Skip to main content
Article | Risk Management Matters – Legal PI

October 2020 solicitors professional indemnity insurance renewal

Lessons learned

Risk & Analytics|Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Joanne Cracknell and Joe Bryant | November 24, 2020

In this article, we share our thoughts and key insights on the latest October 2020 renewal activity, which law firms should take note of.

Background

The requirement by the consumer-focused Solicitors Regulation Authority (SRA) for law firms to purchase professional indemnity insurance (PII) to comply with minimum terms, has remained a constant in these unprecedented times. The recent 1 October PII renewal process has been challenging. It has highlighted the issue of negotiating PII renewal terms in an insurance market undergoing significant change, whilst also adjusting to recessionary conditions imposed by the coronavirus (COVID-19) pandemic.

Since the PII market for solicitors moved from a mutual insurance arrangement (SIF) to the open market in 2000, conditions have largely been ‘soft’, meaning that the supply of insurance outstripped demand and prices remained increasingly competitive. In an attempt to keep prices down when they threatened to go up, the SRA introduced unrated Insurers as an option for firms. However, changes to the PII market began to emerge in 2018, when various Insurer stakeholders highlighted their concerns regarding the underperformance of PII as a class of insurance business. The position deteriorated further following a thematic review by Lloyd’s of London, the upshot of which was that PII was formally identified as an under-performing class, and a number of Lloyd’s syndicates were refused capacity to continue writing it. With the reduction in numbers of Insurers willing or able to underwrite PII came a ‘hardening’ of the market; demand suddenly outstripped supply and prices started to rise.

As a result of this perfect storm of market conditions – made even worse by COVID-19 - renewal discussions were extremely challenging this October, with all firms experiencing rate increases regardless of their claims records and risk profiles. We do not foresee conditions changing in the short term. But, having experienced the approach that Insurers have taken to this latest renewal season, there are steps that firms can take to prepare for their next renewal.

The October renewal period was expected to be challenging even without the added factors caused by the pandemic

The October renewal period was expected to be challenging even without the added factors caused by the pandemic, with the UK officially going into recession for the first time since the Financial Crisis of 2008 and, we cannot forget, the uncertainty around the outcome of the Brexit trade negotiations. It is fair to say that the present PII market conditions are the most challenging the legal profession has experienced for years.

At this renewal, Insurers asked many questions of firms about the business impact of COVID-19. Underwriters were keen to understand how law firms have adjusted to - and are continuing to manage - the evolving risk landscape. In particular, enquiries were raised with regards to how firms had adjusted to conducting business and maintaining quality and supervisory standards - not only during lockdown, but also as restrictions eased, with law firms returning to the workplace and/or operating in a hybrid structure. We also saw Insurers place a much greater emphasis on firms’ financial hygiene and stability (more on this below).

Many Insurers sought more information which made for a much-increased administrative burden on firms in obtaining and completing all of the necessary paperwork across, often, several different Insurers.

As is usual at renewal, Insurers closely scrutinised firms’ claims summary records to identify any clear areas of concern both historically and into the future. These were given far more attention that we have experienced in previous years, as Insurers sought out trends and areas of weakness that might dissuade them from offering renewal terms at all. Part of this process involved them insisting that firms with particular work/risk profiles complete additional proposal forms, largely based around trends that they are seeing across the profession, as set out below.

General claims trends

Whilst is still too early to determine the full impact the virus has had on claims over the last few months, there have been some issues that we see are arising from the pandemic. We also continue to see the usual variety of claims against solicitors, with firms that are active in conveyancing and wills and probate seeing the most significant claims activity. In particular:-

Failed investment schemes

Claims continue to arise from solicitors’ involvement in fraudulent investment schemes (typically buyer-funded developments), despite frequent warnings from the SRA. Allegations generally relate to conflict, failure to advise fully and independently on the ramifications of investment and/or breach of trust. Insurers are understandably reluctant to insure any firms that actively participate in buyer-funded development schemes, and any firms who have historic involvement in such schemes will need to give full disclosure and persuade Insurers that the risk of claims arising is low. This will not be easy, but a full pack of sample engagement letters, risk assessments, AML checks and client vetting procedures might go some way to placating them and convincing them that the decision to become involved was an informed one and that all risks have been mitigated as well as possible. So, any firms that do have a history of acting in buyer-funded developments should put some effort in now to collate such a pack and present this risk in the best possible light. Many firms that have been active in this area were refused insurance at this renewal, such is the concern that surrounds it at the moment.

Multiple dwellings relief

Claims against solicitors usually allege failure to properly advise of the potential to claim multiple dwellings relief (MDR) savings on Stamp Duty, generally in relation to ‘granny annexes’ or similar self-contained residential units. As above, firms that have conveyancing practices should pull together evidence of training given to staff in the area of MDR and any checklists or other procedures aimed at minimising the risk of failing to advise.

Escalating ground rent

The Competition and Markets Authority report of February 20201 suggests that escalating ground rent clauses in leasehold property transactions may well be unenforceable. However, whilst that is good news going forward, there remains some claims activity around escalating ground rent. Hopefully by now most firms that have potential exposure to claims have notified their concerns to their incumbent Insurers, but certainly any Insurers on renewal will want to know that this is an issue that has been fully explored and that there are no skeletons in the closet. So, again, any evidence that firms have to demonstrate their investigations would be appreciated by Insurers and would serve to show that the firm has taken the issue seriously and dealt with it appropriately.

Home equity release

This is becoming a new source of claims, generally relating to the adequacy of solicitors’ advice as regards the consequences/risks of Home Equity Release upon the homeowner. The Equity Release Council now highly recommends that two firms are involved in home equity release transactions (one for the homeowner and one for the mortgage company) so as to avoid conflict, and Insurers will certainly welcome seeing firms’ procedures insisting upon this approach so as to assuage any concerns that they have in this area.

Will drafting

We continue to see the usual mix of claims regarding testamentary capacity, undue influence, drafting errors, execution issues and so on. This is an area that has been disproportionately affected by COVID-19 and its restrictions on face to face meetings, and Insurers are very concerned about the risk of future claims arising from practitioners’ inability to meet their clients both to take instructions, assess capacity and execute their wills. Delays in executing wills caused by COVID-19 restrictions whereby the testator dies before the new will can be effective will also cause claims. Firms that are active in this area would be well advised to pull together a note explaining how they have adapted to the COVID-19 environment and how they have proactively managed the risks associated with a lack of face-to-face contact with their clients and the delays in execution that COVID-19 has caused. Insurers will be increasingly concerned about this as claims start to emerge.

COVID-19 claims trends

Inevitably, the rapidly evolving nature of COVID-19 and its impact on all aspects of home and business life has unsettled the insurance market. Whilst Insurers cannot exclude COVID-19 problems from the PII cover they offer to solicitors (due to the SRA minimum terms), they are keen to limit their exposure wherever possible. They are all too aware of the risk of claims arising from the restrictions that COVID-19 has created, specifically around the following areas:

Inadequate supervision: it is unlikely that ‘remote’ supervision of employees (especially at the beginning of lockdown when firms were still fine-tuning remote working capabilities) will have been as comprehensive as supervision in-person in an office environment.

Absent/unavailable staff, counsel, experts etc: absence and delay (whether caused by illness to themselves or others or mental health issues which we expect to increase as the effects of COVID-19 continue to be felt into the future) may mean missed limitation and other court deadlines and a general failure to meet clients’ expectations.

Communication: linked to the above, an intended message can get lost in writing or over video calls in circumstances where face-to-face rapport is much easier to build. Where trust is hard to establish, effective communication is vital but increasingly hard to achieve. Service issues will rapidly escalate to fee disputes and, inevitably, claims.

Firms with paper-based diaries/filing systems: issues could potentially arise where diaries or files are not held centrally and staff go off sick. It is easy to see claims arising from missed deadlines or general mismanagement of client/opponent expectations where supervisors may have very limited visibility.

Paperless firms: whose systems are more efficient but vulnerable to cyber-attack. Sadly, we have seen a very significant rise in cyber attacks on professional firms during the COVID-19 pandemic. Remote working connections seem to be easier to target than firms’ in-office servers, so firms must be vigilant and ensure that all staff are fully trained to spot the signs of attempted hacking.

Remote working connections seem to be easier to target than firms’ in-office servers

So firms should expect Insurers to ask probing questions around all of the above areas before agreeing to provide PII cover. As above, some time spent now in collating/ refreshing/refining policies and procedures aimed at reducing the risks associated with these factors would be well spent, and would go a long way towards demonstrating to Insurers at the appropriate time that the firm is properly and safely managed, and that it is fully aware of - and proactively managing - its risk profile.

Managing risks

The next PII renewal (whether it be in April 2021 or later next year) looks set to be as challenging as October’s renewal. Firms are advised to prepare early; mid-size and larger firms are likely to already be working collaboratively with their incumbent broker to help highlight risk management and compliance frameworks and culture. By not taking the time to prepare in advance, especially in this current climate, firms may leave themselves open to the risk of failing to obtain competitive rates.

The requirement to identify, manage and present risk positively is of significant importance and sufficient time needs to be invested to deal with this adequately.

Distressed risks

For firms who have an active claims record or who practice in areas of the law that are deemed to be particularly high risk, it may be necessary to do more than suggested above. This year, for the first time, it is understood that some Insurers were refusing to provide quotes to firms with higher risk profiles unless the firms agreed to:-

Undertake a full external risk audit: This is a process undertaken typically at the firm’s own cost whereby a third party reviews all of the systems and processes of the firm to help it identify and manage its claims risk.

Put up a sum of money representing the full aggregate excess value and hold it in an escrow account: This is to give the Insurers the comfort of knowing that there are funds in place to meet any excess payments that might fall due, in circumstances where those payments would otherwise become the Insurer’s responsibility if the firm is unable to pay.

Provide personal financial guarantees from all partners of the firm: to cover payment of the premium, all excess payments that might become due and also any run-off premium that might fall due if the firm ceases trading during the policy period.

Whilst we would stop short of advising firms to brace themselves for any of these additional requirements, they do perhaps give a flavor of just how difficult this renewal season was for some firms. If you feel that you might be in this category, we would certainly advise you to speak with your broker well in advance of the renewal date and work together to present the firm in the most favourable light. Perhaps a proactive decision to obtain a risk audit might save time and stress in the long run.

Summary

This renewal season was challenging for many firms. However, lessons can be learned, and firms that take an introspective and honest look at themselves to identify, address and document their risk areas well in advance of their next renewal stand to emerge with the best possible terms.

Footnote

1 Competition and Markets Authority (2020). Leasehold Housing Update Report 28 February 2020. Retrieved from: https://www.gov.uk/cmacases/leasehold

Authors

Associate Director - Finex PI UK Legal Services

Partner, Beale & Co

Contact Us

Related Capabilities