Can sole practitioners avoid getting a raw deal on PII premiums?

When it comes to professional indemnity insurance, many sole practitioners are getting a raw deal. The effect of the credit crunch on the housing market and levels of repossessions has led to an increasing number of lenders looking for ways to recoup their losses by suing solicitors.Insurers are getting nervous and the number willing to provide PII for solos over the past five years has decreased dramatically, though the recent entry into the market of insurance giant XL offers one crumb of comfort.

Richard Brown, director of Prime Professions Limited, the approved broker of the Sole Practitioners Group (SPG), says the amount a sole practitioner pays for PII varies greatly depending on the type of work they do.

‘A small firm doing 100% criminal work could pay in the hundreds, while a sole practitioner who employs lots of staff and does 100% conveyancing and has had some claims could pay into six figures – although this would be pretty exceptional.’

But most firms, he says, will pay in the £1,500 to £15,000 range and pay similar premiums to 2- to 3-partner firms with the same profile (comparable fee income, work-split, location, experience and claims record).

‘This compares in most cases quite favourably with 10 and five years ago, but not with two years ago,’ he says. ‘The market is hardening considerably. The main driver is the credit crunch – particularly its effect on the housing market and levels of repossessions and mortgage fraud claims. Small firms who have done work for the more litigious lenders and have claims are going to find it difficult this year.’

Janis Purdy, chairman of the SPG’s indemnity committee, says that though rates overall have been lower than they were when solicitors had to insure with the Solicitors Indemnity Fund, last year’s renewal had its difficulties for sole practitioners and, with the market hardening, an increase in premium rates is widely expected this year.

‘Because insurers have to provide cover on a claims-made basis, it means the current insurer of a firm has to pick up claims made now for work that might have been done years ago,’ she says. ‘That means firms doing conveyancing now or, in the past, will see a marked increase in premiums. Some firms may not even get cover, or only at massive cost.’

There are still some good deals available for sole practitioners, she says. Insurer Quinn, for example, offers free run-off cover on retirement if a sole practitioner has insured with the company for three successive years with no claims and then retires. Scaled-down run-off is also offered to those who have only one or two years free of claims.

Purdy says: ‘No other insurer offers or has ever offered this. Sole practitioners running good practices can now afford to retire. For some, the cost of run-off is too great and they simply can’t afford it and have to run their practices down to a minimum, or keep going till they can find a successor practice to take them over. In the current recession, though, I suspect there are not too many firms expanding.’

Frank Maher, partner at Legal Risk, predicts that most sole practitioners will see rises of around 5-10% this year, but foresees a big increase in the number unable to obtain any cover, perhaps because they have had recent adverse claims experience or through insurers’ fear of a spate of lender claims.

‘Because there is only a handful of insurers willing to look at sole practitioners at all, there will be an increasing number of solos unable to obtain cover in the open market and unable to afford the only alternative – the assigned risks pool, which charges a crippling 27.5% of fees on the first £500,000.’

Simon Lovat, divisional director at United Insurance Brokers, says part of the reason of why PI insurance is so expensive is down to the SRA’s coverage requirements. ‘This lack of balance in relation to what an insurer must cover under the policy, and sole practitioners’ inability to limit their liability, means that solicitors as a profession pay a significantly larger premium than almost any other professional group,’ he says.

Sole practitioners are commonly regarded as high-risk by insurers, not least, says Brown, because they are unable to pay premiums large enough to offset the costs of one claim, let alone a raft of them.

‘Insurers’ biggest fear is that they are going to get hit with the deluge of property-related claims similar to what we saw in the 1990s,’ he says. Another concern, he says, is that when there is pressure on fee-income levels, solicitors will be tempted to ‘dabble’ in areas of the law they are not experienced in.

Lovat says the limited number of insurers underwriting sole practitioners is a good indicator of how the market perceives them. ‘The reality of a "hard" and "soft" market is about market capacity for certain types of business. Many insurers see the risk elements of sole practitioners significantly higher than the premium they would ever be able to charge – realistically the elasticity of the market has no bearing on risk, just on the perception of the ability to generate a return.’

He says the main issues that concern insurers in relation to sole practitioners are the lack of peer reviewing and the lack of checks and balances that would often be found in larger firms (such as separate accounting functions). ‘The ability – and increased likelihood – of an individual to act in a maverick capacity is probably an insurer’s worst fear.’

Many smaller firms, he says, believe they have implemented some form of risk management, but in reality they have done a poor job.

‘The reality of sole practitioners implementing robust risk management is highly unlikely,’ he says, ‘if for no other reason than most robust risk management strategies often involve checks and balances from individuals who are independent from the transaction/process under scrutiny.’

Maher says one problem that affects sole practitioners more than others is not having someone to talk to – small problems can become big problems, whereas a fresh pair of eyes might have spotted that there was a simple answer to an issue. It can also be harder for sole practitioners to manage workflow, which can lead to fraud or negligence claims.

One good attribute of sole practitioners from an underwriter’s point of view, says Brown, is that generally any claims involving fraud will be covered by the compensation fund.

Ian Lithman, Law Society council member and principal at Lithman & Co, defends solos, saying they are no more of a risk than any other practice and, in most cases, they are actually less of a risk because most have a hands-on approach and are niche practices.

‘The problem is that the insurers perceive sole practitioners as riskier clients because many lenders will not accept sole practitioners on their panels due to the unique nature of the compensation fund.’

They are also nervous about new sole practitioners, he says, because they fear they do not have the experience to run a practice without making mistakes.

‘This is often nonsense, because they were formerly partners or running branch offices, and those who were assistant solicitors have had to achieve CPD accreditation in management and further education, like all solicitors.’

Brian Boehmer, director of the professions group at Lockton, says there are simple methods that practices can adopt to help them manage risk.

‘Set up a formal process for peer review; implement a diary management system so key dates are not missed; ensure training and ongoing professional development happens, so skills are maintained or enhanced. Sole practitioners also need to make careful checks on their customers.’

Maher says there are many case management systems which can help with matters such as workflow and diary management. ‘Beyond that, however, there is no substitute for a review of risk – either done by the solicitor, or with external help – and a systematic approach to addressing it.’

Often, sole practitioners are better than they realise at risk management, says Brown, and therefore fail to show underwriters their prowess. ‘For example, a partner will review all the post, and one diary can be a firm-wide diary system.’

His firm has a website – www.sprisk.co.uk – which he says is intended to be an online support tool to help sole practitioners run their business.

The Law Society has also launched a package of measures aimed at helping solicitors obtain PII, including a series of seminars and a practice note.

Purdy says the Society has done a good job in trying to address the issues, adding that it and the SPG need to keep banging the drum about PII and markets, and how firms can best present themselves to insurers, where to send their proposal form, and timings of applying for insurance.

One device some sole practitioners are employing to try to force down their PII premiums is banding together with others to buy PII in bulk.

Maher says this approach may offer some their only realistic opportunity of obtaining cover, and may have other added-value benefits, such as reduced cost or free run-off cover on retirement.

However, Boehmer says that to bulk-buy effectively, there needs to be true affinity within the group – which needs to be around all having an excellent risk record, all running a tight ship and actively supporting and reviewing group membership to ensure the qualifying criteria are met year on year.

Boehmer predicts that sole practitioners with good niche practices with a long track record are the ones most likely to emerge from these harsh economic conditions in the most robust fashion.

‘There will always be a demand for good criminal lawyers, personal injury specialists and intellectual property experts. Conversely, there are many sole practitioners active in property and this is a more difficult and more competitive space. The firms that won’t survive will be the ones that drain funds from the business every year, prioritising short-term lifestyle over long-term prudence.’

Lovat, however, is more pessimistic about the future of sole practitioners: ‘My true belief is that the traditional sole practitioners will become a dying breed over the coming years. With the industry needing to adapt to the changing regulatory conditions, sole practitioners are likely to only remain prevalent when working within a multi-disciplined practice.’

Lucy Trevelyan is a freelance journalist

• This is an edited and updated version of an article that first appeared in the Gazette’s 2009 PII supplement, which can be downloaded at: www.lawgazette.co.uk/supplements