Renewing insurance

Solicitors' Professional Indemnity Insurance (PII). Believe it or not, it is not too early for solicitors to be planning for the next renewal on 1 October.

Driven to excess

Most solicitors' PII will carry an excess. Having an excess can be annoying, especially if it is a large one. Some solicitors complain at having to pay an extortionate premium '“ but ill-feelings towards insurers are not helped when it seems the firm is having to pay the majority of its own claims as well. What is the point in paying the premium and the claims?

Nick Pointon of brokers PYV advises firms not to accept an excess that is 'larger than half a per cent of turnover.' He comments that it is not always worth trying for a lower excess, and that nil excesses can prove 'very expensive.'

Although a nil, or low, excess might appear to represent a good deal, it doesn't always work out that way in practice. If your insurer ends up paying, or defending, a large number of relatively small claims this will soon reflect badly on the firm's claims experience and will certainly be an adverse factor for the following renewal. Phil Edwards of QPI comments that if an insurer pays or defends a lot of small claims it turns into a form of 'pound swapping'and achieves very little. In fact, he feels having a higher excess, and therefore a high level of self-insurance, 'sends a good message to insurers, and demonstrates a good attitude to risk management.'

A large excess might prove awkward administratively, and settling claims from the firm's own funds never goes down too well. But a firm can often work closely with its insurers and agree those matters for which the firm can maintain conduct. Insurers will often agree to this. Even though this requires the firm to put in what seems to be all the work, personal knowledge of the client and the problem that has arisen should put the firm in a good position to find a remedy. And this will certainly be less expensive than insurers instructing panel solicitors. Keeping costs down on behalf of your insurers might not figure too highly on your list of priorities, but the savings will reflect well in your end of year claims summary.

Workload and approach

There might be some cases where you have to put in a considerable amount of work. Consider negotiating with your insurers their payment of your non profit costs. They will not always agree to this but, logically, they should have no objection when they know full well the alternative of panel solicitors will be much more costly.

It can be tempting to settle claims that fall within the excess without recourse to insurers. There are a number of reasons why this should not be done. An initial attempt to negotiate a small payment within the excess might result in your client being encouraged to submit a claim for a larger amount.

Furthermore, the settling of any claim in this way could constitute a non disclosure of a material fact at the following renewal '“ especially if there has been a series of small claims. Also, the non disclosure of a series of small claims can deprive the insurer of the opportunity to identify common causes that could help to deflect future claims.

Your policy will probably contain an aggregate excess, which caps the total of any payments you have to make for the policy excess in any one insurance year. You deprive yourself of the benefit of this aggregate if you settle small claims without reference to the insurer.

Furthermore, it is dangerous to develop a habit of nondisclosure. This could easily lead to your not declaring a more serious issue at the right time. Phil Edwards of QPI confirms that insurers have no option but to indemnify solicitors even when notifications have been late, but they do have the right to seek reimbursement from you if their position has been prejudiced. Even if there has been no prejudice they might try to recover the defence costs from you. So always notify, and do this promptly.

Limit of indemnity

In 2005 the minimum terms applied a new definition of 'one claim'. Towergate Professional indemnity says that the new definition considerably extended what is included in a 'series'so that more claims only attract a single limit of indemnity:

''¦all claims against any one or more insured arising from the same act or omission or from one series of related acts or omissions, the same act or omission in a series of related matters or transactions or similar acts or omissions in a series of related matters or transactions'¦ will be regarded as one claim.'

The previous rule aggregated claims arising from 'the same act or omission or from one series of related acts or omissions'. The new rule widened aggregation to related matters; and similar acts or omissions in a series of related matters.

It is possible any of the following could be aggregated as one claim:

• claims from the same client;
• claims from the same transaction;
• claims introduced from the same source;
• claims from a single fee earner;
• claims arising from a repeated mistake; or
• claims from a systematic fault

QPI comments that, when assessing their required limit of indemnity, many firms first look at their largest contract, rather than assessing their likely overall liability under the aggregate rule. It is particularly important to think this through if the firm has a large block of repetitive work that could easily be caught.

Continuity of cover

To switch or not to switch? In the ideal world there would be a strong argument in favour of staying with the same insurer and building up a good relationship. Having said that, not all insurers are of the same calibre, and so loyalty would not always be rewarded as you might expect. And even if you feel the loyalty factor is worth taking into account, there will always be a level at which even the most loyal policyholder will switch. If you have managed to stay with the same insurer for any length of time, one advantage you might not fully appreciate is the ease by which you are able to compile claims statistic. Switching insurers each year builds up a need to obtain updated claims statistics from each insurer in time for every year's renewal negotiations.

Phil Edwards of QPI feels service is very important. Not all insurers have the quick and reliable claims administration that this class of insurance demands '“ and not all insurers provide risk management support. Edwards adds, 'The cheapest quote might not prove to be the cheapest in the long-run.'

He also advises against being 'over-broked'. By this he is referring to the tendency for some firms to complete several proposal forms every year, then asking a number of brokers to quote terms. This can be counterproductive, and insurers can take a dim view of seeing the same proposal from more than one source.

Successor practices

The minimum terms set out in what circumstances your firm will be treated as the successor practice of another '“ and hence inherit responsibility for any claims arising. The rules are complex and there have been some unpleasant surprises with firms being treated as the successor quite unexpectedly.

There is not much that can be done about the past, but this is an issue to consider when contemplating a merger. Nick Pointon of PYV says that a firm's insurance broker should always be consulted about claims issues before merger negotiations become too advanced.

Towergate Professional Indemnity has produced a helpful list of examples of where a firm can unwittingly become a successor practice, such as:

1) One or more principals from another firm join you as principals and use all or part of the same name, or use the same premises, or assumed liability, or took on the majority of staff as employees

2) Your lateral hire from ABC Co was structured so that there was an element of continuity '“ name, premises or team. 'ABC Co'has not continued to practise under that style. Any one of these factors '“ or using just part of the 'ABC Co'name '“ will mean that you are the successor practice. Just one name appearing in your new style could be enough.

Financial services claims

One would hope that we have now seen the end of endowment claims. But, of course, claims can still arise, and there might be latent claims arising from other aspects of financial services work.

This raises the issue of when does the Law Society, as opposed to the Financial Ombudsman Service (FOS), have jurisdiction for cases where you feel it is inappropriate for you to offer your client any compensation.

• The FOS is not able to deal with any complaint made against a solicitor where the alleged negligence occurred prior to December 2001. Prior to this date, solicitors providing financial advice were regulated by the Law Society. If the FOS is not able to deal with a complaint because of this, it refers the complainant to the Law Society.
• The Law Society has stated it cannot award compensation in cases where the alleged negligence occurred between 29 April 1988 (the commencement of the Financial Services Act regulations) and 31 March 1991. (1 April 1991 was the date from which the Courts and Legal Services Act 1990 first established the power for the Law Society to order compensation).
• The Law Society can award compensation for the period 1 April 1991 to 30 November 2001 (from which point jurisdiction passed to the FOS).
• It is reasonable for solicitors to refuse to deal with claims where advice was given more than 15 years ago. Insurance companies are not able to invoke this defence, as the FOS has refused to allow them this protection. But because the FOS has no jurisdiction over solicitors for advice going back this far, the 15 year long stop should still apply.

Action points for renewal

• Check Solicitors indemnity fund printout for accuracy
• Check own record of incidents reported since 1 September 2000. Are insurers' reserves in line with reality?
• Interrogate all partners about any potential claims that should be reported prior to 1 October
• Likewise, partners should interrogate staff
• Detail any risk prevention steps taken during the year, discussions with brokers, risk management action, etc
• Compile any other information that emphasises your firm's professionalism
• Lodge information with insurers or brokers as early as possible
• Diary to make sure that cover is in place well in advance of 1 October