Hammonds’ victory in a £140 million negligence action has provided relief to indemnity insurers but the signs are that the market may still harden.



There was a collective sigh of relief from the solicitors’ professional indemnity (PI) insurance industry last month, when the Football League’s £140 million claim against national law firm Hammonds failed following a robust judgment by Mr Justice Rimer in the High Court. It is reckoned to be the biggest professional negligence action against a law firm to go through the courts.



The league had alleged that Birmingham-based Edge Ellison, which was subsumed into the Hammonds brand, was in breach of duty in failing to protect its commercial interests in an unsuccessful £315 million television rights deal it signed with broadcaster ITV Digital. It was argued that the firm should have advised the company’s bosses to consider seeking parent company guarantees from ITV Digital’s owners, Carlton and Granada. When ITV Digital collapsed, the league was left with a substantial loss.



‘This decision confirms that solicitors cannot be expected to underwrite the success of their clients’ commercial transactions or to advise them of things they know already,’ said Sarah Clover, a partner at City law firm Barlow Lyde & Gilbert at the time. ‘It is very good news for the partners of Edge Ellison, now at Hammonds, and for their PI insurers.’



That view is supported by Michael Seymour, an indemnity specialist at City firm Lovells. ‘If that had come home to roost, then the excess-layer market would have hardened considerably for this year’s renewal. It is a comparatively small market and it would have completely wiped out the premium collected from the entire excess market for this year and probably more.’



There are two elements to solicitors’ professional indemnity cover. The compulsory minimum sum, which doubled to £2 million last year (and £3 million for limited liability partnerships) after a static 17 years, is provided by a select list of qualifying insurers that agrees to minimum terms and conditions and is overseen by the Law Society. Secondly, there is the excess-layer market where firms buy extra coverage above and beyond that minimum.



According to Nick Bird, a solicitor-advocate at City firm Reynolds Porter Chamberlain who specialises in professional liability claims against lawyers: ‘There are cases like the Football League bubbling around at the moment in the market but, because the amount at stake was more than the collective annual premium for the whole sector, it did bring things into sharp focus.’



Frank Maher, a partner at Liverpool law firm Legal Risk, told the insurance press that – while the judgment would be a relief for the insurers directly involved – there would be disappointment elsewhere in the market. As he put it: ‘The result has denied insurers the right to hike up PI rates.’



So the Hammonds saga segued neatly into the usual overheated commentary in parts of the legal and insurance press about professional indemnity rates as the 1 October deadline looms ever closer. ‘Solicitors’ insurers set to face “bloodbath” if rates fall further,’ ran one headline this month. Apparently, brokers and insurers were warning that rates are under pressure to the degree that they have to be hiked because they currently threaten the profitability of the market.



‘What has happened typically over the last five to six years is that rates have been brought down by the smaller firms coming into the market for one or two years, writing competitively and then bowing out,’ says Mr Bird. ‘From an insurers’ point of view, it demonstrates that people are willing to have a go in this market. But the frustration among the larger insurers is that the market is priced artificially low and doesn’t reflect true value.’ He points out that ‘there is a sense to which the larger insurers must be feeling that there can’t be an endless supply of people willing to come in and bring prices down for a couple of years then go’. But he says ‘we don’t know if we are there yet’.



Some in the industry maintain that moment has arrived. Nick Pointon of broker PYV agrees with the thrust of the recent coverage. ‘Everybody is saying that the market is going to be soft but I think there are a couple of insurers pulling out and, while they are not holding a huge amount of capacity, that will change the market overnight,’ he predicts. ‘The lower end of the market, the smaller firms, will be hit massively as the trend goes the other way. Everybody will get on the bandwagon. The solicitors’ PI market definitely needs to harden – and sooner rather than later – otherwise everybody is going to go out of business.’



Nicholas Gilbert, a director in Aon’s professional risks unit, disagrees. He contends that the early indications are that insurers remain committed to the primary market. ‘There are no signs of any market exits, nor are there likely to be, and there is a real appetite among insurers to retain existing business,’ he says. ‘We would expect to see new entrants in this primary market in the run-up to October. These new players will have to quote competitively if they are to succeed in winning business and gaining market share.’



The presence of new entrants in the qualifying insurance market ‘coupled with the market’s existing appetite to retain profitable business’ will ‘put a check on any plans incumbent insurers might have to increase rates’, he insists. Although Aon reckons that the excess market is a different story. According to Michael Silcock, executive director in its professional risk unit, it is ‘not funded with enough premium to sustain a big loss’. The recent Football League case ‘illustrates the potential for such large single-claim losses and highlights the fragility of the solicitors’ PI market as a whole’.



The big three insurers – Zurich Professional, St Paul and QBE International – make up more than half the market for the primary layer of cover. Jonathan Davies, director and underwriting manager at St Paul Travelers Professional Risks, describes the recent headlines as ‘slightly scaremongering’. He continues: ‘Every underwriter that you speak to will say that the rates can’t go any lower and every reinsurer you ask will say that they are charging more for their reinsurance than they were previously, so that’s going up. Eventually that will feed through to the cost of insurance, but it is not doing so yet.’



Phil Foley, senior vice-president at Liberty International Underwriters, which was one of five entrants into the market last year, says coverage has been ‘sensationalistic’ but predictable. ‘This is about the only market I know of in the world where there is one single renewal date for an entire profession – and it is compulsory,’ he says. ‘The mere mechanics of how that is set up creates a massive tension because nobody knows what the market rate is going to be for the year. At the moment, qualifying insurers have not all got in their stride and some have not started quoting yet and some have.’



Mr Foley also notes that, because the compulsory element of solicitors’ indemnity insurance is so tightly defined by the Law Society’s own minimum terms, there is little flexibility in what coverage is offered. ‘And so price becomes all the more important in the solicitors’ renewal season,’ he continues.



Solicitor’s indemnity is big business. Mr Foley reckons there is £300 million of gross written premium. ‘Imagine all that money coming into the market on one single day,’ he says. ‘It is a lot of money, and therefore it ensures competitive pricing.’



In the summer renewal season, the big professional indemnity players hire scores of temporary staff to man telephones to enable them to deal with the volume of calls from law firms. It is often suggested that partners who arrange indemnity cover tend dismissively to treat it as one of a number of things they need to tick off the list before they jet off to sunnier climes, alongside packing the suntan lotion and a good John Grisham novel – although the Law Society has somewhat eased that burden by shifting the date back from 1 September to 1 October.



But why does the Law Society stick to a single renewal date? Insurers and lawyers often feel it is a throwback to the Solicitors Indemnity Fund (SIF), and that it helps only Chancery Lane in its administration of the scheme. Apparently not. ‘We often get the profession coming to us and saying that they would much rather it was a rolling renewal and they think that they could better negotiate rates that way,’ says Andrew Darby, head of the Law Society’s professional indemnity section. ‘Our response is that is not necessarily correct. By having a single day we get this feeding frenzy where there are new entrants who come in – and it creates a very dynamic market.’ Typically, he explains, what happens is that early in the season insurers talk up the rates in an attempt to sign people up by offering deals, then there is a lull when not much is written, and finally there is a ‘flurry of activity’ where firms hang in and wait to see whether the rates have a last-minute collapse.



‘There are always going to be the early birds and the ones that hang on until the end,’ Mr Darby adds. In fact, the number of qualifying insurers remains fairly static at 25 (there have been as many as 35) but the market share of the big three has slipped slightly from 60% to 55%, suggesting greater competition. Mr Darby says: ‘The large numbers of smaller players is actually very helpful. They come in and disturb rates and because they have no trail of history they aren’t trying to recoup premium.’



Last year, the Law Society Council agreed a rewording of the definition of ‘one claim’ in its minimum terms and conditions (known as the ‘aggregation clause’). The move to the commercial market after the demise of the SIF saw a change in the definition of ‘one claim’. Under the fund, all claims arising from the ‘same act or omission’ were to be regarded as one claim. By contrast, under the minimum terms afforded by qualifying insurers, 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 distinction between the two regimes was the phrase ‘or from a series of related acts’. Insurers assumed 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 was a view challenged by the Law Lords (in Lloyds TSB General Insurance Holdings Ltd and others v Lloyds Bank Group Insurance Co Ltd (2003) UK HL 48).



‘The rule change was essential because the interpretation that was left behind as a result of the ruling was unworkable,’ says Mr Davies. ‘It pretty much removed the opportunity for insurers to aggregate anything.’



Mr Darby points out that it cannot be said that aggregation is always good, or always bad, for an insurer. ‘The point to note about aggregation is that it can either work for or against them,’ he comments. ‘If you have lots of small claims with an excess per claim then it might be in the interests of a solicitor to have all the claims aggregated, so long as all the claims are within the insurance limit. You might be better off. Obviously, if you get a number of bigger claims then the danger is, if they are all aggregated into one, they will exceed the cover, which isn’t very helpful.’



In PI terms, the assigned risks pool (ARP) is the legal profession’s ‘sin bin’ for those law firms that cannot find insurance on the commercial market. It has also been described as ‘sulphuric bath’ through which beleaguered firms bounce back into the free market or shut up shop for good. Firms are only allowed two years in the pool and there are currently 25 firms languishing there – ‘a very low level,’ according to Mr Darby. ‘Firms are in the ARP for a number of reasons,’ he says. ‘A poor claims record is only one reason. They might have been declined cover owing to poor payments or because of a disciplinary matter hanging over them, such as a failure to prepare an accountant’s report. They are basically there for whatever reason firms have failed to get insurance on the open market.’



It is a condition of being a qualifying insurer that each insurer underwrites the cost of the ARP according to market share.



Insurer critics say that the net effect is that the many end up paying for the few, which echoes the fundamental problems that many firms had with SIF. ‘The reason why the number is so low is because there is a dynamic and thriving PI market,’ says Mr Darby. ‘The number of firms in the pool is an indication of how competitive the market is. When you get a hardening of rates, the ARP might look attractive.’



Jon Robins is a freelance journalist