‘It should be taken more seriously than it is.’


Jon Robins is a freelance journalist