PII renewal season: Claim trends

All areas of practice for law firms have seen an increase in claims notifications during the past few years, prompted by the start of the financial crisis. Overall, claim notifications peaked in 2011/12, showing an increase of more than 300 per cent since 2007, fuelled in large part by valuations in the residential property sector.

The City of London law firm RPC has reported that the number of professional negligence cases brought in the High Court against solicitors tripled in 2014, rising from 143 in 2013 to 418 in 2014. This peak in claims in the High Court mirrors the jump Lockton saw in original claim notifications during 2011/12.

There is speculation that many of these notifications were issued in order to protect against expiration of the six-year limitation period. The good news is that we’ve seen claims notifications reduce for the first time since the start of the recession; however, the severity of individual claims has increased.

Residential conveyancing

Conveyancing remains the biggest source of claims against solicitors, and costs insurers more than any other practice area. Even expiry of the six-year limitation period has not led to residential conveyancing claims dropping back to pre-recession levels.

While lending practices and mortgage fraud were significant factors for recession-era claims, the vast majority of lender claims against solicitors arise from failure to report a small number of provisions of the Council of Mortgage Lenders handbook. In common with commercial property, failure to register titles and security deeds remains one of the most common and easily avoided causes of claim.

Figure 1: Residential conveyancing 2010-2013

Commercial real estate

Commercial real estate claims peaked in 2011 and have been stable over the past couple of years. Although less common than residential property claims, they tend to be of higher value. Commercial real estate remains a high-risk area for insurers.

The biggest cause of claims is failure to register deeds. Other common causes of claims include errors in rent review clauses, break clauses, and options, and claims arising from dilapidation claims and assignment.

Figure 2: Commercial real estate 2010-2013

Litigation

Personal injury claims went up in 2013/14
due to Lord Justice Jackson’s reforms and market disruption caused by claims management companies aggressively advertising to claimants who had settled their personal injury claims
in the previous six years.

The targets are often solicitors who assigned inexperienced employees to cases and arguably settled too quickly or for too little. This might have been due to the limited time firms spent on claims, the cap on fees that can be charged, or cases where critical deadlines were missed.

The Jackson reforms, which placed new emphasis on enforcing compliance with court rules, practice directions, and orders, resulted in an increase in negligence claims for costs budgeting failures. The decision in Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537 in August 2013 caused a wave of such negligence claims; however, the Court of Appeal’s decision in Denton v TH White Ltd [2014] EWCA Civ 906 helped to clarify the earlier ruling and stem a potential flood of claims.

Figure 3: Personal injury claims 2010-2013

Future trends

There has been an increase in solicitors stepping outside their areas of expertise. When a law
firm dabbles in practice areas outside its field
of specialisation, there is an unavoidable increase in the litigation claims against it.

The past year has seen an alarming rise in cyber scams targeting law firms. The UK cyber security report issued by the government in March 2015 states that the cyber threat remains one of the most significant – and growing – risks facing
UK businesses. Some 81 per cent of large businesses and 60 per cent of small businesses suffered a cyber security breach in the last year.
The Solicitors Regulation Authority reported that the number of bogus firms had soared from 349 in 2012 to 701 in 2014.

The scams are becoming increasingly sophisticated and difficult to spot. The latest
voice/telephone phishing scams, known as ‘vishing’ (when a fraudster phones your business pretending to be from your bank or another law firm in an attempt to gain access to your bank account), rose by 300 per cent in 2014, according to Action Fraud.

Claims trends suggest that the following areas of work will see increased activity in the future:

• Tax – specifically advice on tax mitigation schemes; and
• Divorce – particularly the failure of solicitors to challenge cash equivalent transfer values provided by pension companies, which undervalued pensions by up to 30 per cent.

 

PII renewal

While the professional indemnity insurance (PII) market remains competitive for ‘good’ firms, there is a noticeable change in attitude for firms that are considered too keenly priced or unprofitable. Engaging with insurers early is essential to allow time to build relationships with insurers and differentiate the firm from others. It is believed that more than 10 per cent of the profession have now moved their renewal date away from 1 October.

The proposal form is the firm’s ‘shop window’ to attract insurers and is seen as indicative of how a firm conducts the rest of its business. The approach to the completion of the proposal form should be the same as a firm would take for a business tender. It is quite shocking that approximately two-thirds of forms received by insurers are incorrectly filled out. Time and attention to detail will pay dividends in the long run, improving the speed that insurers will be able to provide quotes and the cost of the PII premium.

The work split of gross fees is a struggle for many firms, as the categories of different types of work required by insurers do not match the way that many firms recognise the work in their own accounting systems. This split of work is, however, a critical underwriting factor for insurers and can mean the difference between an underwriter offering terms or declining to quote. It is therefore important to allocate the work types as accurately as possible.

Where a sizeable amount of work falls into the ‘all other’ category, it is worth providing a description of this work that will allow the underwriter to assess the risk profile. Insurers rate the different types of work from high to low risk and will load or discount their premiums accordingly. A firm that does a large amount of property work will fall into the highest rated category, as shown in the red/amber/green rating table below:

Figure 4: Risk categories

Where a significant amount of fees fall into a high-risk category, but should in fact be classified as lower risk due to the nature of the work undertaken, the firm should provide further analysis to enable the underwriter to reassess the risk profile of this practice area.

Insurer-produced claims summaries covering at least the past six years, and in some cases ten years, are required. However, if there are any significant payments or reserves it is important that full details of these claims are provided. Insurers try to assess the likelihood of such claims occurring again, and so information on the lessons learned and the implementation of post-loss remedial action can help mitigate the effects of these losses on insurers’ premium rating.

Although the market is split between insurers targeting large and small law firms, we believe strong competition among insurers will shape the PII market in 2015. This will be due to new entrants creating ample capacity. Insurers see increased opportunity for growth with the expiration of the six-year limitation period following the financial crisis and the perception that we are past the peak of claims against solicitors. SJ

Steve Holland is senior vice president of global professional risks solutions at Lockton Companies