Law firm closures plummet as professional indemnity insurance challenges ease

The legal landscape has witnessed a significant decline in law firm closures attributed to the inability to secure Professional Indemnity Insurance (PII).

In the period up to the end of October 2023, only 34 law firms were forced to shutter their operations due to PII issues, marking a considerable decrease from the peak of 65 closures in 2019/20. This decline reflects a positive trend in the legal sector, indicating improved access to PII coverage.

Hazlewoods attributes this favourable development to several factors. Firstly, the price of PII has decreased, making it more affordable for law firms. This reduction in costs stems from an influx of insurers entering the market and an increased willingness among law firms to switch providers in pursuit of better rates. As a result, the overall market for PII has softened, easing the burden on firms seeking coverage renewal.

Research conducted by insurance broker Howden corroborates this trend, revealing that 66% of its law firm clients experienced a decrease in PII premiums in October 2023. This reduction in insurance costs comes as a welcome relief to law firms, which have long grappled with the financial strain imposed by high PII expenses.

Professional Indemnity Insurance is a mandatory requirement for all law firms, serving as a crucial safeguard against professional negligence claims. However, obtaining PII has historically been one of the top financial challenges for firms, alongside staffing and property costs. The recent downtrend in closure rates offers a glimmer of hope for firms navigating these financial pressures.

Ian Johnson, a Partner at Hazlewoods, acknowledges the significance of this positive shift in the PII landscape. He notes, "Law firms will be very glad that PII premiums appear to have begun to soften – some firms had been finding coverage difficult, even at very high prices." Johnson emphasizes that while certain firms, particularly those perceived as higher-risk by insurers, still face challenges, the overall outlook is improving.

Furthermore, the resurgence in Mergers and Acquisitions (M&A) activity within the legal sector has provided an alternative avenue for struggling firms. Partners in firms deemed unviable by insurers have found refuge through mergers, enabling them to continue their practice under different arrangements.

Hazlewoods' previous research underscores the uptick in M&A deals within the legal profession, with the number of law firm mergers rising from 99 in 2021 to 122 in 2022. This trend indicates a broader recovery in M&A activity, signalling resilience and adaptability within the legal sector.

In conclusion, the decline in law firm closures attributed to PII challenges represents a positive shift in the legal landscape. With insurance costs becoming more manageable and alternative solutions such as mergers gaining traction, law firms are better positioned to weather financial uncertainties and sustain their operations. As the sector continues to evolve, proactive measures to address financial vulnerabilities will remain essential for fostering long-term stability and growth.