As most firms prepare to renew, brokers and solicitors report a hardening market – partly driven by higher-value claims. Eduardo Reyes reports from the Gazette’s roundtable on professional indemnity insurance
Firms with the right profile and approach find there are good professional indemnity insurance (PII) deals to be had, but there is evidence of a harder market in the 2019 renewal round. That is the clear message from the Gazette’s latest roundtable discussion.
‘We’ve been told that the market’s hardened,’ Rebecca Atkinson, Howard Kennedy’s director of risk and compliance says, ‘but this year we’ve achieved a reduction in our premium of around 17%… Over the last four years, we’ve reduced our primary layer premium by roughly 50% in total – a seven-figure sum.’ She puts this result down to a more structured approach to managing relevant risks, with a risk management team that has grown to five people since it was established five years ago. This has contributed to a lower claims record, while the impact of historic claims has fallen away. ‘There is a lot of discretion that underwriters have in terms of the premium,’ Atkinson adds.
Nevertheless, a ‘harder’ PII market is the overall picture. Broker Lockton’s Brian Boehmer explains: ‘You have to look at the hardening in two sections.’ Rates for larger practices in the most recent renewal period increased ‘by about 36%’, he says, though that is from a lower base than smaller firms typically secure. ‘For the smaller practices,’ he adds, ‘we saw a rate increase of about 3% across the board.’
Patrick Bullen-Smith, of broker Hera, says: ‘It’s no secret that the Lloyd’s [of London] market is hardening. A lot of syndicates are struggling for capacity [and] some are pulling out.’ In that context, Bullen-Smith notes, the legal profession is faring better than other sectors: ‘Other professions are really, really struggling… engineers, surveyors.’ As the Gazette was first to report, the market sat up in alarm last August when Libra Managers, which provided cover to 20 of the top-200 law firms, confirmed it would not underwrite any new business from 1 October. That left 10 of the 20 firms, for which 1 October was the renewal date, with just six weeks to find a new insurer.
For solicitors, there has been a particular impact on the price of cover in excess of the minimum. Broker Howden’s John Wooldridge relates: ‘The excess layer market has hardened dramatically, a 100% uplift in premiums is not uncommon.’ He adds: ‘In previous years, if your fees went up, the insurers would try and swallow that to effectively give you a rate reduction. I think that’s gone… If your fees go up, then your premium will go up.’
Wooldridge has also found 18-month policies, increasingly popular for many clients since the mandatory renewal date was scrapped, are now harder to sign at a competitive price. ‘Insurers have definitely pulled their horns back in that regard, and that’s simply a reflection of a hardened market,’ he says. ‘If they think that in 12 months’ time the market conditions will still be relatively tough, and they can act in a relatively mercenary way, and extract as much premium out of you as possible, then they’re going to do that.’
John Kunzler, of broker Marsh-JLT Specialty, says: ‘At primary layer, I think it’s driven mostly by incumbents being quite cautious, particularly around new business. They are not as hungry as they were, so [aren’t] driving price down continuously.’ Affecting the excess layer, he notes: ‘There have been some exits of insurers, [with] no new capacity coming in.’ As a result, ‘some of the larger firms are looking at strategies around minimising the impact of that’. Solutions being considered include the creation of captive insurers (owned by the insureds).
In the past there were concerns that market volatility and problems with capacity had a disproportionately negative impact on smaller practices that were founded and led by black and minority ethnic solicitors. Solicitor Nwabueze Nwokolo, former chair of the Black Solicitors Network (BSN), recalls the profession’s efforts to achieve change in the treatment of BAME-led firms. ‘There was great difficulty for that demographic to get insurance,’ she says. ‘We did a lot of work with insurers, the SRA and the Law Society.’ The improved picture has endured, Nwokolo says: ‘[BSN] reviews insurance as it affects our members on an annual basis and I’m pleased to report that everyone gets insurance at the rate that they can afford.’
That is an important reassurance to relate, because the market is responding to bad news on claims across the market – notably in the ‘excess’ market. Wooldridge says that in the past few years, he could report no claims in the excess layer from his clients, which was a helpful negotiating point to make on behalf of those clients. That has ended in the last year: ‘It’s demonstratively true that the claims are bigger, scarier than they were a few years ago, and that the frequency has increased. The excess layer market has been ravaged… with insurers exiting at a rate of knots… The price is going to go up.’
Kennedys partner Martin Chesher acts on such claims. ‘The values of the claims are higher, and not only higher, they’re far more complex,’ he confirms. ‘So, defence cost values are far greater as well.’
Losses in the excess layer market ‘haven’t crystallised yet’, Boehmer points out. But from an underwriter perspective, he says, losses in the ‘working layer’ (the value range in which most claims are made) are cause for concern. ‘Compared to other professions,’ he notes, ‘the legal profession in England and Wales has benefited quite considerably from competition in that working layer.’
Boehmer expands on the source of some claims: ‘There’s not one area where a large number of claims come from, but [property] developments is definitely one area, and I think commercial work. We’ve also seen some estates, some probate work, where perhaps the wills weren’t drafted in the appropriate way, or the estates weren’t distributed in the right manner, and claims have emanated from that.’
High property values and complicated families have fuelled claims related to estates, Kunzler notes. He reports ‘challenge from all kinds of potential beneficiaries to being left out of a will or the amount they were left under a will – it’s far more common’.
He adds: ‘The complexity of second and third families… stepchildren, capital moving between the generations,’ means such private client work is ‘a lot more complex than it was’. The result is more claims against solicitors.
‘People are living longer,’ Wooldridge notes, ‘creating more potential for capacity issues’. Hence, more complex family structures combine with clients ‘dying in their 90s’ to leave solicitors ‘wide open to allegations’ that a client’s capacity was not properly regarded in carrying out instructions.
Atkinson says her firm has identified and responded to risk related to the development sector, significantly raising cover in the excess layer: ‘We were at £100 million and we’ve just renewed to £165 million because we do a lot of development work, a lot of property work, and we’re giving certificates of title to the benefit of banks, where they’re loaning way more than £100 million.’
‘The firms that I speak with,’ Nwokolo says – ‘small firms, sole practitioners – don’t do any conveyancing or commercial work. They do immigration, crime, family… if you are in the small firm bracket and you do not do conveyancing, commercial work or probate, you shouldn’t expect a surprise insofar as premiums are concerned.’
Insurers, though, will not just judge firms on the part of the market they occupy, Boehmer says: ‘Regardless of your size, what practices need to do is present their wares in the appropriate manner. If they think a one-page, short declaration is going to get them favourable terms from multiple different markets, then those days are gone.’
Wooldridge also cautions against a ‘back of a cigarette packet’ application: ‘It really sends the wrong impression. If I were an insurer, I wouldn’t want a contract with a firm that clearly sees the whole PII process as a bit of an annoyance.’
However Michael Garson, managing partner at Kagan Moss & Co and a member of the Law Society’s PII committee, sounds a ‘pessimistic’ note on the process. ‘For small firms, I’m not sure… underwriters really [pay] much attention to what’s on our form,’ he says, ‘because we’re too small, we’re too costly, and it’s all broad-brush stuff. So, we get our members to write great long dissertations year to year, and it doesn’t make a jot of difference. There is still a great lack of transparency around the market as far as small firms are concerned because we’re not that profitable, I guess. We’re just a big risk.’
That is worrying, Garson adds, ‘because the regulatory standard, obviously, is to have a suitable and appropriate level of cover’.
The discussion turns to a comparison between the indemnity market’s experience of law firms compared with licensed conveyancer members of the Council for Licensed Conveyancers (CLC). ‘They’re performing excellently as a risk,’ Kunzler relates. This despite the fact that many licensed conveyancers employ a high proportion of non-lawyers.
‘Experience of our CLC membership is that the businesses tend to be newer,’ Wooldridge says. ‘They’ve got much better, more modern IT arrangements. Second, you haven’t, with the CLC people, got the dabbling problem. You’ve got specialists.’ There are also far fewer CLCs than law firms, others point out, perhaps making the comparison unfair.
For firms with a personal injury practice, improvements in fairly basic technology have reduced claims against solicitors for missing ‘limitation’ dates and thereby making a client’s claim impossible. However, Boehmer notes: ‘There’s a level of caution [among] some underwriters with regard to the potential forthcoming changes in personal injury. If [a firm is] solely reliant upon [low-value road traffic accident] work, the question might be, “Is the business viable going forward?”.’
Last year, claims related to under-settling were reported, in particular from claims companies suggesting to clients that their solicitor had advised them to settle a case for too little. ‘Claims management companies are still alive and kicking,’ Boehmer notes, but Kunzler adds that the courts have sent a useful signal in relevant judgments. The ‘merits’ threshold for such claims has been helpfully raised. ‘That’s a very useful impact,’ he adds.
Fraud related to property transactions remains a concern, though those present relate that the character of IT-enabled fraud is changing. Kunzler notes that solicitors getting wise to the vulnerability of the client account has led fraudsters to look elsewhere in the transaction chain. In one case, a fee-owner provided details to what he thought was the Land Registry that in the event allowed funds to be diverted at an earlier stage. ‘The money had never hit the client account of the firm,’ he says. ‘What the fraudsters had done was taken details about the transaction and used it to create a false document which persuaded the client to hand over money to the fraudster.’
Hewitsons’ Rebecca Austin reports other features of fraud that have emerged. ‘Fraudsters buy [bank] accounts off students, [at] the end of university… there are these people on the black market who will buy your account,’ she says.
‘They use those accounts to move the money.’ Firms, she says, are also vulnerable to staff being lured in by apparent special offers – emails offering vouchers or seeming to come from a local cafe. ‘Click to get your free coffee,’ runs one example.
NO MORE BACKSTOP
The Solicitors Indemnity Fund is set to close in 2020, ending what had been additional cover for claims against closed firms after their six-year run-off cover concluded. Law Society Council member Sundeep Bhatia says: ‘I get the impression that most small firms and sole practitioners are probably not aware of this problem. Or not sufficiently aware. There’s a need for the profession to reach out as well to tell people, “This is something you need to consider”. It’s a big problem brewing.’
SIF’s closure will have a disproportionate impact on BAME-led firms, Nwabueze Nwokolo (pictured), former chair of the Black Solicitors Network, says: ‘Most black and minority ethnic solicitors work in this sector. So, we were opposed to the end of cover after six years.’
The end of SIF remains controversial. Some question whether it actually needs to happen in 2020. Kagan Moss’s Michael Garson points out: ‘SIF has managed to pay out claims since 2000 without actually taking any more premium from the profession.’
Barlow Robbins’ Esther Millard, who advises on negligence cases, cites a typical sequence of events within firms that enables fraud: ‘Reading through the chain of fraudulent emails going to and from the solicitor, you can see the buttons that the fraudster is pushing.’ Messages stress urgency, threaten complaints and include authentic details that the fraudster has been able to discover. ‘The claims that I do where there has been fault on the solicitor’s part have been bigger firms,’ she observes.
Overall, though, Bullen-Smith says: ‘The volume of our clients[who have] fallen for cyber crimes has reduced… solicitors have got much more aware of it [and now have] lots more internal procedures.’ Still, Wooldridge adds: ‘The fraudsters become ever more ingenious.’ He says fraudsters are ‘writing code to access the accounts’, rather than just blagging details. Every transaction ‘requires relentless vigilance and attention to detail’, he says.
‘The problem for the profession,’ Garson observes, ‘is it’s often the client who’s the vulnerability and who is penetrated. And when the client does not obtain redress from the solicitor it doesn’t prevent the opprobrium attaching to the solicitor.’
How receptive, though, are clients to messages on risk management? Atkinson notes that firms can but try – informing clients at the outset: ‘We will never send you details of our bank account in an email.’
Client education is also relevant to the view the profession and the insurance industry take of new rules to allow ‘freelance solicitors’ to advise clients on both reserved and unreserved matters – the latter including litigation and conveyancing. ‘They [will] have to have suitable and appropriate cover,’ Garson notes – but he sees problems ahead. ‘It’s a distinction which is going to be extremely difficult to police and regulate in any way. And it’s a recipe for confusion. And, frankly, as a conveyancing-based firm we would certainly not be comfortable doing any conveyancing with a freelancer on the other side unless they took out MTC cover, or appropriate cover above that.’
Sundeep Bhatia, a Law Society Council member and principal of Beaumonde Law Practice, comments: ‘When I was chair of the [Law Society] Regulatory Affairs Board we commissioned some research about the public’s awareness of who they’re dealing with and what they’re dealing with. And there was a lot of scope for confusion. I don’t think the public realises the difference between somebody who is a solicitor employed by an unregulated firm as opposed to one employed by an SRA regulated firm… the problem is they’ll only really see the difference when things go wrong.’
Against that general scepticism, Nwokolo concludes by urging the group to see the merit in this aspect of market liberalisation – not least, she points out, it will favour women with families. Freelance solicitors will not lack high standards, she insists: ‘If you are a freelancer you must tell your client how you work as a lawyer. You have to state categorically… Solicitors are meant to be honest. We have to be forthright and open and transparent in our communication, not just with our clients, but with everybody. We are officers of the court.’
This roundtable was kindly supported by Lockton, Howden, Marsh JLT-Speciality and Hera
Photo credit: Noah Da Costa
Law Society support and advice on professional indemnity insurance can be found here. You can also phone the Society’s Practice Advice Service on 020 7320 5675 (open weekdays 9-5).