This article was first published by the Law Society Gazette.
Professional Indemnity Insurance (PII) cover is one of the biggest costs in running a law firm. Nexa’s Eliot Hibbert and Zahrah Aullybocus recently contributed to The Law Society Gazette’s article looking at the changing state of the PII market and what law firms can do to control these costs.
A hard market, with a lack of new capacity as well as increasing premiums, has become a familiar and depressing reality for solicitors when it comes to PII renewals. The figures make for uncomfortable reading – particularly for smaller practices. A Law Society survey published in July found that the median cost of compulsory cover rose by 23% for small firms and by 15% for sole practitioners in the last financial year.
PII cover remains one of the biggest costs in running a law firm. Inevitably, it has led to a number of firms having to close their doors. A report published by accountancy firm Hazelwoods noted that, in the year to June 2022, 37 law firms closed due to the rising cost of PII cover. A further nine firms closed in the three months that followed.
Just as the legal profession had resigned itself to another increase in premiums, after years of a shortage of capacity, there may be some hope on the horizon. ‘We found that stability appears to be returning, after the hard market that has been affecting solicitors’ PII since 2018,’ notes Law Society president Lubna Shuja, referencing the July report.
For firms able to show a good claims record and strong risk management, premiums could fall, notes John Wooldridge of broker Howden. For others, he adds, there could be a flattening of rates.
Paul Bennett at law firm Bennett Briegal, who advises professional services firms, agrees that the market is definitely improving and getting softer. New capacity is coming online for well-run firms with good risk management systems in place, he says.
Nexa Law is one firm to have already benefited from flattening premiums, as its founder and COO Eliot Hibbert explains: ‘We renew our PII in April and were worried that as our turnover had gone up our premium would too, but it’s not been as bad as we thought. A couple of insurers were playing each other off [which got] the price down.’
It is not just the prospect of new entrants but a growth in existing capacity that is helping to improve the outlook for the profession. ‘There is increased capacity in the market,’ says Patrick Bullen-Smith at broker Hera Indemnity, ‘with two, potentially three new entrants. This coupled with the fact that existing insurers are looking to add to their capacity means good news for solicitors’ firms.’
Linda Lee of Weightmans, chair of the Law Society’s professional indemnity committee, notes: ‘We’ve been in a hard market for a few years now, and practitioners will no doubt welcome the new entrants to the market, as well as the increased appetite for risk.’
Wooldridge, however, sounds a note of caution: ‘In the general PII market rates are reducing, but we need to be mindful that the solicitors’ PII market is one of the most challenging when it comes to claims and we do not believe we will see reductions at the same level we are seeing in the broader PII market. We also need to remember that some of the increase in recent years has been “market correction”, and we do not expect rates to return to the levels they were prior to the hard market.’
The growing number of law firm closures has led insurers to be wary of the financial stability of any firm they insure. Under the Solicitors Indemnity Rules and Code of Conduct, it leaves them on the hook to provide six years of run-off cover, even in instances where the premium has not been paid.
‘If any firm is worried this could be an issue for them, we suggest they consider reviewing their strategy, including taking professional advice, sooner rather than later,’ says Howden’s John Wooldridge. ‘If the numbers don’t look good, they will need to be ready with a story and plan.’
High-profile failures include firms within the ‘accumulator’ business Metamorph Group. The group once boasted of having 650 professionals serving 50,000 clients from 15 offices. With signs of financial distress becoming more evident through 2022, the group announced the closure of several offices. In December, the SRA intervened in several firms. Some carried on, but in July this year, the remaining firms in the Metamorph Group were forced to close after failing to obtain PII cover.
Firms that carry out a large amount of conveyancing have always been on the risk radar for insurers; the nature of the practice is such that it generates volume work, often carried out under extreme time pressure. The Law Society’s July PII report found that for firms carrying out conveyancing in the last year, the total cost of their current compulsory level of PII rose by £10,000 on average.
Current market conditions, with increasing mortgage interest rates, and the potential for a property price slump, will no doubt heighten insurers’ concerns. Past experience from the 2008 and early 1990s recession would suggest that such conditions can create the ideal breeding ground for more claims against conveyancing practices.
Wooldridge advises firms carrying out conveyancing work to highlight to underwriters any processes they use to streamline workflows and reduce risk. ‘Have you structured your conveyancing department in a way that ensures work is being done at the right level?’ he asks. ‘These are issues that you can highlight at renewals in a covering letter or supplementary document.’
There are some insurers who will not consider any firms whose practice consists of 25% conveyancing or over, says Bullen-Smith. Broadening other practice areas, or coming to a referral arrangement with another firm, are just some of the ways to limit the risk exposure that comes with conveyancing, say brokers.
Natasha Lewis, co-managing partner at Lewis Denley in Horsham, West Sussex, explains her firm’s experiences of PII: ‘We have a clear claim record and have been robust in our due diligence and still we’ve seen a significant increase in our premiums. We utilise a lot of technology at Lewis Denley, even developing our own legal software to help protect the business and build in efficiencies. We’ve never had a claim but the PII tripled for us last year.’
Lewis explains: ‘Our property practice business area exceeded 30% of turnover and as a result, I pivoted the business, hiring experienced partners from other law firms and expanding into other areas of the law, starting up new departments, such as private wealth, which focuses on private client law. We feel insurers are basing decisions on past experiences following, or during recession when claims are inevitably high.’
There may, however, be good news on the horizon for conveyancing practices, with Howden recently launching a new facility aimed predominantly at one-to-10 partner firms, with no restrictions on the amount of conveyancing work undertaken.
The Building Safety Act and how it affects the sale and purchase of relevant leasehold land is being flagged up by some brokers to whom the Gazette spoke as an area to be approached with caution. They note that additional questions may start to be asked by insurers in proposal forms on renewal. The act, a response to the Grenfell Tower disaster of 2017, and the subsequent review of building safety, places a number of new obligations on conveyancing practitioners.
The Building Safety (Leaseholder Protections) (England) Regulations 2022 set out the duties that are now placed on leaseholders and landlords, including a duty to provide a Landlord’s Certificate and a Leaseholder’s Deed of Certificate. The regulations apply to any building at least 11 metres/five storeys high. UK Finance, the trade body for mortgage providers, requires confirmation that the building in question has been or will be remediated. In addition, part 2 of the Lenders’ Handbook requires confirmation of a building’s compliance with the act, further increasing the burden placed on solicitors.
Practitioners note that the act has led to many transactions significantly slowing down as well as increasing costs for clients.
At a House of Lords briefing in July on the Earl of Lytton’s consumer protection for buildings (amendment to the Levelling-up and Regeneration Bill), Nexa Law consultant solicitor Zahrah Aullybocus said: ‘PII insurers are telling solicitors not to do the work because of the chaos created by the current legislation.’
Writing in the Gazette in late July, Law Society president Shuja noted: ‘The complex implications of legislation and the potential requirements it places on solicitors could be significant.’
She added: ‘There are possible implications for the availability and cost of professional indemnity insurance.
‘Referring clients to suitably qualified persons (if they can be found) will add expense and delays to the process.’
The Law Society is currently in talks with a number of key stakeholders, including the Department for Levelling Up, Housing and Communities, PII brokers and insurers, regulators and UK Finance, to make sure members’ concerns are understood, Shuja explained.
‘In our experience most firms are quite rightly exercising caution,’ notes Wooldridge. ‘Many are declining to accept instructions on the sale or purchase of relevant leasehold property while matters are so uncertain. We encourage those law firms that are engaging in this work to consider the potential impact when it comes to renewal of their PII.’
Supervision and training
Good management of staff, through proper supervision and training, is an important part of reassuring underwriters.
‘Showing how your team manages risk is not usually in the renewals form, which focuses on standard approaches and not the firm’s own checks,’ Bennett says. He advises using a separate sheet to show that the firm has thought this through.
‘If you have a strong management, you can also negotiate claims without insurers, which they do appreciate,’ adds Hibbert.
Training supervisors on the supervision of files and risk management is also important, Bennett notes. ‘Firms should be looking to build up their supervisors’ skills and knowledge as a key priority, given the LawCare Life in the Law Survey in 2021, [which] highlighted a lack of management training as a concern. The trend has not changed in the interim, but the SRA focus on supervision and culture means supervision is now a key regulatory obligation since the April 2023 changes to the SRA codes of conduct’.
New obligations require firms and individuals to ‘treat those who work for and with you fairly and with respect, and … not to bully or harass them or discriminate unfairly against them’.
Law firm managers, such as partners, are required to challenge behaviour that fails to meet this standard, according to the code.
The SRA has also updated its guidance on workplace environment, and the risks of failing to protect and support colleagues. First published in February, this was updated in May 2023. It followed complaints that some firms had an ‘unsupportive, bullying or toxic working environment and culture’.
‘From a PII perspective one of the threads throughout the thematic review and consultation that led to the changes, was the importance of avoiding a working environment which risks leading to mistakes and poor outcomes for clients,’ says Wooldridge. ‘The guidance is clear that there is an expectation firms will have both systems and culture that enable individuals to raise concerns.
‘Health and wellbeing of fee-earners is now firmly on the agenda for PII underwriters,’ he adds. ‘They are increasingly aware that while a claim might present as an issue such as a missed time limit or failure to properly advise a client, if you look deeper, the real cause is often a fee-earner who is struggling to cope.’
Law firms across the board remain a target for cyber-attacks. With PII claims often arising in the wake of such an incident, some underwriters are now requiring separate cyber cover. This enables firms to access the right expertise to get their systems up and running again quickly following a cyber-attack.
‘There is no doubt that law firms, whether big or small, are a target for cyber criminals,’ Wooldridge says. ‘PII underwriters have been expressing concern about cyber security for some time, and we have seen an increase in claims against the PII policy in circumstances where clients have suffered a loss as a result of a cyber-related incident. There is now an expectation that law firms have safeguards such as multi-factor authentication and VPN in place.’
Law Society data shows that 72% of firms have not purchased cyber cover, despite a change to the minimum terms and conditions in 2021 which now excludes first-party losses resulting from a cyber event.
In its June report on the legal sector, the National Cyber Security Centre noted that the sector remains attractive to cyber criminals due to the large amounts of money and sensitive data handled. It adds that remote working has made firms vulnerable in new ways.
‘Given the recent news stories about data breaches, many firms may be wondering how they would respond if they found themselves in such circumstances,’ Shuja says. ‘This is why we are encouraging our members to give serious consideration to acquiring comprehensive cyber insurance policies, which include data breach recovery and response.’
In the long run, the greater capacity in the market will start to affect the prices and benefit both practitioners and their clients, notes Lee. That can only spell good news against a backdrop of high inflation and increased overheads.
Completing proposal forms in plenty of time ahead of the traditional October renewal date is as important as ever. ‘It always takes longer than [firms] expect. Paying attention to the completion of a renewals submission is also very important,’ says Wooldridge. ‘Most firms do not have the opportunity to meet with their underwriter, so the renewals submission is the one snapshot of the firm that the underwriter receives, and it is important to make a good impression.’
‘It’s all about preparation,’ adds Hibbert. ‘The more information you’ve got, the better. You need to know your practice inside out and be transparent.’