On the record: The claims that could increase your PI premiums

Every lawyer likes to think that he does a very good job – that he can spot the points, read the documents, carry out instructions and give wise advice. But, of course, sometimes things go wrong.

The more effort that is put into understanding claims that arise against lawyers, the more the firm will be able achieve a return on its professional indemnity insurance (PII). Every law firm has claims and each should aim to deal with these efficiently, constructively and sensitively. It is what the profession has insurance for.

Defining claims

Problems can arise when identifying what is a ‘claim’ and what is a ‘circumstance’ that may give rise to a claim. The following definitions have been provided by the Solicitors Regulation Authority (SRA) for UK law firms:

“Claim means a demand for, or an assertion of a right to, civil compensation or civil damages or an intimation of an intention to seek such compensation or damages.”

“Circumstance means an incident, occurrence, fact, matter, act or omission which may give rise to a claim in respect of civil liability.”

In relation to circumstances, inclusion of the word ‘may’ sometimes causes a firm to wonder what it is required to notify. When considering whether to notify a circumstance to insurers, it is often advisable to ignore:

• the amount of any loss – even matters that clearly fall below a lawyer’s policy excess should be notified; and

• personal views on any liability – even if the risk of a potential claim is minimal, it is usually, for reasons explored below, still worth notifying.

If there is any doubt as to whether a circumstance should be notified, then it is probably worth notifying or at least consulting your broker about it.

Reporting impact

There are significant consequences for underreporting, as well as for late reporting of claims and circumstances.

Reimbursing insurers

The solicitors’ minimum terms and conditions (MTC) are set out in Appendix 1 of the SRA Indemnity Insurance Rules 2013. The MTC prescribe the minimum level of cover to be provided by every compulsory policy of qualifying insurance. There are provisions in the MTC that permit insurers to seek reimbursement from the insured in certain circumstances.

Failure to disclose material information to a firm’s insurer will not permit the insurer to avoid cover for claims within the primary layer of cover. However, clause 7.2 of the MTC provides that the insurer may seek reimbursement from each insured that has committed or condoned (whether knowingly or recklessly) any:

• non-disclosure or misrepresentation;

• breach of the terms or conditions of the insurance; or

• dishonesty, fraudulent act or omission.

As well as reimbursement and retrospective premium increases, lawyers can also face paying a higher excess than might have been the case had prompt notification occurred.

Failure to notify circumstances that may give rise to a claim can be classed as a non-disclosure or a breach of the terms of the insurance. Insurers are increasingly willing to take issue with notification. McManus Seddon Runhams v European Risk Insurance Company [2013] EWHC 18 (Ch) considered what constituted a valid notification of a circumstance under the SMTC.

Coverage disputes can often escalate to adjudication. A dispute with your insurer is not a good place to be and firms can ill afford to be alienating their insurers in the current economic climate. Insurers are, however, not averse to taking points which might damage their relationship with the insured; they may not want to renew the insurance anyway if the firm is regarded as a poor risk.

If you find yourself in dispute with your insurer, take advice from your broker, which may have more commercial power than your firm does personally. It is important for firms to recognise how vital their relationships are with their brokers and insurers. A good relationship reduces the risk of points being taken.

Remedial action

Prompt notification is also vital, as it can sometimes result in insurers indemnifying the costs of remedial action, which could get matters back on track, save money and preserve the client relationship.

An example of when insurers may consider indemnifying the cost of rectification is a residential conveyancing lawyer instructed on behalf of the seller of a parcel of land. The seller owns the parcel of land but also a strip of adjacent land. The lawyer, in error, completes the incorrect Land Registry documents, thereby transferring the parcel as well as the strip of land from the seller to the buyer. It was not the client’s intention to transfer the strip, but only the parcel of land. As the contract for sale was correct, in that it provided for the sale and transfer of the parcel only, the matter was considered capable of rectification.

It would however be prudent to obtain insurers’ consent before taking any remedial action.

Nature of claims

Let’s now consider the nature of claims – what they look like and where they come from.

Claim numbers are reportedly down; however, the number of claims against solicitors compared with other professionals is still relatively high. This is because solicitors:

• handle client account money;

• conduct transactions and litigation;

• are responsible for a multitude of tasks and quite often have complex project management responsibilities;

• deal with complexity; and

• are the first port of call for and the interface with the client – often the underlying transaction is high pressure for the client.

External forces can play a part as well, such as economic conditions.

One of the leading PII brokers, Lockton, conducted an analysis of the claims (both paid and reserved) across its book of solicitor clients over a four-year period from 2008. It found that lender claims accounted for around 25 per cent of all claims against the profession, with the vast majority arising from a failure to report a small number of provisions in the Council of Mortgage Lenders’ handbook.

According to Lockton, the statistics are not merely a recessionary ‘blip’. Claims have generally increased in recent years, particularly since the recession, but the overall percentage of claims arising from property work has remained consistently high over a number of years.

Commercial and residential property continue to attract the very highest risk ratings. It is no surprise that financial advice services are considered high risk areas when the number of claims against independent financial advisers is reportedly on the rise.

In a mixed or general practice, it is important to know what the relevant proportions are, as this will affect premiums. A firm practising exclusively in criminal defence work may not earn much money, but it will have a very low insurance premium, as it is likely to have a very low claims incidence. High volumes of residential conveyancing work will carry fairly high risks of claims.

Causes of claims

Claims statistics are necessarily somewhat generic in their categorisation of the causes of claims. Descriptions such as ‘delay’ or ‘missed time limit’ are useful, but only go so far.

In the UK, the outcomes-focused regulatory regime requires firms to maintain a record of breaches, complaints and claims. These can become valuable management tools if they contain an objective analysis of the causes of the claim and SMAR’ risk improvement action points (specific, measurable, achievable, realistic and timed).

One hears frequently that a claim was ‘a one-off’ and a disappointing outcome after a series of unfortunate events. However, claims often arise because of deep-seated underlying problems with the way client work is conducted by the firm. In short, the causes of claims should not be treated superficially.

Types of claims

Claims come in all shapes and sizes and include a missed limitation in a high-value clinical negligence claim, a complicated breach of trust in a low-value residential conveyance and a failure to register
a charge in a property transaction.

If anything can go wrong, at some time or another it will do so. But, that does not mean that a firm should have a resigned approach, accepting claims as part of the way of life of doing legal work. All partners and case handlers should be risk aware and conscious that the work being undertaken has to be delivered to
the best possible standard of care. Part of that mentality should
of course be outstanding client care; another part should be
a desire to avoid claims. Awareness of what can go wrong and
the importance of doing things right is part of each lawyer’s protective armour.

Client screening

Some clients are claimants waiting to happen: they have unreasonable expectations, they behave unreasonably throughout the transaction and they are impossible to satisfy.

Then there are other clients who use solicitors as an insurance fund, who always want to take things to the limit or incur huge risks. When the desired outcome is not achieved, they look to their lawyers to make good the shortfall or deficiency.

There are also clients who, quite frankly, bully lawyers and try to get them to do things that they should not. With these clients, lawyers sometimes forget that they have conduct of the litigation and professional duties to others, including the court.

And, of course, there are clients who are dishonest – relatively few in number, thankfully – who cause huge losses to lawyers and their insurers.

So, the lesson is to know your clients extremely well, constantly strive to improve the firm’s client base and ensure that the client relationship is a healthy one in all respects, from inception to payment of the bill.

Future challenges

The UK legal profession is improving in terms of risk management and the number of claims is decreasing, but there is no room for complacency. New challenges are facing the sector as a result of funding reforms, the new regulatory framework, pressure on pricing and a lack of high-end work. Economic factors can have significant effects on claims incidences.

Insurers’ exposure to conveyancing claims arising from the recession should start to subside as claims become time barred. But, claims tend to have a long tail, the six years often being extended on account of later knowledge and even, in some cases, because of deliberate concealment or because the action is not based on tort or contract but some other cause.

Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537 will result in a seismic shift in how lawyers litigate. The courts will have less patience for failure to comply with rules, orders and deadlines, which will result in claims in respect of matters that were struck out or gave rise to an adverse costs order.

There will be more litigants in person as a result of funding reforms. They may use the Legal Ombudsman procedure as a
test run.

Meanwhile, there will be less lucrative work freely available for law firms, less personal injury work from road traffic accident cases and fewer employment tribunal claims. There will be too many lawyers chasing too little work, at least until the next economic boom. As a result, lawyers are likely to do things at the margins of their skill sets. One way to avoid claims is to only do what you are good at.

This article is drawn from the report
The Good Risk Law Firm: The Comprehensive PI Insurance Toolkit, published in May 2014. The report authors are Michelle Garlick,
head of Weightmans’ Compl-i service;
Bhavni Shah, regulatory manager at the
SRA; and Joanne Smith, Adam Entwistle
and Jennifer Haren, members of the Compl-i team. Pick up the report today for only £60 – email publishing@ark-group.com or call +44(0) 207 566 5792 quoting code KF-2124-60-MP to place your order.

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