PII Focus | Conveyancing: lender claims set to rise further

In the past year large numbers of post credit crunch lender claims against conveyancing firms have finally come home to roost, particularly in relation to lender losses arising from the buy to let market. Professional indemnity insurance is written on a claims-made basis and claims are still only now being made consequent upon the market correction in 2008. It is likely that the end of the six year primary limitation period in late 2013 and 2014 in respect of transactions that completed in late 2007 or 2008 will result in a further round of lenders emptying out their filing cabinets and issuing claims.

The prospect of this will inevitably make insurers nervous, particularly in respect of the smaller high street practice or any firm that operated a conveyor belt approach to conveyancing in the lead up to the credit crunch. Further, the imminent demise of the assigned risks pool and the prospect of forced closure if a firm cannot obtain cover within the 90 day extended insurance period from 1 October, means that the safety net for firms who cannot obtain PII on the open market will be lost. Consequently, we can expect to see further mergers and consolidations in the market between now and the New Year. So what can firms do to better manage risk and to improve their claims record? Firms can work with the SRA’s outcomes-focused regulatory regime and concentrate on process and risk management. Qualifying market insurers still report that most complaints and claims arise from process and management failures rather than poor legal advice.

Firms should continue to focus on fundamentals such as (i) establishing the retainer properly, (ii) providing clear estimates on costs, (iii) managing a client’s expectations and (iv) avoiding delay.

Concentrating on these issues will reduce claims over time and so improve a firm’s PI record. Not concentrating on these issues runs the risk of claims arising which, in turn, will adversely impact a firm’s '¨PI record.Likewise, firms should make the most of their compliance officers for legal practice, finance, and administration; (COLPs and COFAs). The regulatory world has changed, and will continue in its current direction, so firms have no choice but to embrace the new approach. There is evidence that having one person responsible for practice management issues, such as a COLP, is beneficial. A similar system introduced in New South Wales in 2004 is credited with a one-third reduction in claims and complaints over the following four years.

As for COFAs, there is clear financial pressure on firms at present and having a COFA should help to avoid a repeat of the high profile insolvencies that the legal market has seen in recent years.While improving risk management systems should help to improve the terms on which PII is offered, firms still need to think carefully about the levels of insurance that they obtain. A firm may believe that it has £3m of cover (or only £2m if a general partnership) for each and every claim, but the aggregation wording in the Minimum Terms and Conditions is wide (“similar acts or omissions in a series of related matters or transactions”) and insurers are quick to aggregate claims, for instance when they arise from the dishonesty of one rogue employee or partner.

If a firm has or had departments that acted on large numbers of similar transactions, whether it be buy to lets, right to buy, purchases of holiday homes or tax advantaged investments, then if a batch of claims is aggregated, the mandatory limits of indemnity will quickly be exceeded.

Similarly, the position is '¨the same if the firms acted on high value property development deals or corporate acquisitions, where a single claim can far exceed £3m. Firms with such a profile should consider substantial excess '¨layer insurance. All firms, but smaller firms in particular, also need to think carefully about the reputation and standing of the insurer that they are proposing to place their business with.

Firms should not default to going with the lowest premium without considering the attitude of the insurer concerned to its insureds. In the post SIF world, insurers are much more inclined to investigate whether small partnerships are sham or real, or whether all the partners in a firm can properly be said to have committed or condoned some dishonesty that resulted in the claim.

Insurers will also look critically at whether a particular solicitor’s activities amounted to legal services within the insuring clause. All insurers have the duty to act in good faith and to comply with the Minimum Terms and Conditions, but it will be reassuring to know that the insurer on risk has an established track record of supporting its insureds if and when claims arrive.