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What next for solicitors’ professional indemnity?

Results of the general election and Brexit negotiations may lead to volatile times ahead, as well as trigger an increase in claims, suggests Julian Smart

3 July 2017

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Solicitors have faced a barrage of risks over recent years and 2016/17 was no exception. While many lender claims and mortgage fraud allegations triggered by the property crash have now tailed off, they have been replaced by issues which are equally as serious for law firms and their clients. Fraud remains one such risk. It comes in several guises and fraudsters are becoming increasingly inventive.

Seller fraud

To conveyancers, ‘seller fraud’ remains very much a risk at the red end of the scale and one which they are constantly on alert for. Non-conveyancers will be amazed by the myriad of ways fraudsters can impersonate genuine sellers of property, such that buyers and lenders are persuaded to transfer funds to the fraudsters. Of course, in those unfortunate situations the solicitors involved in the transactions (and their PI insurers) are targeted as a source of recovery.

The courts were kept busy in the latter part of 2016, with the judgments in P&P Property Limited v Owen White & Catlin and Dreamvar v Mishcon de Reya. Much to the relief of solicitors acting for sellers (and their insurers) the claimants in both those cases were unsuccessful against the solicitor acting for the fraudulent seller.

The same cannot be said for purchaser’s insurers having been found liable for breach of trust in relation to the entire purchase monies. The appeals in those cases have been conjoined and listed to be heard by the Court of Appeal in February 2018.

Friday afternoon fraud

As the profession got to grips with the risk of accounts staff releasing passwords and security codes to fraudsters, it then had to respond to the threat that fraudsters were monitoring both solicitor and client email accounts for anticipated financial transactions.

Most law firms are now alive to the danger of email accounts being hacked and know that last-minute instructions to change bank details should ring alarm bells. Firms are having to respond to this threat by investing in improved IT security where possible and constant vigilance to ensure that their systems are robust.

Data theft

Solicitors hold significant amounts of material on behalf of their clients and while there has been a focus on theft of money, theft of data is also a significant risk. Fraudsters are increasingly recognising the value of data and law firms are seen as a valuable target.

Tax avoidance and evasion

It is widely known that HMRC has a real appetite to challenge aggressive tax schemes (e.g. film finance and enterprise investment schemes). While accountants and financial advisers are often targeted by investors in failed schemes to recover their losses, lawyers can also be sued if they have been involved in advising on the scheme.

These claims are expected to continue, especially with the announcement in the Queen’s Speech of a Summer Finance Bill 2017 that ‘will include a range of tax measures including those to tackle avoidance’.

Litigation funding

It can be a struggle for litigators to keep abreast of the increasingly complex funding and insurance arrangements, so they can advise their clients properly. We are seeing an increase in claims by clients who say they were not advised of all the options, both in the funding or insurance of their own costs and the insurance against adverse costs.

With funders and insurers investing significant sums in cases, it is foreseeable that, in the event of an adverse outcome, those investors may try to turn to the solicitor to recoup their losses. There is always a time lag between changes in the way solicitors do business and claims, so we may well have not seen the exposure on that yet but it may be on its way.

Personal injury

With the changes in the discount rate and the possibility of further change to come, solicitors on both sides of claims will need to ensure they stay completely up to date. The timing of any settlement has taken on a greater importance than it necessarily had in the past and solicitors need to be able to adapt their strategy for resolution of the claim to fit their client’s best interests. On the horizon

We know that professional indemnity claims tend to be cyclical, rising in periods of recession and low market confidence. With the result of the election and with the Brexit discussions just beginning, there could be volatile times ahead, which could trigger an increase in claims.In the meantime, for solicitors approaching renewal in 2017, PI underwriters will no doubt be keen to see investment in IT security, as well as good risk management practices, in the areas touched on here.

Julian Smart is a partner and head of professional indemnity at BLM

@BLM_Law www.blmlaw.com

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Risk & Compliance Professional negligence

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Brexit cyberfraud