Professional indemnity insurance
Professional indemnity insurance: X-unrated
Tony Collins scrutinises a time of change – and challenge – for legal insurers, with the unrated insurance market decline, an abundance of rate capacity, and a fraud claim spike.
About the author
Tony Collins was, at the time of writing, a freelance legal journalist.
When Elite Insurance announced that it was to pull the plug on its solicitors’ professional indemnity insurance (PII) unit in February 2016, it was another sign of the swift decline of unrated PII insurance. Elite entered the market in 2012 when unrated insurers, such as Balva Insurance, Alpha Insurance and Enterprise Insurance, had built up a 12% of market share.
Elite’s recent announcement was not met with much surprise. Patrick Bullen-Smith , CEO and head of professions at Hera Indemnity, says that the unrated insurers have been forced out of the market by a combination of factors, specifically: a lot of underwriting capacity; firms willing to pay extra for rated products; and lenders insisting that panel firms must have rated cover. ‘The model was that unrated cover would have to be cheap when compared to the big providers, but PII is not a profitable enough sector to operate with such tight margins, so dropping the premiums by 20 per cent proved to be unmanageable,’ he outlines.
Grant Clemence, director of underwriting at QBE, points out that the quality of paper weakened through various unrated carriers because the legal profession was focused on price, and unrated cover was typically cheaper than rated cover: ‘The short-term strategy was to build up market share, but the problem was unrated insurers were not charging enough in premiums for the level of exposure and, I suspect, they ended up paying out more than they were getting in.’
Elite’s withdrawal marks the end of another unrated PII provider for law firms, with Alpha and Enterprise the only notable names remaining. Joe Bryant, a partner at RPC, who specialises in handling claims against solicitors, brokers and construction professionals, says that the rock-bottom premiums kept the overall market for solicitors’ PII very competitive for a number of years, but most of the unrated insurers have now ‘fallen by the wayside’ , either by withdrawing from the sector having suffered huge losses or by simply going under. ‘Their unsustainably low pricing came back to bite them and their unsuspecting policyholders, and that sector is now all but gone, never to return,’ he continues.
‘No reputable broker would recommend unrated products in the current climate, which gives the Solicitors Regulation Authority a bit of a headache as rated insurers will insist on charging higher and more sustainable premiums, and there is now very little to keep this trend in check.’
Even so, law firms should not automatically expect a major hike in premiums. The last few years have seen a number of new players enter the market, including Pen Underwriting and Pelican Underwriting Management, and the feeling is that, despite the possible end of the unrated market, there are plenty of good rated deals to be had.
‘Competition is currently strong as investors look at insurance ahead of savings or the stock market, meaning a lot of insurance options,’ Grant Clemence claims: ‘In fact, there is no need to go to an unrated insurer, as firms can get terrific prices from good quality rated paper.’
A note of caution comes from John Kunzler, head of financial and professional (FINPRO) national practice at Marsh, who says that there is a lot of new capacity from providers and most firms have no issues in getting cover, but some of the long-term players are ‘reviewing their appetite for the market’ . ‘There may be a changing of the guard during the next year as insurers assess what is making a return, and their exposure to property claims,’ he remarks.
The need for A-rated cover is becoming much more pertinent for law firms as the dynamic of the claims market shifts. According to research from RPC, while there was a fall in high court claims brought against law firms last year, there are concerns that a large number of potential litigants are poised to bring cases this year. The firm cites conveyancing disputes over subprime mortgages originating from the financial crisis as one source, but adds that there is a crop of specialist law firms targeting solicitors and legal professionals on behalf of their former clients.
‘Despite the overall fall in number of PII cases against law firms, there is a growing body of claims against solicitors brought by former clients: the allegation being that the solicitor failed to secure them enough compensation first time around,’ Joe Bryant says. ‘For example, we are seeing claims by divorcees disappointed with their settlements, particularly regarding the inadequacy or lack of any pension-sharing agreements, and litigation by those whose injury settlements allegedly failed to provide for them sufficiently far into the future, typically miners’ claims relating to vibration white finger injuries.’ He adds that it is a concern that targeting solicitors for a ‘second bite at the cherry’ is becoming such a trend.
Patrick Bullen-Smith has seen similar moves from the claimant sector, citing the Jackson reforms, which clamped down on low-end , no-win , no-fee personal injury claims, so many lawyers are looking for secondary work in the shape of ‘hindsight claims’ stating that previous settlements were too low and alleging negligence from the legal advisers as the reason.
‘Lawyers are a good target as they have guaranteed insurance, so many claimants are looking to get a pay-off to go away in order to avoid going to court,’ he states. ‘Insurers do not want to go down that road as it sets a precedent for spurious claims.’
Joe Bryant stresses that a significant percentage of claims against solicitors do not go beyond the pre-action stage, presumably because those advising the prospective claimants know that there will be significant evidential hurdles to overcome in order to prove their cases. ’However , this doesn’t stop them testing the water by intimating the claim early and seeing if the insurers might pay out in order to avoid the costs associated with litigation,’ he comments.
Insurers say that the risk factors for solicitors broadly remain the same as they have ever been: areas of practice, turnover and claims experience are key indicators. Indeed, insurers say that claims experience overrides all the external risk management schemes and is an absolute priority when it comes to assessing risk.
‘Most negligence claims are based on lack of business skills rather than lack of legal skills,’ Patrick Bullen-Smith says. ‘It is factors like bad administration, slackness and poor communications that form the crux of a claim. Firms can bring in risk managers to tighten the ship as well as implement case-management software to reduce the risk.’
The bulk of claims still centre on conveyancing, with high-risk factors being firms with a lot of subprime lending claims and those that undertake mass conveyancing without very high standards. Underwriters are also wary of firms that dabble across lots of different areas. The ratings for firms reflect the risk in the work. Property work and commercial are, in general, the highest rated for risk followed by litigation, with family law lower. Crime, debt collection and immigration are, in general, seen as the lowest risk.
John Kunzler observes that underwriters are putting more focus on reviewing the finances of a firm. ‘Those businesses that have strong balance sheets, behave responsibly - such as reducing partner drawings when revenues are down - and have a sophisticated, long-term approach to the practice will be attractive and generate the most competition, so are likely to have the most competitive quotes,’ he elaborates. Law firms, however, are still struggling to get to grips with the single most important risk factor currently facing the profession: fraud.
Insurers say that they did not have fraud - or the sudden surge in cybercrime - in mind when they were looking at the PII pricing criteria. Firms are falling foul of card reader scams, telephone fraud and e-mail interception breaches that can see entire client accounts wiped out.
Unlike traditional negligence claims, which are launched after the event, cybercrime sees the money lost upfront, with the focus on insurers to step in and cover the shortfall; for example, so-called ‘Friday afternoon fraud’ , which can affect conveyancing chains, is becoming more sophisticated.
Grant Clemence underscores the point by stating that fraud is now ‘the biggest risk to law firms’ from the insurance point of view, as client funds can be stolen in an instant and are rarely recovered. He continues that there is a lot of frustration for insurers on fraud, and the one thing he would say to law firms is, simply, do not accept a change of bank details via e-mail . ‘Ring up the clients and double-check ,’ he stresses. ‘The fraud can be easily prevented in this way, but the message does not seem to be getting across. Law firms also need to move away from being quasi-banks ; they are not there to store millions of pounds of accounts.’
John Kunzler echoes the point, remarking that digital PII claims ‘seem to have replaced mortgage and lender claims’ . He states that security and confidentiality are the cornerstone of a lawyer-client relationship, and clients expect their information to be safe and not accessible to the public. Clients also expect lawyers to keep their money secure.
‘While the insurance cover has to be in place, law firms should expect enquiries about their technology and internal systems to increase significantly,’ John Kunzler says. ‘Some firms have old software, which may have vulnerabilities, and need to be more streetwise in the face of the increased cyber threat when it comes to frauds and scams, and the use of technology.’ Grant Clemence emphasises the importance of the topic: ‘It is very serious as these claims can kill a firm.’
Firms need to act quickly and decisively if they are subject to a cybercrime, as a way to stave off any potential problems with future PII coverage. They can take solace in the knowledge that such ‘one-off’ claims – if remedied – would not be terminal.
Patrick Bullen-Smith adds that if a firm falls victim to a one-off claim such as a cyber fraud, it may not mean that their premiums automatically increase or they become uninsurable. ‘These firms can bring in experts to fix the breach and improve the security systems,’ he concludes. ‘Instead, it is the firm with a regular flow of claims – not showing any sign of improving – that is the hardest to secure insurance for.’