Roundtable: Professional indemnity insurance
The professional indemnity insurance market for solicitors has, within a few years, become the preserve of stable, ‘rated’ insurers, premiums have fallen, and for smaller firms the choice of insurers has increased. The end of the single renewal date means underwriters can pay proper attention to firms’ submissions, ending the phenomenon whereby firms that were a poor bet were simply ‘washed in on the tide’.
That is the broad, very encouraging, picture painted by attendees at the Gazette’s 2017 roundtable discussion on PII – though alongside such generalities there are areas such as cybercrime, a proposed reduction in the minimum terms, and the, some say, ‘startling’ implications of the High Court judgment in a negligence case brought against Mishcon de Reya.
For the first time, the roundtable brought together four brokers, each there to relate their experience of different parts of the PII market: Hera Indemnity representing one-to-three partner firms; Howden speaking on four-to-ten partner firms; JLT Specialty focusing on 11-20 partner firms; and Lockton talking on the position of larger partnerships (21-plus). They were joined by four law firm partners and an accountant.
Hera Indemnity’s Patrick Bullen-Smith opens the discussion: ‘For good risks, the market is still soft. There’s good capacity out there, and prices are coming down.’ He is among those who note, and welcome, the more even spread of renewals across the year. ‘Now, March and April are very, very busy times,’ he adds.
‘At the moment, there is a bit of a capacity glut,’ Howden’s John Wooldridge observes. ‘The capacity is good quality, as well. Gone are the days when we had to worry about the unrated participants and the carnage that they generally cause when they exit.’ This has happened, he says, ‘against an extremely benign claims environment… where there’s nothing seriously worrying for insurers. It’s a buyers’ market’. In such circumstances, Wooldridge notes: ‘You would have to say, given what we know and past experience, that anyone [who] is happy to contract to an unrated carrier – you’d have to question their judgement, at the very least.’
A particular feature of current market conditions for PII is, JLT Specialty’s Martin Ellis notes, the choice and competition among insurers at the lower end of the market. ‘It wasn’t that long ago when a small firm… would have had less than a handful of options. Now you could be talking at least a dozen options,’ he notes.
So, all good then? ‘The only caveat I would attach to that,’ Ellis says, ‘is that we still have the so-called Friday afternoon fraud exposure.’ From the perspective of an underwriter, ‘negligence they can deal with’, Ellis says. Looking at the management of fraud as a risk is more difficult. ‘There is a big exposure there,’ he adds.
With the end of the single renewal date, Ellis says, ‘the teams of underwriters are geared up enough to deal with the volume now, whereas a few years ago, they would be geared up just for one date of the year’. As a result, gone are the days of ‘interns and temps’ looking at firms’ PII forms as a summer job.
Among larger firms, Lockton’s Neville Miles says, ‘probably 30% of our portfolio is now falling away from 1 October’. That is not due to a price advantage, he notes, as the market remains soft. ‘The rates are still very, very cheap,’ he observes. More often, there is a wish to align PII cover with the financial year for planning purposes. He adds: ‘If you look at the difference in the markets available to sole practitioners compared to the very large firms, I think the smaller firms may have more choice now than the larger firms. If you look at the very large firms, they have very limited choice [of provider].’
Overall, it is observed, premium rates are ‘a fraction’ of the level seen 17 years ago, when the commercial market was introduced to PII – capacity has increased; the total value of premiums is around £230m against an annual market value in legal services of more than £30bn.
Lawyers present have experienced that change first hand. Sally Azarmi, principal of City firm Azarmi Legal Services and chair of the Law Society’s Small Firms Division, says: ‘Five years ago when I started, you had a very limited choice, and I probably paid two and a half times what I’m paying now… last year, I was inundated with brokers trying to get my business as a small firm. It was really good… really competitive.’
As a partner at a larger firm, Philip Matthews at Wedlake Bell says: ‘We’re getting exactly the same messages as round the table here. That it’s a soft market, and the insurers recognise that it’s a competitive situation.’ He expects pricing to be keen this year.
Paul Bennett’s firm Aaron & Partners moved away from a 1 October renewal date, ‘partly to take ourselves out of the madness, and so that we could get a better service from the insurers and the underwriters, because they’ve got time to deal with us’. The firm also changed insurer for the first time in 15 years, in part to secure a lower premium.
As an adviser to other law firms, on professional practise issues, he can say with certainty that despite the ‘benign’ market ‘there are some elephants in the room’. ‘The firms who are thinking of mergers and acquisitions are still concerned,’ Bennett relates. ‘Firms who have successor practice issues, either through retirement, or wanting to exit the market, and the [personal injury] sector in particular, are very concerned about where the market is going to go over the next 18 to 36 months… I think there are some choppier waters ahead.’
Azarmi adds: ‘The biggest issue we hear about, constantly, is run-off insurance. It’s an absolutely huge issue for quite a few small firms.’ It is a topic the group returns to below.
Bennett asks whether alternative business structures are viewed differently by underwriters. Within the same practice, where an ABS includes non-lawyers, he notes, ‘you’ve got different ethical regimes, different backgrounds… the cultural challenges’.
‘At the moment, there is so much capacity around,’ Woolridge responds, ‘whereas, maybe a few years ago [when] the ABS model was in its infancy, people were generally concerned and wanted to ask lots and lots of questions. The interest seems to have died down.’ The focus instead is ‘to entice you in with a competitive price’, he adds.
Should underwriters see a multi-profession ABS as, for example, a law firm or an accountants? ‘It ends up being on solicitors wording,’ Bullen-Smith says, though he notes, ‘there is confusion in the market about ABSs’. Of the 700 ABSs to receive an SRA licence, the vast majority are operating as reasonably traditional law firms, several attendees note.
Of closer interest is the areas of law a firm is advising on. High risk areas for claims, such as residential conveyancing, require care and thought around the presentation of that risk.
‘The presentation is really important for a firm that covers high-risk areas, like conveyancing,’ Bullen-Smith notes. ‘[First, remember] there are insurers that actually want to write conveyancing practices… Secondly, you need to embrace whatever your high-risk area is. Insurers want to know, have you got expertise? Do you actually know what you’re doing? How can you prove that years of experience would help? Look at your claims record and demonstrate that.’
He continues: ‘If you have had an issue, what have you done to stop that issue happening again? [A firm] may have a rogue fee-earner, been unluckily tied up with a developer – or experienced a “Friday fraud”.’ The key question, he says, is: ‘What have you done to stop that happening again? Insurance is compulsory, so these things happen. What insurers really want to know is, what have you done to stop this happening again? Insurers are in a benign market, and are very open minded.’
Woolridge says the end of the common renewal date has been helpful in such instances. ‘We found that it allowed insurers to make much better informed decisions, because they have more time to devote to each submission, and more time to spend face-to-face with their clients. This is absolutely vital, especially for firms that are practising in higher risk areas.’
Claims will exist, Ellis notes – there is a reason why cover is mandatory for solicitors. As such, a claim by itself does not stop a firm securing the deal it seeks. ‘Regardless of the area of work, some firms need a claim, or at least a near miss, to wake them up,’ he says. ‘Whether it’s a large firm, or a small firm, it’s quite interesting, that sometimes you see a six-figure, or seven-figure claim… Five or six years later, every year has been claim-free. Whether it’s a large firm… or a small firm, when you have an issue, you don’t ignore it.’ He adds: ‘An underwriter would actually, in many respects, prefer a firm that’s gone through some pain, then years later had a steadily improving record. They can make a judgement call on that firm’s approach to the management of risk better than for a firm that’s never had a claim.’
‘The worst risk,’ Bullen Smith notes, ‘is the [firms] that have [had] four or five claims every year. Not necessarily very big, but [for] £20,000 to £30,000 ever year. They’ve done nothing to stop that. They are paying through the nose for their insurance, and seem to be happy to do that, because they’ve done nothing to stop the systemic claims every year. They’re the type of firm that insurers don’t want.’
As Wooldridge notes, such a firm has, ‘just accepted [claims] as an occupational hazard’.
Residential conveyancing hits the headlines. But Jeremy Riley, head of professional indemnity at insurer-focused firm Kennedys, can cite a much wider range of claims risks. ‘From a defence point of view, a lot of claims coming in against solicitors… are under-settlement cases, on [personal] injury, and also divorce settlement.’
Riley, who is also head of the Forum of Insurance Lawyers’ special focus team for professional indemnity, says claims occur when a party ‘wants to open up the divorce settlement at a later date, because assets have been hidden, or because of the recent case law’ indicated a better settlement could have been reached in court. In personal injury under-settlement cases, Riley describes some claims as ‘cannibalism’. He describes marketing aimed at potential clients – which goes beyond the traditional ‘Have you had an accident?’ line to ask, ‘Did you settle it? Are you happy with your settlement?’.
‘A lot of firms [defending such undersettlement claims] carry, say, £10,000 to £15,000 excesses,’ Riley says, meaning many such cases will be fought. ‘If you break and settle one of them, then they think they’ve got you, and you’ll be settling a hundred of them.’
At Lockton, Miles is aware of claims in an area where larger firms are involved. ‘We’ve had quite a few pensions [claims, following] equalization [cases],’ he says. ‘The problem with that is that the work that is giving rise to these claims could have been done in the nineties.’ Such claims can be large, he notes, meaning: ‘That doesn’t seem to be so much of a frequency issue, but it’s severity issue, and there have been some very, very substantial cases… It doesn’t stop the firms from getting insurance,’ he adds. ‘It just means that the insurers will apply a different rate to that activity. Your rating models are pretty sophisticated now.’
The discussion turns to risk management. Bennett cites money laundering and future changes in data protection law as two areas where risk managers are concentrating: ‘The big firms have got their risk managers in place,’ he notes. ‘They’re rolling out fairly bog standard programmes. They’re relying heavily on webinars. It’s not bespoke to the firms that they’re in. That, to me, is one of the challenges ahead because, actually, the rules of both of those bits of the game are changing, and people need to understand how that impacts on them on a day-to-day basis.’
In mid-size firms, of five to 25 partners, Bennett notes: ‘There is a lack of awareness of the significance of the changes. Both in terms of the money laundering changes arriving in June, but also in terms of the data rule changes for 25 May next year.’
Cyber security is another risk that must be managed and, increasingly, it is separately insured.
‘The cyber [security] insurance market is young in the UK,’ Miles notes, with most firms having a choice of at least seven insurers. ‘Of the large law firms I think probably 80% of them now buy separate cyber cover.’ Most, he says, ‘are probably buying for the breach response service that comes with the cover’. Cyber policies ‘are a fraction of the cost of professional indemnity insurance’ Miles notes, meaning: ‘Even if a lot of those firms think that their IT security is incredibly robust, they are still saying “Why wouldn’t I buy this product at the moment, when it’s so competitively priced?”.’ Typically, he adds, firms do not need huge limits, but the market ‘is offering these products at the moment, at extraordinarily reasonable pricing, with relatively low self-insured excess points’.
Still, cyber security policies are not always well understood, even though they are now much discussed. As Wooldridge puts it: ‘What staggers me [is] the level of ignorance as to what cyber insurance actually covers. They seem to think, on many occasions, that it’s there to protect and repay money that’s taken from client account. Well, of course, your PII does that. They then lurch from that misconception to [thinking], “Well, they only have to pay the office account, which isn’t insured by the PII.” Well, it’s not designed to do that either. It’s part of the role of the broker, obviously, to educate their client base as to what’s available, what it covers and why it’s a good idea to purchase it.’ Still, he notes: ‘A lot of firms simply just think, “It won’t happen to me”.’
‘It’s on [our] insurance this year,’ Matthews says, ‘and it is [there for the] response cover, which I think is the most important thing, from our perspective.’
‘The frauds are becoming so much more sophisticated,’ Azarmi says. The possible interception of both emails and phone calls is a genuine concern for law firms. ‘I think, for small firms, the other fear is that someone takes your identity,’ she adds. ‘I have a massive fear of waking up one morning and finding someone is pretending to be my firm.’
The SRA’s proposal to lower the minimum terms for PII cover remains a possibility. This would take minimum PII cover from £2m-£3m, where it currently sits, down to a likely floor of around £0.5m.
The proposal was badly received in previous years, and those present have not changed their minds about its poor desirability. Miles says: ‘I think the profession are incredibly lucky to have the extent of the minimum terms they have at the moment. It’s an extraordinary amount of cover provided, which isn’t available to any other profession. Why you would want to tamper with that while the insurers are prepared to offer it? I cannot understand why you would do that.’
The only constituency that Gordon Jones, accountant at Kreston Reeves, notes might find that lower cover suits them ‘practice in parts of law with very low commercial risk’. A solicitor handling legal aid work is one instance he gives. ‘I could probably see a handful of solicitor practices having a benefit,’ he notes.
But for the rest of the market, the relationship between the level of cover provided and the size of premium paid is not direct. ‘The insurance market already reflects those lower risks,’ Wooldridge observes. Matthews adds: ‘The flawed thinking is if you reduce the sum to a sixth, the premium will go down.’
A reduction in the minimum terms would also harm the SRA’s ability to protect the public through regulating the market, Miles points out. ‘Stick with what you’ve got,’ he urges. Insurers have indicated they do not want to provide cover for law firms at the lower level, Miles adds, concluding: ‘I think we’ll probably go through this consultation and end up with pretty much the same result as before.’
Miles notes that proposals on halving the time a solicitor must pay run-off cover for would likewise dent client/consumer interests. ‘It’s true,’ Wooldridge adds. ‘[The SRA is] basically saying that 60% of claims are in the first three years so, okay, you stop [run-off cover] at three years. What happens to the other 40%? Where’s the consumer protection there?’
The risk of empty property fraud, where fraudsters target empty properties which they use to apply for mortgages and loans, gives rise to claims. ‘The problem comes from a lot of the back-to-back transactions that we saw on all the mortgage property fraud, especially round the north-west,’ Riley notes, ‘where someone was buying a property on day one and then selling it on day four, and [then] re-mortgaging it and falsifying the mortgage documents and falsifying the purchase price. The Land Registry is so slow that it takes about four, five or six weeks to catch up. That’s why some of these back-to-back sales can go through.’ It is, he says, an area of claims that the Land Registry needs to help professionals address.
As the discussion heads towards its close, the group turns its attention to the negligence claim Dreamvar v Mishcon de Reya, where the High Court decided that Mishcon and its insurers should carry the £1m financial burden of an identity property fraud, even though the claim for negligence against Mishcon, as well as all claims against the buyer’s solicitors, failed (Gazette 30 January 2017). The case is subject to appeal. The claim was based on an alleged failure by the firm to seek an undertaking from the purported seller’s solicitors that it had taken reasonable steps to establish its client’s identity.
As Matthews notes: ‘The judge decided that [Mishcons] had not done their job properly, they hadn’t done their [anti-money laundering] checks but they owed no duty to the defaulting buyer.’ The case turned on the concept of constructive trust, ‘accepted without argument’, Matthews observes. ‘I think the decision is absolutely iniquitous. I was tempted to cancel my house insurance on the basis that if it burned down I could claim on next door’s policy.’
The final point considered is a regulatory point – how attractive is it for firms providing legal services, but who could choose a regulator other than the SRA, to do so? The point is relevant to PII, given the SRA superintends the market’s mandatory insurance conditions.
‘I think it’s a really interesting concept,’ Bennett says, but he does not detect much appetite among firms for such a move. ‘The firms that I’ve spoken to who’ve looked at maybe moving regulator have chosen not to do it because it’s problematic, practically,’ he adds. ‘I think if you’re a start-up entity at the moment, you would look very carefully depending upon which areas you were in, either at going with CILEx or the Bar Standards Board, because their regime and the insurance position is a lot more favourable to new start-up entities.’
This article was first published in The Law Gazette on 5 June 2017.