A straw poll of my clients indicated that professional indemnity insurance had a couple of effects on law firms: fear and loathing. I then wondered if there was a link with the movie Fear and Loathing in Las Vegas. It has been described as ‘a black comedy road film’ or ‘a savage journey to the heart of the American dream’. It made me think that perhaps PII is not as frightening or as daunting as Las Vegas or as we solicitors find it to be.
Talking to the firms that we advise as partnership and professional disciplinary lawyers, there are still anxieties about the market. The primary concern appears still to be the classic: will I get a good price? What about succession and mergers? For the majority of small to medium-sized law firms, PII is one of the biggest external spends each year. Hopefully, this special focus and the recent Gazette roundtable (tinyurl.com/ybkf4wrz), which brought solicitors, brokers and underwriters together, will give firms a better insight insofar as the market is currently very favourable to law firms (and particularly small law firms). I took away some key points from the roundtable; probably the most reassuring was the comment of Patrick Bullen-Smith of Hera Indemnity, who stressed that prices are falling, reflecting a soft market with plenty of capacity.
His thoughts were echoed by John Wooldridge of Howden, another broker, who noted a capacity glut and added that the capacity was ‘good quality’. Gone are the days when we had to worry about unrated participants and the carnage that they generally cause when they exit: ‘[Set] against an extremely benign claims environment… where there is nothing seriously worrying for insurers. It is a buyer’s market.’
So 2017 should certainly be characterised by a professional indemnity market that the profession can embrace with confidence. We have got there, in my view, in a number of ways. The much-maligned posts of compliance officer for legal practice/finance and administration (COLP/COFA) have, despite being ham-fisted and overbearing in many respects, focused firms more on the issue of risk. My clients now talk to me about risks, whether or not they are involved in a partnership dispute, an employment dispute, or they are being investigated by the SRA. Five years ago, when I mentioned the words risk management, I saw blank faces. Not now. I suspect this is no coincidence.
There is a perception that smaller firms get a less favourable deal than larger firms. This was articulated at the roundtable by Sally Azarmi, chair of the Law Society Small Firms Division, who commented: ‘From the small firms day to day that I see, again, the real issue is not the limit, it is not knowing what the price should be for what they are paying for, especially firms that are just starting out… you have no idea whether you should be paying £10,000 or £3,000.’
Azarmi’s comments about the limit refer to the fact that the SRA wants to bring down the minimum protection level, in order to enhance competition. Brokers and underwriters are united in their view that this will not make any difference, as ultimately it is not the level of the claims which is the problem, but the prevalence of them and the onerous qualifying insurer rules (which the SRA has created). Amending the level of cover in isolation will not, therefore, have the impact that the regulator desires.
So what should you do to secure the best deal on your professional indemnity insurance this year? First, get to know your broker really well. If you have not used a broker before and you have gone direct do try a broker – typically their knowledge saves money. With brokers, I would recommend applying the ‘cup of coffee test’. If you are meeting them for a cup of coffee, does that fill you with dread, or is that person somebody you have got to know and trust? Only use the latter.
Specialist brokers offer a highly personalised service focused on the market. In getting to know your broker, you will understand that the ‘dark arts’ perceived to be taking place are about the management of risk, and about explaining that risk so that you get the best deal. A good broker will help you explain how you manage your risk effectively and will offer step-by-step support to see you through the process. The days of completing the form in the dark and sending it out yourself to 15 different insurers should probably be confined to the past.
The issue that typically arises in my own practice in relation to successor practices and mergers, when advising lawyers, law firms and funders, is that each wants to know that their position is clear and secure. The fact that the successor practice rules are a barrier to mergers is something which the SRA could – and I would argue should – address, rather than seeking to lower the limit of protection.
For firms going through a merger, looking carefully as part of the due diligence process at the way in which risk is being managed, and at the claims and complaints history in the widest sense (not just the reported sense) is key. Remembering that a complaint is only an expression of dissatisfaction under the Legal Ombudsman’s rules is a good starting point, as is auditing files (subject to appropriate confidentiality safeguards) to demonstrate that what the firm thinks it is doing is what is actually happening across all fee-earners and practice areas.
Put simply: understand what the underwriter wants and deliver on it.
Paul Bennett is a professional practices partner specialising in regulation and partnership matters at Aaron & Partners LLP.