Taking stock

The 2013 insurance renewal for solicitors '¨in England and Wales, more than any '¨which preceded it, perhaps requires mature reflection before jumping to conclusions about how things might be better. This year '¨has been one of the most problematic renewals since the open market for compulsory cover began in 2000.

Year in, year out, too many focus on price as the key issue. Price is important, but focusing on that is far too simplistic. This year, the issue for many firms was whether they could obtain cover at all.
While that was predominantly a small-firm issue, it affected some top 100 firms too.

On paper, the main change was that this was the first year with no assigned risks pool (ARP) to provide cover for those unable to obtain insurance in the open market.

In practice, the bigger issue, mainly for small firms, was the Balva problem, and changes in the market for rated cover, of which more below.

This year, firms unable to obtain cover could call on the extended indemnity period (EIP), providing 90 days' further cover from their existing insurer to enable them to arrange an orderly wind down of the business. In the first 30 days they can continue taking on new work while looking for cover; however cover has to be backdated to 1 October, which may be problematic if a claim comes in after 30 September. At the time of going to press, the number of firms in EIP had risen from 69 in the first week of October to 185. Firms unable to obtain cover after the 30 day period must then wind down and trigger the six years' run-off cover with their existing insurer.

Leaving it too late

Some have suggested that firms who had difficulty in obtaining cover had only themselves to blame for leaving it too late. That may have been the case with some firms, but a large number were affected by the Balva problem.

The Latvian insurer covered approximately 1,300 firms. Many thought they had two-year policies and could put the renewal problem to bed until 2014. In March 2013, Balva was barred by from writing any further UK business, and on 22 July 2013, the shareholders agreed to appoint a liquidator.

Meanwhile, firms insured with Balva were assured that they still had valid cover. In June, most were offered a replacement policy with a German insurer, Berliner, so still assumed they had no problem arranging insurance until October 2014.

The bombshell came when firms were told in the second week of September that Berliner may be unable to write any solicitors' business in the 2013-14 renewal. By then, the avenues for obtaining alternative cover had diminished substantially. It has to be remembered that although some firms may have chosen Balva (and later Berliner) on price grounds alone, many had little choice - either because of problems with their claims record, leaving them with no prospect of obtaining cover from a rated insurer, or because their straitened economic circumstances meant they simply could not afford anything else.

But the problems were not confined to Balva. Rated insurer XL pulled out of the market for 1-3 partner firms in mid-August - leaving more time to react, but, for some, few places to go.

Conveyancing proved to be a massive '¨problem, but not the only one: other practice areas had their problems too. Firms with more than 25 per cent conveyancing had particular difficulty obtaining cover.
Some seek to blame the lenders for visiting their losses on solicitors, others blame the judges for holding them liable. Yet there is little new in solicitors' liability to lenders beyond fine-tuning, most fundamental points having been determined in the wave of lender litigation in '¨the 1990s.

Many of the problems continue to be down to conveyancing by inadequately supervised, unqualified staff. However, for many firms, the claims issues, some of which involved substantial sums, were legacy problems dating back even before the collapse of Lehman Brothers in 2008.
For those, it might have been helpful to identity this fact in the proposal, if it meant that further claims from the same era are unlikely to appear having regard to the passage of time, even though there may not technically be limitation defences in all cases.
A major difficulty is that despite having quality accreditations such as Lexcel and the Conveyancing Quality Scheme, it is not possible to undo the risk of claims from bad practices in the past. Other problems were related to corporate claims and personal injury, particularly where firms had a volume of claims from undervalue settlement.

Commercial viability

Concern about firms' commercial viability were also a problem: insurers do not want to insure firms which fail, because they have to fund unpaid excesses on claims, and provide six years' run off insurance, even if the premium is not paid.

'Drive the bad firms out of business', was the message from those who advocated the end of Solicitors Indemnity Fund (SIF) and the move to the open market. In fact many large firms have had rogue partners and claims problems, some substantial, but continue to obtain cover, simply because they pay enough in premiums and can stand large uninsured excesses so they represent a commercial proposition for an insurer.

Small firms who have had a problem, such as a rogue partner, can find themselves uninsurable very rapidly, simply because the economics do not stack up from an insurer's perspective. They may be good firms who have been unlucky.

Some have asked whether now is the time to bring back SIF. Regrettably, my view is that it would not be practicable, either on a compulsory basis, or as a qualifying insurer in competition with other insurers, an approach which was tried in Ireland and failed.

Firms, particularly those who had problems this time, should think now about how they will approach next year's renewal.
A strategy of leaving it until you have a problem shortly before renewal is doomed to fail. Many sought help too late.

Insurers are in business to make money. I have seen a large firm with a sustained record of claims over many years which exceeded premiums many times over.
So look at your claims figures (both paid and reserved) and the premiums paid over the past six years and ask yourselves whether insurers are making money out of you.
There should be no 'ifs and buts' about this, least of all ignoring large portions of the claims on the ground that they related to a rogue partner or employee, or that the claims are only reserved and have not yet been paid.

Firms have to be able to demonstrate that they are managing risk - and that they are doing so in line with their peers. That is not something which you should seek to address in the last two weeks before renewal.

Successor practice

The 'successor practice' provisions help ensure that firms which have ceased are insured. They '¨can make another firm liable for insuring the '¨firm which has closed, and the rules sometimes operate in an arbitrary way. It means that firms need to exercise care, first as to whether they '¨will assume such liability, and secondly, if they do, to carry out due diligence on the firm to which they succeed.

Many a good firm has been doomed by successor liability for the legacy claims exposure of another firm. One firm had trouble obtaining cover because its predecessor firm had done an inadequately worded block notification (or 'laundry list'): block notifications need doing with some care and understanding of the issues.

In some cases, firms can elect to avoid there being a successor. However, a quirk in the wording has resulted in insurers taking differing stances on whether firms which go into the EIP and merge after 30 September 2103 can do this.

Unrated insurers

The Law Society has warned firms of the '¨dangers of unrated insurers, though not all unrated insurers are created equal.

Some say they should be banned, but that would mean a large portion of the profession would be uninsurable unless there is a reduction in the scope of cover.

Perhaps one of the most telling points was that XL's withdrawal from the market for 1-3 partner firms led to a major global insurance broker, which had previously eschewed unrated insurers, offering small firms cover with an unrated insurer.
That perhaps tells us all we need to know about the sustainability of the market for rated insurance for small firms, which in turn begs the question whether cover is too wide.

It is understood that the SRA will be consulting on the issue in the New Year and it is critical that the profession informs the debate.
What is doubtful is whether the current scheme can continue as it is. Otherwise a large portion of the profession will be unable to obtain cover and will close.