Heading off trouble
Firms should be strategic when presenting themselves to insurers, as Michael Wilson explains
The relationship between solicitors and the insurance industry can be strained at the best of times.
There is a tendency for insurers to place increasing reliance on solicitors when investigating policy coverage, especially in connection with large losses.
This has led some commentators to question whether an overuse of solicitors has deskilled the insurance industry. Do insurers staff their claims and underwriting departments with the knowledge and experience required to make sound decisions?
It follows that solicitors might question the skill and judgement of insurers when it comes to the placement of professional indemnity insurance (PII). There is a feeling that solicitors are subjected to arbitrary underwriting processes, with little evidence of a careful analysis of the true risk.
If it is true to say that underwriting skills are becoming scarce, with too much emphasis on computer models that say ‘yes’ or ‘no’ (and we are just dealing with perceptions here) – what can be done to ensure fair treatment?
Solicitors are often the masters of insurance decisions in complex claims, yet the relationship is reversed at the PII renewal. If insurers say ‘no’ and they all say the same, it is time to close. It has happened this year.
This raises the question: is this the fault of insurers or the profession?
It is widely recognised that PII insurers don’t like conveyancing. The simple reason for this is that, historically, this is where insurers have difficulty breaking even because of the high cost of claims in proportion to the premium. It is sometimes felt that conveyancing fees are not sufficiently realistic to enable a conveyancing firm to deal with a high turnover of cases while maintaining quality control.
And some firms that employ the number of staff required to deliver a good service can so easily fail at the next hurdle – that of supervision. Any business model based on high turnover at low fees will inevitably feel the strain, so sense the insurers.
In 2021, insurers will be expecting an economic downturn. The economy is already shrinking although there has been little sign, yet, that this is having an impact on property values. But insurers (and their computer models) recall the last recession and they remember the high level of conveyancing claims that arose.
They expect the same again, especially as the property market seems to be enjoying a boom. However, unlike the last recession, there are relatively few high loan-to-value mortgages; and the last time around, there was a glut of 100 per cent mortgages. This left lenders that embarked on repossessions with losses which brought conveyancing solicitors under the microscope. This seems less likely now.
However, there are other expected claims associated with conveyancing, including problems advising on stamp duty land tax (SDLT) relief, ground rent issues and fraud, including buildings that never reach completion. Whether these issues do turn into high volume claims, the insurers’ computer model will have factored them in.
Minimum terms and conditions (MTCs)
We can debate whether or not the legal profession is well served through its PII arrangements. Perhaps the only way for this class of business to return to profitability for insurers will be the long-discussed renegotiation of the MTC.
With the interests of solicitors’ clients in mind, the minimum terms first negotiated in 2000 have served the profession well. But insurers are increasingly reluctant to participate while they have little opportunity to obtain redress in circumstances where there has been:
• Nondisclosure via a failure to make a fair presentation of the risk as required under the Insurance Act 2015.
• A late notification of circumstances.
• A breach of other policy terms.
• A non-payment of premium (sometimes leaving the insurer carrying the risk, including run-off, for several years without income).
Insurers do retain a right to seek recovery from its policyholder once the claim has been met, assuming they can demonstrate prejudice. This is a battle insurers would rather not have to commence when, ordinarily, insurers would have simply refused an indemnity in the first place.
So although these terms represent a useful safeguard for both solicitor and client, it is out of step with other professions and the insurance industry is showing an increased reluctance to participate.
Best foot forward
Mark Ramsbottom of Solicitorassist, an independent insurance broker law firms, has some helpful suggestions as to how firms should present themselves to the insurance marke: “Fill in renewal forms as if it was an examination. Present information to show why you are better than the average firm.” What extras should be provided?
Explanations – If you’re aware a potential insurer might question your partner/staff ratio and that it might raise questions about supervision and quality control, provide a narrative to explain what measures you take.
Notifications – Most firms will have made notification of circumstances from time to time. Examine the claims printout and provide a narrative explaining what happened and what steps have been taken to prevent such circumstances recurring. A cold printout isn’t helpful to your cause.
Complaints – If you declare matters that have been taken to the Legal Ombudsman, provide full details.
Remote working – With staff working remotely, explain how this operates and what measures exist to monitor work, organise file swaps and deal with mental block cases.
Ramsbottom makes the point that firms should understand the process by which a broker goes to the insurance market. To deal with this, solicitors need to know the chain that is likely to exist.
The firm might use an ordinary retail broker that has provided reliable advice over the years, but who else is in the chain?
It would be quite normal for your broker to refer the case to a wholesale broker to ensure access to the right insurers. That works perfectly well until your partners decide you should also invite another broker to quote terms.
That broker might use a different wholesale broker or even more than one. Through this process, a single underwriter can end up seeing the same submission via wholesale brokers three or four times. This annoys underwriters and sometimes results in no quote – and that’s far from helpful in a contracting market.
Ask your broker what the process is and which wholesale brokers and insurers are going to be approached.
Armed with this information, you’re better equipped to approach another broker if you wish, along with your instructions as to which parties you don’t want them to approach. That should avoid the unwelcome duplication and will make your application more welcome for it.
Continuity of cover
The price isn’t always the most important factor, no matter what your partners tell you. If you can manage to stay with the same insurer over a number of years, this should help in times such as now when interested insurers can become scarce.
Ramsbottom tells the story of a firm that was with a high-quality insurer, but left for a fringe insurer – having first parked a number of claims with the existing company.
This was for a premium saving. When the new insurer withdrew from the market, the previous company refused to go back on cover at any price.
As always, start renewal negotiations as early as you possibly can. If you sense that the shape of your practice is such that insurers might refuse to quote, you might like to consider whether the time has come for a merger.
The run-off PII that comes along with there being a successor practice is a substantial benefit; although such plans would need to be formulated within the insurance year rather than the countdown to your cover’s expiry.
Michael J Wilson is regional director for Flaxmans insurance advocates flaxmanpartners.co.uk