It’s a buyers’ market for professional indemnity insurance, reports Grania Langdon-Down, but practitioners must keep on their toes.
As this year’s professional indemnity insurance renewal season hits the final straight, law firms are benefiting from a buyers’ market with exceptionally competitive premiums.
But even though brokers describe the market as ‘soft’ and ‘benign’, with both existing and new entrants keen to build market share, there is still plenty to keep law firms on their toes.
Top of the agenda are cybercrime, proposals for further regulatory changes and the Insurance Act 2015. And practitioners who advise partnerships say they are counselling an increasing number of firms on coverage disputes with their insurers.
So what is the mood of the market with three weeks to go?
Very calm, says Frank Maher, partner with professional indemnity and compliance solicitors Legal Risk. There is plenty of cover available, so few firms should have significant problems. ‘Many brokers are talking of 10%-20% reductions,’ he notes, ‘while a number of insurers have offered early renewal terms.’
It is certainly a ‘buyers’ market’, agrees Sandra Neilson-Moore, who leads broker Marsh’s lawyers’ practice, with the usual caveat around claims. ‘But even those with problems should find cover,’ she says, ‘though it will be more expensive and the pool they can fish in will be more limited.’
Premiums have gone down, though she puts the reductions at 5% to 7%. ‘It’s all about negotiation,’ she says. ‘If your premium has gone up, you should be asking questions unless you have had a large claim.’
The favourable market for firms means insurers are ‘hurting a bit’, she says. Yet the Solicitors Regulation Authority reports the highest number of applications – 50 to date – to be participating insurers, though that includes several who do not offer terms on their own.
So what is the attraction of this market, given any reductions this year come on top of an 8% drop in average premiums last year?
‘The simple answer is the economy,’ says Neilson-Moore. ‘Where else can you put your money? The thing about PII is it has a long tail, so you are earning your money now and you don’t have to pay your losses until several years into the future.’
Colin Taylor, executive director of brokers Willis Towers Watsons’ PI team, looks after firms with 11-plus partners up to the magic circle. ‘Notifications are significantly lower, the renewal market is relatively benign and the capacity is there,’ he says.
‘But clients shouldn’t think it is an easy renewal, because there are still challenges. There are some very large claims about. I have had one firm recently which is coming up to renewal with a £1m notification which needs to be carefully managed.’
However, if a firm is well managed, has invested in workflows and technology, and has a good claims history, it should see a reduction in its premiums this year, says Viv Williams, managing director of the 360 Legal Group consultancy.
There will also be some benefits for group schemes, he says: ‘But, as we know, there is a big contrast between the claims history and quality of firms so, while group schemes are worth exploring, they are not for everyone.’
September has traditionally been the high-stress month for PII renewals. The liberalisation of the PII process three years ago has gained traction, with a third of firms moving their renewal date. However, many firms signed 18-month contracts, which means they are back to renewing on 1 October this year, with insurers expecting around 90% of firms to renew then.
One of those is Maher’s firm, which has just negotiated a reduction on a further 18-month policy. Reverting to the busiest time has not proved a problem, he says: ‘I take the view that rates are low, so every extra month you can buy at current rates and on your current claims record – assuming it’s good – is worth having.’
Taylor is seeing many 12-month polices with an agreement to renew on the same rates, as long as fees have not increased by more than x, the firm has not merged, or had claims in excess of x.
‘These are effectively two-year policies,’ he says, ‘They have been well received as any additional certainty from having a fixed rate is helpful, albeit some argue that rates may come down further if the market stays soft. But I can’t see premiums getting much cheaper, while there is a long way for them to go up if there is a market issue, interest rates increase or Brexit triggers problems.’
Solicitors will spend at least £225m on premiums this year, down from about £255m in 2015.
A third of firms have changed their renewal date since 2013 – though those which took out 18-month polices have now reverted to 1 October. Brokers say about 90% of firms will renew on 1 October this year.
Around one in six firms dealt with their insurer on claims in the year to 1 October 2015, though this rose to 1 in 2 for 11-25-partner firms.
Firms are increasingly looking at separate cyber policies as the scale of attacks increases. Accountants Hazlewoods says law firm cyber losses rose 40% in a year.
Richard Brown, head of the 1-10 partner solicitors team at insurance broker Miller Insurance Services, is also seeing significant reductions in both premiums and rates. What is happening, he says, is that firms’ fee income has gone up across the board but underwriters are happy to offer the same premium as last year, reducing the percentage of revenue firms have to pay.
Where the soft market has had some impact is on unrated insurers. In February, Elite Insurance, which targeted the personal injury firm market, announced it was withdrawing from the market.
Chief executive Jason Smart blamed some rated insurers for reducing premium rates to an ‘unsustainable’ level, which, he said, was ‘ironic as unrated insurers are often accused of discounting rates’. Increasing fraud attacks on client accounts had also become a risk ‘beyond the control of our underwriting team’.
So how worrying are Smart’s claims? Talk of unsustainable rates would ‘make me feel nervous’, says Alan Radford, chair of the Law Society’s PII committee, ‘if I thought that it would result in a dearth of providers. But there are plenty of good insurers jostling for position’.
Radford adds: ‘Unrated insurers came into the market when it was hard and rated insurers were quoting very high premiums which were beyond the economic reach of some firms. We felt it was better to have the devil of unrated insurers than the devil of firms closing. But the competitive market has now driven rated insurers down to the premium levels of the unrated. I am delighted because, if you look at the history of unrated insurers, it has not been a happy story.’
That will chime with the 43 firms insured with unrated Gibraltar-based Enterprise Insurance, which were given just 28 days after it collapsed this summer to find new cover. Two-thirds secured new polices by the deadline, with the SRA working with the others to sort out new policies.
What is clear is that, despite solicitors’ gripes about the cost of PII, it is not a high-margin business. Just one client account bank scam can result in an aggregate loss across a book of business.
But the insurance market is cyclical, and commentators say some insurers may write premiums at low levels to keep their ‘skin in the game’, in the hope that by the time the claims come home to roost they will have picked up more premiums on a future year.
Nipping off to another regulator
A proposal to waive the obligation on firms to buy six years’ run-off cover when they switch to another approved regulator is due to be considered by the SRA board.
If it decides to press ahead, it will have to seek Legal Services Board approval and give insurers two months’ notice of its plans to vary the participating insurers agreement.
Under the current rules, SRA firms transferring to another regulator are treated as closing down. This triggers a requirement to purchase six years of run-off cover even if the firm’s replacement PII also provides similar cover.
The SRA argued in its consultation paper that the cost of meeting the current obligation for run-off cover – which could be two or three times a firm’s annual PII premium – ‘potentially creates a barrier’ to firms choosing the most appropriate regulator.
The waiver could make regulation by the Council for Licensed Conveyancers (CLC) attractive, after its move to an open market scheme this summer with free automatic run-off cover at the point of an insured firm’s closure.
The Law Society raised concerns about client protection, while Alan Radford, who chairs the Society’s PII committee, says the CLC’s move is a ‘clear land grab’ and a ‘very significant carrot’ for solicitors.
‘I fear that firms of solicitors my age, in their late 50s, who can’t sell their business for much, may nip off to the CLC and then close,’ he says. ‘I don’t know whether that will happen but I couldn’t stand against it because it seems to me to be in my solicitor members’ best interests if they are able to do that.’
However, the CLC says it has identified this risk, as have insurers, and has a separate process in place to identify any practices doing that.
Stephen Ward, the CLC’s director of external affairs, says: ‘We are confident past clients will continue to be as well protected.’
So far, Ward says, there has been a ‘small but steady’ number of solicitors setting up new practices specialising in conveyancing or probate under CLC regulation.
‘The current hurdle of PII run-off cover means we haven’t seen a great number move lock stock and barrel or hive off their conveyancing arms,’ he says. ‘However, we won’t know if this will change until after the SRA makes any changes to the current regime.’
Miller’s Brown is not expecting unrated participants this year as the only thing they can compete on is price and, with a soft market and low rates, it is difficult to price aggressively. ‘It is ironic when unrated insurers complain about low premiums when they are largely the ones who have driven prices down,’ he says.
Where Smart’s claims do strike a chord is over cybercrime, which was included in Office for National Statistics figures for the first time last year and is now officially the UK’s most common criminal offence.
Stephen Catlin, founder of Catlin Group, the largest Lloyd’s of London insurer, was quoted in the FT earlier this year calling for governments to cover the risks of cyber-attacks as they do for acts of terrorism because the potential liabilities are too large for insurers to cover.
Insurers QBE totted up the cost of cybercrime against law firms and estimated that hackers had stolen £85m in 150 successful cases of ‘Friday fraud’ scams, with 10 times as many failed attempts.
Research by the Law Society found that more than one in five law firms with up to 25 partners was targeted by scammers last year, with money taken from client accounts in 8% of cases. Banks and insurers made up most of the losses but partners had to make up the deficit in others. There are also reports of a law firm suing its bank for failing to protect its client bank account from fraud, leading to seven-figure losses.
Generally, the major exposure is the third-party loss which puts PI insurers in the frontline because that is covered under the SRA’s minimum terms & conditions (MTCs). And it increasingly means insurers are moving from assessing business risk based on what a law firm does, to how it transacts its business and what security precautions it has in place.
Maher says that it would be ‘tricky’ for insurers to decline to pay out for weak cyber precautions alone: ‘However, many insurers are now including questions on cyber precautions and training in proposal forms, so an inaccurate answer could open the door to them taking a point on it, and, while they would generally have to pay the claim, they might have recourse against the person responsible for that inaccurate answer.’
Cybercrime has been a ‘real blot’ for solicitors over the last year, with insurers taking some very bad hits, Radford says. ‘It’s always been there – 25 years ago I was a partner in a firm and someone forged my signature on a fax to the bank asking it to pay money from the client account. But the scale now is so significant, I would be surprised if the government took on responsibility for it.’
The trend has created a ‘real run’ on cyber policies, says Neilson-Moore. These will typically cover a firm’s own losses and the costs of forensic investigators, notifying clients and dealing with reputational issues. The key is to find the right level of cover for your business based on: the amount and type of confidential, personal or sensitive data you hold; the size of your business; and your dependence on computer systems.
Marsh is designing policies for firms that interact with their PII policies like a web, says Neilson-Moore: ‘But I don’t even care if a firm doesn’t buy it from us – I just want everyone to make sure they only buy what they need.’
Maher warns that many such policies leave a lot to be desired: ‘Firms may be surprised by some of the gaps in the cover, so it is vital to look at the terms critically and seek advice on if they are right for you.’
Taylor agrees. ‘There isn’t a firm out there that hasn’t obtained some information about cyber cover or isn’t actively looking at it,’ he says. ‘However, the market is still pretty embryonic so there isn’t standard wording yet. People need to get good advice whether to go to a specialist or look at a package with your PII insurer.
‘We are spending a lot of time with firms on this. We have facility here with a tech business which can put in IT that monitors 24/7 every single bit of kit that any lawyer would use around the world and can pick up an unusual behaviour. But it is also about awareness and training.’
Chancery Pii, which was created in 2013 in partnership with the Law Society specifically to provide sustainable PII for 1-4 partner firms, does not offer separate cyber policies to cover a law firm’s own losses.
Insurance Act 2015
The Insurance Act 2015, which came into force last month, is the biggest change in insurance legislation for over 100 years and everyone buying insurance needs to understand it, says Marsh’s Sandra Neilson-Moore.
‘Law firms may be tempted to think it doesn’t affect them because their PII’s minimum terms and conditions (MTCs) are so wide,’ she says. ‘But it is not as simple as that. While a claim may still be paid, insurers will have remedies for recovery and there are the excess layers to think about.’
She welcomes the new legislation as a ‘fantastic’ modernisation of the old Marine Insurance Act 1906, which ‘softens’ its ‘draconian’ obligations and remedies. ‘But legal minds have suggested that, because the 1906 act was so onerous, judges would give some leeway,’ she says. ‘But now the obligations and remedies are softer, if you breach them, they will probably be enforced.’
Under the 1906 act, insureds had to disclose all material facts and the remedies allowed insurers to void a policy from the beginning, even if the non-disclosure was innocent and even if, had the insurer known all the facts, it would still have provided cover but imposed only a small increase in premium.
Firms now have to make a ‘fair presentation’ of the risk. If they fail to do so, the insurer will have a more ‘proportionate’ range of remedies.
Neilson-Moore says all submission materials for this year’s renewals should take it into account and she asks: ‘Have you thought about what the transition means for you? Has your broker or insurer talked to you?’
Miller’s Richard Brown says the changes mean firms ‘will no longer be able to “data dump” material on their insurers. Firms have been improving their presentations but we have still seen some massive folders’.
Legal Risk’s Frank Maher flags up concerns about the provisions in section 4 over what an insured ‘knows or ought to know’. This includes knowledge of senior management and of the person responsible for arranging the insurance.
‘It will be important to maintain an audit trail,’ he warns. ‘We are advising several firms on coverage disputes with insurers where processes have been shown to be inadequate, some involving large firms and some with substantial amounts at stake – approximately £40m in one case. The new provisions could mean that they are not covered in the event of a claim.’
Mark Carver, professional indemnity specialist and one of the architects of Chancery Pii, says there is a large array of products in the market of ‘variable’ quality, warning that the real differences are not necessarily in the heads of coverage but in the small print at the back of the policy.
‘Most prudent insurers and brokers wrote to all their insureds at the start of the year, giving outlines of scams and what firms should do,’ he says. ‘What is frustrating is seeing a firm ignore that advice when it is neither complex nor costly. To me, that is pretty unforgivable.’
More generally, brokers say the frequency of claims is down, although there are still some big claims coming through.
Julian Smart, head of professional indemnity at insurance and risk law specialists BLM, says the risk of claims is increasing as pressure is put on lawyers through a rapidly changing and consolidating market.
‘As a result we have seen work delegated downwards to very junior lawyers which raises the risk of errors being made,’ he says. ‘This can be in the form of potentially under-settling injury claims or matrimonial settlements.’
Williams says several insurers are looking at individual premiums on specific matters, particularly in commercial property, but as claims could be over a 15-year period this is seen as a non-starter.
‘One of my clients turned down a role in a £19m project and handed it to a larger firm because the additional cover over 15 years made it unviable,’ he says.
Another long-running issue is over aggregation of claims. The case of AIG Europe (Appellant) v Woodman and another (Respondents) has been granted permission to appeal to the Supreme Court and has been provisionally listed for 10 October.
Radford says the case has highlighted the danger that firms can be left exposed if they do not tie up appropriate dispute resolution measures between their PI insurers and their top-up insurers.
‘A case came to our committee from a firm with multiple claims which together were worth about £7m-£8m. The primary level insurer said these were all aggregated so its total exposure was £3m under the compulsory layer and it was over to the top-up insurer. But the top-up insurer argued the claims were several and didn’t reach the minimum level of cover, so it is back to the PI insurer. We were going to have to go to the SRA to get it to direct one of the insurers to deal with the claim but the matter was resolved.’
Looking ahead, the SRA is planning a further consultation later this autumn on whether the MTCs and the compensation arrangements could be more flexible while still protecting clients. It will also bring its proposals to reduce run-off cover to three years back to the table.
Radford says the SRA is ‘simply wrong’ to take the view that the way to meet consumer need for easier access to legal services is to reduce costs by relaxing the very high level of client protections.
‘If you have good client protections, which are well tried and tested, why try and destroy them?’ he asks. He believes reducing run-off cover to three years would be bad for clients as 30% of claims come in years four to six and would leave retired solicitors vulnerable to personal claims.
Any problems will be compounded once the Solicitors Indemnity Fund, which picks up claims that come in after the six-year run-off period, closes to new claims in 2020.
The Law Society is investigating possible options but Radford is pessimistic: ‘I fear that it will be extremely difficult to find any insurer on the open market who will agree to provide equivalent SIF cover at anything other than prohibitive premiums, because it is business they don’t want.’
For Maher, the key point is that, ‘if cover is reduced, someone has to lose’.
What is clear is that, while this year’s renewal season may be benign, plenty of challenges are pending.
Grania Langdon-Down is a freelance journalist