High rise security?

Amid a climate of uncertainty surrounding indemnity premiums, Mark Smulian finds that law firms must establish good risk management procedures to keep insurance costs down

Solicitors may depart for the beach or the country this August in a marginally more relaxed frame of mind than in the past, because they know that this is the last time that they have to endure the midsummer scramble to secure professional indemnity cover.

The renewal date for 2004 has shifted to 1 October, instead of 1 September, after a chorus of complaints, mainly from smaller firms that had found it inconvenient to negotiate insurance cover while most people were on holiday, both in their own offices and in those of the insurers.

This change means that solicitors will have to fork out for 13 months' cover this year to carry them round to October 2004, and insurers are not likely to be offering '13 months for the price of 12' deals to entice them.

The extra month looks like a one-off cost that firms will have to absorb as the price of the convenience of not having to perform this task in August.

It is a task becoming more professional all round.

Four years into the open indemnity market, insurers are becoming increasingly familiar with what types of legal work are most likely to pose a risk, and are adjusting their charges accordingly.

Indeed, while the market is large enough to offer cover to all but the most troubled firms, insurers are becoming increasingly picky about the business they wish to take, and many will press solicitors to have effective risk management measures in place.

Solicitors' indemnity insurance is big business with premium income of more than 225 million for the compulsory 1 million layer of insurance for 2002/3, up 36% on the year before.

However, it was still less than in each of the final three years of the former Solicitors Indemnity Fund (SIF).

In addition, large firms seek extra cover which ensures that even more business comes the way of underwriters and Lloyd's syndicates.

The Law Society now lists 27 qualifying insurers (there were once 35), judged suitable to offer professional indemnity.

The great majority of these work only through brokers, of which 16 are listed by the Law Society, though this is a non-exhaustive list and the Law Society does not vet or approve brokers.

Views range widely in the insurance industry as to how premiums will move this year, though there is no doubt that they will rise.

However, the weight of opinion is that the increases demanded may be more moderate than last year.

Peter Farthing, a partner at Clyde & Co, chairs the Law Society's indemnity insurance committee.

Even from this vantage point he cheerfully admits: 'I've no idea how premiums will go.

It's probably accurate to say they will go up, but I don't know.'

Firms will simply have to negotiate over prices and benefits as a matter of supply and demand and of how attractive the solicitors' market is to them.

However, Mr Farthing is cautiously optimistic: 'The people in real trouble [with insurers] are the actuaries, whereas solicitors are a fairly stable commodity unless there is a great slump in the housing market.

So there is no great reason why premiums should rise.'

David Coughlan is head of the largest solicitors' professional indemnity insurer, Zurich Professional, which this year overtook the Law Society's joint venture partner, St Paul International, at the top of the table.

Zurich captured 21.6% of the market for the compulsory layer, with St Paul on 20.7%.

He predicts: 'Rates are going to continue to increase in this market.'

One explanation for this is the uncertain economic outlook, neither wholly good nor bad, which he says always marks a time when the indemnities sold to professionals increase in price.

The reason is that when a rising proportion of clients ceases to trade or suffers losses, they tend to look to their professional advisers to see whether they can raise any money as a result of any mistakes that have been made.

Mr Coughlan also points out that the 13-month change in itself will add to costs.

Zurich was one of the few dissenting voices that opposed the change to October, and Mr Coughlan warns that solicitors may find that as a result, documentation from insurers is not available by the time they need it to renew their practising certificates on 1 November as required by the Law Society.

'We did not see any purpose or benefit to firms in this change,' he says.

'Well-run firms would prepare for renewal and get a quote early on and have it arranged in good time.'

However, one thing all insurers are agreed on is that good risk management is a key way of limiting the increase in premium charged.

Mr Coughlan says: 'What we have seen is that most claims in conveyancing and commercial work arise from very simple and fundamental mistakes and these have stayed the same.

'These are errors like not clearing titles within the time limits, which is a key cause of negligence claims.

They could be prevented by having good risk management in place, which would reduce claims and so would reduce the impact of premiums as firms' claims experience became better.

'If they can demonstrate good risk management, they can get lower premiums.

If they want to see an improvement in their premiums they have got to do it.'

Obtaining the Law Society's practice management standard, Lexcel, is one way to do this, and some insurers offer discounts to those with it.

Conveyancing continues to be the main cause of negligence claims.

Figures released last week by broker Alexander Forbes Professional - which compiles figures from the major insurers - found that 24% of claims came from conveyancing (see [2003] Gazette, 19 June, 4).

After that came trusts and probate (12%), litigation (11%), commercial property (10%), personal injury (9%), matrimonial (6%), company, employment, and landlord and tenant (4% each), and financial services (3%).

Fears raised by the St Paul earlier this year that lender claims are on the rise have yet to be borne out by other insurers.

From the brokers' side of the fence, Trevor Moss, executive director of Alexander Forbes, says: 'A number of insurers are talking about increases in premiums yet again this year, in about the 20-25% range on last year.'

He does not anticipate seeing increases above 25% for any firm unless 'it was distressed in its claims experience history' and would not expect all firms to get stung for a 25% rise.

Last year saw higher increases in excess layer premiums because the supply became limited, he says, but this is unlikely to be repeated as 'we are beginning to see stability in this market'.

'If you look at the increase of rates for professional indemnity in general, solicitors are a little bit worse off, but all professions have seen significant hikes, and employers' and public liability insurance costs even more,' Mr Moss adds.

But one changing factor is that 'underwriters are beginning to be more sensitive to aspects of legal work that give rise to claims experiences', he says.

The main areas he sees affected are intellectual property, particularly if it relates to a US action, which tends to attract large costs, and corporate finance, where big deals can go expensively wrong.

Another area that raises insurers' eyebrows is wills and probate, says Mr Moss.

'It's because of some fairly large awards in the last few years where solicitors got it wrong with high net-worth individuals' estates,' he explains.

He agrees that risk management is 'very critical' in relation to solicitors' professional indemnity, and that insurers will do what they can to ensure that solicitors have adequate risk management techniques.

'Insurers don't have to write this cover - they are in it to make a profit.

If a firm has all its ducks in a row with good risk management, it has a better chance of getting a decent quote,' he says.

Risk management is also taken seriously by Liz Mullins, executive director of broker AON Professional Risks and formerly head of the SIF, who says 'insurers are more selective [than previously] about what work they write'.

'Certain insurers take a very big interest in risk management and I do know that with some there has been a flight to quality,' she says.

'Insurers see risk management as a cultural issue in firms and are increasingly looking for firms with a commitment to a culture that will eventually impact on its claims experience.'

However, her list of practice areas that worry insurers differs from that given by Mr Moss.

Ms Mullins says: 'I have seen some insurers question firms that do class actions, or engage in financial services, or which have a lot of activity on behalf of the media and music industries.

These are all seen as risky fields.'

But she agrees with the general view that the market will not demand increases as high as last year.

'There is relatively little activity right now, but what we are seeing generally is rates getting a 20% uplift.

'We have seen stabilisation in the market since last year because the rates increased then in response to the knock insurers took on their assets and liabilities.

'That produced a hard market and solicitors were affected by this external factor rather than by anything internal to the legal profession.'

Nick Pointon, who heads solicitors' indemnity at broker PYV Professional Indemnity, says: 'Most of our clients have seen a freeze in their indemnity premiums this year, taking into account firms fee income rises and a slight lift for the extra month.'

However, he predicts that it will be difficult for firms that are looking to secure extra cover in excess of 5 million to avoid an increase this year.

According to Mr Pointon, 'top-up will cost them up to 50% more than last year, and so they will probably be looking at a net increase of 30% on their premiums this year'.

There is no sector trend to make particular sense of which firms are seeing rises and falls either, he says, adding that although matrimonial and trusts are 'becoming harder markets', the general picture is 'just very variable'.

Michael Rendell has 20 years' experience as a broker in the professional indemnity market.

He thinks the change to October is 'overall good for insurers and solicitors because it has always been a bit of a disaster trying to do this while people are on holiday'.

Mr Rendell maintains that with the more stable market, there may even be bargains for those who hunt around and negotiate skilfully.

'Rates will be competitive this year and hopefully solicitors will see the benefit from that,' he predicts.

'Last year Zurich was very hungry, and this year Royal & SunAlliance and St Paul will be after more business.

Good solicitors with good records will benefit.'

Royal & SunAlliance lists on a Web site some of the claims it has had to settle for solicitors, and this may be intended as a warning of the dangers of not insuring adequately.

The insurer's payouts include 5.5 million where a solicitor acted for a company in financial trouble and a receiver was appointed, 5 million for a claim by a client who won damages substantially less than those his solicitor advised him to reject during the proceedings, and 2.5 million where it was alleged a solicitor was negligent in handling a residential lease.

Examples are, of course, a useful guide for other firms' looking to control risk and divine what degree of risk they wish to cover this year, but ultimately it is the individual performance and record of each firm that counts.

Mark Smulian is a freelance journalist