PII Focus | What can the market expect this year?
Solicitors Journal asks brokers, barristers, experts and solicitors what they expect from professional indemnity after June renewals
The expert: 'lender claims will tail off'
This year's solicitors' renewal exercise will be interesting and potentially challenging for the smaller end of the market, especially for firms with one to four partners, who tend to rely upon less well known insurers, who sell minimum terms cover on price. Recent experiences, like that of Quinn Insurance, have demonstrated how this can be a risky business, and there is a lot of noise around the challenges that face one or two other providers and those firms who have their policies with them.
The larger firms have a more established market to choose from, and those markets work hard to keep them within their portfolio. In recent years, a number of insurers have moved away from the smaller end of the market and are only prepared to offer terms to larger firms (over ten partners).
In terms of trends, the lender claims that have dominated the professional indemnity solicitors market over the last five years are start to tail off. Insurers are trying to anticipate if the Jackson reforms are likely to generate a spike in claims from litigation. My view is that despite early signs that the courts are being stricter on aspects of court procedure, we will not really see the impact of these changes until the reforms have been in place for 12 months.
Jason Nash is a partner in the professional indemnity team at Berrymans Lace Mawer (www.blm-law.com)?
The broker: 'not what you do, but how you do it'
Leaving aside changes in respect of the abolition of the assigned risks pool (ARP), the only options left for those now unable to find cover are to find a buyer for the firm or close it, which itself leads to a very expensive run-off premium.
“The loss of the ARP also means there is, theoretically, no ceiling on what insurers can charge a firm. This should act as a strong incentive for firms to work to minimise their exposure to risk in order to make them more attractive to insurers.
“While those law firms working in higher risk areas, such as conveyancing, could face higher premiums, the work they do shouldn’t be dictated by their PII insurance – it shouldn’t be a case of what you do, but how you do it.
“If the firms can show an insurer not only how well they conduct these areas of practice but also how well they manage risk, it will help them to manage their insurance costs.
“Another change to the market for 2013 is that it could become more difficult to find a truly independent broker, given brokers are increasingly tied to one insurer. In order to fully cover the market, a ten-partner law firm would have to approach at least seven different brokers, which could be very time consuming and unnecessary.”
Ged Wood is a professional indemnity manager at Wesleyan Assurance Society (www.wesleyan.co.uk)
The professional body: 'buyer beware post-ARP'
The Law Society is focused on warning solicitors to check the financial strength of an insurer. A few years ago when we had a harder market, unrated insurers did provide firms with a clear alternative to the ARP, despite the attendant concerns.
But, since Quinn, we've had increasing concerns about the strength of some insurers entering the market - which have been justified by recent insurer failure. While we understand that the SRA does not and should not regulate insurers we do think that the SRA should consider further, the impact of unrated providers on the market and the profession.
Our position is 'buyer beware'. We recognise that historically some firms have had no choice but to go with an unrated insurer, but they must understand the risks they face in the event that their insurer is unable to meet its obligations to pay claims - particularly post ARP. There could be significant threats, both to the business but also, in the case of partnerships, to the individuals too.
We need long-term stability in the market, rather than cyclical peaks and troughs. The approach of some market participants has contributed to books getting burned after three to five years and a cycle of entry followed by retraction or exit. We just end up with a market paradigm that makes it more difficult to arrange cover, particularly for certain sectors of the profession.
I hope to see changes in the solicitors' PI market that will help to create and maintain the stability that we all want.
Elliott Vigar is head of regulation at the Law Society
The view from the Bar: 'new culture of negligence claims'
The good news is that the long term effect of Jackson on PI claims and hence PII will be positive - the amount paid out in claims will decrease, thus reducing rates. The volume of claims arising from non-contentious business will simply reduce - it will no longer make financial sense for claimant lawyers to underwrite poor claims either on the basis that they know that what they lose on the swings they will win on the roundabouts, or on the basis that they can hold the defendant to ransom and extract a settlement during the protocol period or at mediation. As a result more claims will go to trial, and because more will fight more claimants will lose. Most importantly, reserves will be reduced and that will affect rates and renewals.
The not so good news is that the introduction of costs management, the new proportionality test and other changes to the rules is going to produce a flood of claims arising out of contentious business. The complexity and uncertainty around ?the new rules will mean that any dissatisfied but well-advised litigant will look back at any concluded case to see if his solicitor could have managed the process more cost-effectively.
It seems to me that there is endless scope for a paying party to argue that his solicitor has mismanaged the costs budgeting process so that he ends up paying more, or a receiving party so that he ends up receiving less. In my view, Jackson will produce the unintended effect of creating a new culture of negligence claims arising out of allegedly mismanaged litigation - and this will have a knock on effect for PII.
John de Waal QC is a barrister at Hardwicke chambers, specialising in property-related professional indemnity claims ?(www.hardwicke.co.uk)
The sole practitioner: 'high-risk areas are not just conveyancing'
When I set up my practice, I chose one of the largest insurers as my provider of PI insurance. None of the insurers were helpful to me in setting up the practice, but fortunately one of the brokers recommended by the Law Society at the time was quite helpful. He steered me towards the areas where insurers had greatest concern and I have stayed with the broker and the insurer ever since. I felt at the time that it was reassuring to pick a provider based upon their size and reputation.
Shortly after setting up the practice I was involved in defending a client in a relatively long trial with a co-defendant represented by Halliwells. Two days into the trial the news emerged about the Halliwells collapse and the Quinn Insurance uncertainty period thereafter only served to confirm my choice of provider.
Since that time the insurance market has changed and the pressure on insurers seems to have eased. The pressure on firms however to provide increasing levels of detail in relation to the financial management of the business, the type and form of the work being done, and the unwillingness of many insurers to accept high risk law firms as clients has been notified to me by my broker.
Some providers are better than others in providing support. Some of the larger insurers offer training to manage the risk profile of their current clients and target firms (COLP and COFA training seems topical) while others seem to offer newsletters targeting the main sources of claims on policies.
My broker has commented that high-risk areas now include not just conveyancing but anything involving the management of funds in a client account. It also seems that other areas to look out for on renewal include complaints, procedures, the COLP and COFA appointments, turnover changes and declining practice areas such as legal aid and general crime. Perhaps civil litigation will also make it into the high-risk category by next year.
Stuart Armstrong, of SVArmstrong Ltd, specialises in health & safety and regulatory law (www.svarmstrong.com)
The mid-sized firm: 'consequences for firms looking to sell'
Probably the biggest issue at present is unrated capacity in the market. The demise of BALVA this year plus the imminent demise of the ARP could force more firms out of business. There may also be consequences for firms looking to sell; the modification of the successor practice rules to allow firms to elect to go into run-off could be an illusory benefit if run-off is underwritten by an unrated insurer, which becomes insolvent. It also puzzles me how the SRA can sanction unrated capacity given the potential impact on clients if an insurer is unable to meet claims. Rumours are that rates are set to fall this year as insurers’ liability to fund the ARP comes to an end, and new capacity is entering the market.
Roger Coleman is ?senior partner at ?Colemans-ctts Solicitors ?(www.colemans-ctts.co.uk)
The City firm: 'perceived deep pocket status makes us an attractive target'
As an international law firm, with a sector focus, our perception of the issues in the current professional indemnity insurance market is taken from a different angle.
While we have not been directly affected by unrated new entrants to the pool of qualifying insurers, the financial stability of our insurers is a key criterion for us.
The changing profile of City firms’ business is something that, in our experience, insurers have been willing to recognise. Examples of how the way firms do business increases the risk exposure for insurers are: Acting as part of consortia, which may include non-lawyers, where the consortium arrangements require joint and several liabilities of the advisers.
We may take on a contractual responsibility for work of other professionals – and as a perceived ‘deep pocket’ when it comes to PI cover, may be an attractive target in the event of a claim. Fronting up the provision of legal services, where other law firms are involved. Clients may retain us to co-ordinate the provision of legal advice on a subject or transaction which involves retaining firms in overseas jurisdictions. Sometimes the client may direct which firms should be used.
However, as “lead” firm, we take overall responsibility for all the advice.? In these situations, our insurers have been reassuringly pragmatic. Insurers expect us to do due diligence on the entities we are doing business with, to ensure that they have the necessary expertise to deliver the expected quality of advice.
They also expect the PI insurance of the other service providers to be known – although in some jurisdictions it is not the norm for law firms to carry any significant, amount ?of cover.
Emma Kendrick-Jones is a partner at Simmons & Simmons ?(www.simmons-simmons.com)
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