Root cause of risk

With the deadline
for this season’s professional indemnity insurance (PII) renewals fast approaching,
we consider (i) the impact on smaller firms of the delay in the decision on changes to the PII arrangements of solicitors and (ii) what firms can do to improve their chances of obtaining cover and reducing their premiums.

By way of background, back in May, the SRA proposed a series of changes to the compulsory
PII arrangements for solicitors. The proposal that hogged the headlines was the proposed reduction to the level of mandatory cover for law firms from £2m to £500,000 per claim. The SRA also proposed to limit compulsory cover to claims by individuals, small businesses
and charities and introduce an aggregate limit to cap insurers’ ultimate liability, among other things.

While small law firms
were broadly in favour of
the proposals, many others, including of course the
Law Society, lodged serious objections to the proposals. Faced with such a backlash,
the SRA then proceeded to go ahead solely on the basis of the lower PII limit of £500,000 and put everything else on hold pending a wider insurance review. The latest is that we await the decision of the Legal Services Board, although this is now out
of time for this latest renewal season.

There is discussion that
this delay has had a significant impact on the insurance renewal season, although, will smaller firms really see a difference if
the minimum PII cover proposal
is introduced? Many sole practitioners and smaller firms were hoping that they could reduce their insurance premiums by reducing the cover to £500,000 per claim. While the premium may be slightly lower, smaller law firms really need to consider the types of work they do and the claims against them, to see whether there will be much saving all in all. For smaller firms, the proposed limit of £500,000 is very much the working claims layer. Therefore, in reducing the limit,
it is unlikely that there will be significant benefits for insurers that will manifest as wholesale premium reductions. In any event, a lower premium, if any, may also be a false economy if clients are requiring law firms’ limit to remain at the current £2m in any event.

Mitigating risk

Brokers have suggested that
the only way to really reduce premiums for these smaller
firms is to consider risk. The
root cause of exposure needs
to be addressed. Savings on premiums may be better sought by considering the firm’s claims record by business area and working on ways in which to reduce risk in good time.

One of the main areas
of business where smaller
firms experience claims is conveyancing. Insurers will generally offer a financial
reward to firms that empirically demonstrate risk mitigation and compliance policies. Therefore, addressing the risks associated with conveyancing would, more than anything else, radically reduce premiums.

Various law firms and brokers offer risk and compliance consultations and making use
of these in good time is likely to result in a significant reduction in premiums. Among the services available are claims trend monitoring to assess the areas
of risk and target those areas of high claims with changes in policies, training or other solutions. Some insurers have suggested software systems that act as risk management tools, but of course, there is no substitute for proper training and supervision. While reducing premiums, these would also reduce the claims being brought, such that fewer excesses will be payable and
less fee earner billable time
will be wasted in dealing with complaints and claims.

While the jury is out on
what real difference the current SRA proposals on compulsory terms of PII cover will make, the decision of the Legal Services Board on the SRA proposals that was due on 12 October 2014 will no doubt provoke much debate in the market. It will be interesting to see where the review will go from here. SJ