A tale of two insurance policies

In recent years, the UK professional indemnity insurance market has been very difficult, with many firms struggling to get cover on the open market. Following a ‘root and branch review’ by the Solicitors Regulation Authority (SRA), reforms intending to phase out the assigned risks pool (ARP) – the insurance industry’s long-term bête noire – are now underway, but the legal market is by no means out of the woods yet.

While the SRA reforms to tighten regulation and risk management to ensure a better risk profile across the profession are undoubtedly a welcome step from the insurers’ viewpoint, recession-fuelled claims activity will not go away overnight and insurers remain cautious.

PII remains the second-highest overhead for most small law firms after staff salaries, a cost that could be the difference between survival and failure of the business as a whole. Firms with a large conveyancing practice face particular difficulties in securing competitively-priced cover, as claims dating back to boom-time residential and commercial property continue to taint the image of the conveyancing profession.

When you consider the combined value of conveyancing-related claims that have come in since the credit crunch and exposure to mortgage fraud, it is not difficult to see why insurers remain highly selective in their approach to property practices. But what can you do to improve your chances?

A badge of honour

Many firms will be considering awards, accreditations and membership of various professional standards schemes as a way of improving their standing in the eyes of insurers. For conveyancers in particular, the Law Society now offers the opportunity to join the Conveyancing Quality Scheme (CQS), which offers additional credibility for member firms, with ?a whole range of stakeholders from insurers to regulators, lenders and consumers. Could this be the answer to your PI renewal concerns?

Yes and no. It is by no means a silver bullet: CQS membership on its own cannot and will not automatically guarantee lower PII rates. What it can do, however, is serve as an additional indication that a firm takes its quality control seriously and is therefore a better risk than some of its peers might be.

The same could be said of award wins or industry accolades – they are not the only or even the main thing ?that determines a firm’s risk profile but, all else being equal, they could prove to be the one thing that tips the balance in your favour.

Lessons from across the Atlantic: title insurance

A growing number of firms are now using an option that is ?still too often left unexplored by legal practices. Title insurance is a form of insurance that protects lenders and/or borrowers against losses arising from their mortgages becoming unenforceable or the property being devalued as a result of problems with ownership or legal title of a property. Crucially, the policy remains valid regardless of whether or not the ?defect leading to devaluation could or should have been identified by a solicitor.

Title insurance was introduced to the UK in the 1990s, but in the US it is, in fact, compulsory on all property transactions, which is hardly surprising given that the right policy has enormous benefits for all parties – the home buyer, the lender and the conveyancer.

Put simply, it is the equivalent of purchasing warranty insurance when buying a second-hand car: everyone would appreciate the benefits of a policy to protect against unknown mechanical or electrical defects and faults that the previous owner is unlikely to have disclosed. A property can also contain a hidden catch that even the most vigilant convenyancer might struggle to spot: long-running identity theft, for instance, can be extremely difficult to prevent.

In one striking case in the UK, an insured lender granted a mortgage to a fraudulent borrower for the purchase of a property. The conveyancer acting for the fraudulent borrower completed all of the ID checks required by the Council of Mortgage Lenders’ Handbook. The fraudulent borrower fell into arrears with his mortgage repayments and the insured lender issued possession proceedings.

The real owner of the property then filed a defence, alleging fraud by the fraudulent borrower and that he had no knowledge of signing a transfer deed. The fraudulent borrower was convicted for fraud and sentenced to two years’ imprisonment. The real owner successfully applied to the Land Registry to have the land register rectified.

The result was that the insured lender’s charge was removed. The title insurance claim was settled with the insured lender. The insured lender had no need to pursue the conveyancer for its losses. The insurer then made a successful application to the Land Registry for an indemnity claim.

Case law through the years demonstrates clearly that a determined fraudster can defeat even the most stringent checks and, of course, incidences of fraud tend to be more frequent in difficult economic times. The Mortgage Finance Gazette recently reported findings from KPMG that fraud amounted to £3.5bn in 2011 (these figures represent instances of fraud for over £100,000 heard in the UK Crown Courts).

A number of issues from fraud and forgery to non-disclosure of relevant information by the seller, such as a boundary dispute, may only come to light after the purchase has been completed. It stands to reason, therefore, that insurance against the risk of undisclosed defects is beneficial to the purchaser, but what it can offer to solicitors is less ?well understood.

Title insurance, client relationships and profitability

The right title insurance policy could in fact be the key to preventing a high number of claims on a PI policy and to a better risk profile, better client relationships and better overall profitability.

For most solicitors, some form of defect discovered in the title after a property transaction is likely to lead to notification of a claim to their PI broker. A claim of negligence against a solicitor’s PI insurance can take a long time to settle, potentially poisoning a firm’s risk profile for years and years. However, under a title insurance policy, a claim will be processed within months, not years. This is because, for a PI claim, negligence has to be proved. But, to claim on a title insurance policy, it is only necessary to confirm that the defect, or in some cases suspected fraud, is covered by the terms of the policy.

To put this in more concrete terms, the average PII claim takes a year to 18 months to process, and the client continues to suffer during this time. But, the right title insurance policy allows for a claim to be wrapped up within six months. This means clients are compensated earlier, avoiding a protracted conflict which, in turn, means better client retention in the long term as a single issue need not spell the end of ?a client relationship.

Even if something goes wrong, problems are settled more quickly and conveyancers do not have to get involved in a dispute with the clients where title insurance is in place. Instead, the claim is dealt with by the insurer.

Thus, title insurance offers effective protection from costly claims. Moreover, it allows lenders to accelerate the traditional conveyancing process. The benefits of a faster mortgage completion for the homebuyer are obvious but, for the solicitor, title insurance can also mean improved efficiency and profitability. Downward pressure on fees is the inescapable reality of today’s legal market, so efficiency and the ability to turn around a greater volume of cases is vital if you are to maintain competitiveness.

Choosing the right policy

There is a persistent myth about title insurance, claiming that it dumbs down the legal profession by removing the need for proper checks and searches. This is by no means the case – the need for quality legal advice will always be there, just as it has been for hundreds of years.

In fact, title insurance is evolving to incorporate the results of legal checks as well as to provide cover for unforeseen issues. A well-worded policy will allow you to add issues identified in the course of legal checks to the policy as ‘known defects’ – a clear demonstration of the complementary roles of legal work and the right form of title insurance.

You should also consider the question of subrogation rights when reviewing policy wording. In many cases, where a solicitor is found to have been negligent, the cost of compensating a client will ultimately be reclaimed from the PI policy by the title insurance provider. However, innovative policies designed with solicitors’ concerns in mind will actually waive subrogation rights against the conveyancer when a valid claim is made under the policy, bringing you real peace of mind.

Conclusions

The SRA is phasing in reforms to improve PII access and affordability, but the 2012 PI renewal season will still be tough for all but the biggest and most stable of firms.

Competitive cover is ultimately a question of simple economics, a matter of supply and demand, and the balance is not skewed in favour of solicitors at the moment. There might be more insurers willing to enter the solicitors’ market in the coming years as the SRA reforms start to make a difference and the overall economic climate improves, bringing about a return for slightly higher risk appetites. But, at the present time, there is certainly no queue of A-rated insurers chasing solicitors’ business.

Banks and insurers are still coming to terms with the scale of losses coming out of the bust of the property boom, and one consequence of this is that conveyancing practices are still facing particular challenges when it comes to PII renewal. Yet, securing affordable cover is paramount to the survival of the business and the good news is that there are ways to make your proposal form more attractive to insurers.

Nothing can replace service excellence and strong ?quality controls, but title insurance for property transactions can help your practice to manage the unforeseen and even ?the unforeseeable.

For further information, please contact Christopher Taylor, CEO of London & European, on: 020 7929 7650

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