Running for cover

It has been two years since that most dependable of PII stalwarts – the single renewal date – was scrapped on 1 October 2013. Thus far, rather like the legal market as a whole, lawyers have preferred the status quo in their PII routine. Insurers claim that between 75 and 85 per cent of clients are sticking to 1 October.

‘My team represents over 1,000 firms ranging from sole practitioners to large international firms,’ explains Martin Ellis, executive director and UK professional indemnity practice leader at FINEX Global in the Willis Group. ‘I believe around 8,000 firms renewed their policies on the 1 October.’

Insurers have not been shy in encouraging change though. Flexible renewal dates, policy lengths and products have all been on offer, but are failing to generate widespread interest. Jason Smart, chief executive officer at Elite Insurance Company, points out that his firm has been offering 15- to 18-month policies to try to spread out renewal rates.

‘The pick up has been slow, perhaps because firms are looking at keeping overheads down and 18 months’ cover costs more than 12,’ he continues. ‘I expect to see this situation dissipate over the next five years as new firms launch and further consolidation happens.’

Indeed, new entrants have recently launched businesses based on the predictability of 1 October renewals. Paul Cusition, who established Pelican Underwriting Management earlier this year, says that while the long-term goal is to offer products across a range of professions, the first product was solicitors’ PII because it was something ‘we could get up and running as well as being suited to our background and timings, specifically the October PII deadline’ .

‘Many insurers were advocates of maintaining the common renewal date, and the majority of firms still go for 1 October deadline,’ Cusition continues. ‘The fringe players, notably unrated carriers, did enter the market and offer certain deals - such as 15 months for the price of 12 - and that has been taken up by some firms.’

Rating success

The unrated insurers have been trying to reject the status quo too because of a reduction in law firms taking cover from them. This has been because of pressure from the major banks which, as a prerequisite of securing a spot on a lucrative lending panel and the fact that conveyancing is also the prime source of claims for negligence, are more cautious regarding appointments. They requested that panel firms used rated insurers, which saw many firms moving away from unrated insurers.

‘This resulted in hundreds of firms moving to rated insurers, which had an impact on rates although with plenty of insurers’ capacity and, therefore, choice, many firms still benefited from a more competitive environment,’ Ellis says.

Cusition observes that the market has also been pressing for professional legal bodies to have requirements that all members are covered by A-rated insurers, as is the case for the Royal Institution of Chartered Surveyors. ‘The unrated capacity has pretty much gone during the last two years after lenders removed law firms that had unrated cover from their panels,’ he adds.

Smart disagrees with such market perceptions on unrated insurers, which he says has been the choice for difficult products or higher risk coverage. ‘This is not the case,’ he argues. ‘Our market is firms of one to four partners, and we still face the same liquidity and capital requirements under Solvency II as rated insurers.’

Even so, the migration from unrated to rated insurers, coupled with new entrants, has resulted in something of a soft market. According to Steve Holland, senior vice-president of Global Professional Risk Solutions at Lockton Companies, the PII market has been ‘relatively benign and rates have not really gone up’. He says that the only firms which have seen increases are ones with a poor track record on claims, or ones that have undertaken a merger and are covering past liabilities of the acquired firm. ‘The competition from underwriters has been quite aggressive, which is evident in that although firm’s legal fees have been increasing, insurance premiums have not,’ he continues.

While premiums may be steady and options aplenty, experts are warning that a critical new professional indemnity threat is emerging, a prime example of which hit the headlines in the autumn with Karen Mackie. Mackie, a sole practitioner based in Surrey, fell victim to a telephone scam which saw her clear out client accounts to the tune of £734,000. Mackie was suspended from practising and has been declared bankrupt.

New threats

A growing number of lawyers are being targeted by such fraudsters, insurers say, claiming that fraud and cybersecurity are the biggest current risks to firms of all sizes for potential professional indemnity negligence claims. Criminals - through hacking or scamming - dupe lawyers into transferring huge amounts of client money into bogus accounts. Negligence claims for such cases would be treated as PII, so - with hundreds of thousands or even millions of pounds at stake - firms need to remain diligent.

‘We have seen a huge uptick in notifications for cybercrimes from the start of 2015,’ Holland remarks. ‘Law firms are being targeted by phishing and vishing scams: false client e-mails or fraudsters calling and pretending to be the bank or a client. These types of claims are easily avoided with basic awareness and training. The insurance market has not reacted to the increase in cybercrime in terms of rates so far, but that will come if the trend continues.’

In a usual negligent case in, for instance, conveyancing, the claim would not be for the whole sum of a property, but rather a smaller amount to cover something like a defective title. Instead, lawyers are leaving themselves open to claims for much larger sums of money.

‘I left Travelers in 2011 and cybersecurity was not a major issue,’ Cusition says. ‘Since then, I have seen a significant number of claims in the market on the matter, with conveyancing and probate firms especially vulnerable because they often have a disproportionate amount of client money in their accounts. Worryingly, it is not hard to find the firm has acted negligently in some capacity somewhere in the process. In fact, we are currently working on a risk management practice guide for all our insured firms to be aware of the warning signs and risks.’

As part of the minimum terms, insurers have to replace money taken from client accounts. This can leave insurers exposed. Elite has, this year, paid out £2.5 million from just three claims involving client account fraud. ‘Elite has less than three per cent of the total PII market, so that gives an indication of the potential liabilities to fraud,’ Smart adds. ‘In fact, it is reaching a crisis point. We had one case where a law firm cashier spent two hours on the phone to the fraudster, who claimed the client account had a virus so the funds had to be transferred to a new account. The fraudsters stole £1.15 million.’

While insurance companies may be saddled with picking up the bill, insurers warn that the ramifications - especially if negligence is established - will also impact on law firms in the long run.

‘It would be a brave insurer that paid out more than £1 million to a High Street firm for a hack or fraud, and then agreed to renew the policy the following year,’ Smart expands. ‘Now the assigned risk pool is gone, firms may well find themselves unable to obtain cover and, ultimately, out of business.’

With the potential liabilities soaring, experts caution that now is not the best time for the Solicitors Regulation Authority (SRA) to be pushing its idea to reduce the minimum level of PII cover.

Minimum levels

The SRA renewed its call to slash the minimum cover level in July 2015, reducing it from £2 million to £500,000, to help ease insurance costs. The insurance market is broadly divided on the plans. Ellis says that when the idea of reducing the minimum level of cover was first raised, the insurance sector and other key stakeholders did not believe that it was an appropriate suggestion.

‘It may only be the minimum level, but a significant number of negligence claims do exceed £500,000 and there is no sign of these claim values reducing.’ Ellis points out that many houses in the UK cost considerably more than £500,000, and his firm believes that lenders are still not comfortable with such a low level of minimum cover. ‘As a result of this and many other risk factors, many firms would no doubt elect for higher levels of cover as a prudent business risk decision as well as to meet their clients’ requirements.’

Holland - who also says that the proposal to reduce the run-o ff for claims against a law firm from six to three years is ‘short-sighted ’ because at least 40 per cent are brought after three years - concurs, stating that reducing the limit is ‘not in the interests of the profession’ .

‘The SRA thinks it will save insurance costs, which will reduce the solicitor’s fees and so benefit consumers, but the key issue remains that of claims,’ he explains. ‘Firms with a lower risk profile are already paying lower premiums. Clients may ultimately suffer if their law firms do not have the right level of coverage. In such cases, it may become more common for clients to persue claims not just against the firm but individual lawyers. As was seen with their push against unrated insurers, lenders too will likely insist on a level of cover much higher than £500,000.’

Cusition has a different view, observing that a small law firm does not necessarily need £2 million of coverage and will very rarely face claims of that size. ‘Most claims are below £500,000, but the difference between the cost of the premium between the two is negligible: probably not even five per cent. The volume of claims is also an important factor. If a firm has 50 claims, then it has 50 claims, irrespective of what the aggregate is.’

Smart builds on this, supporting the reduction because £2 million is a ‘large limit of indemnity’ and there are firms - in sectors such as road traÿc accident claims or employer liability - that just do not deal with potential claims of that value. ‘Even if the level was reduced to £500,000, it is not like a firm cannot seek additional cover for claims higher than that amount.’

If only the PII market was as certain as a 1 October renewal date.