PII: a change in the weather

The 1 October renewal deadline for professional indemnity insurance (PII) is not the bunfight it once was – law firms may now renew on different dates and strike deals for periods longer than 12 months. But a significant proportion still renew on the traditional date, some rotating back to it through 18-month deals.

Firms renewing on 1 October are understandably nervous. Mandatory PII represents one of their largest overheads, and a shortage of new insurers willing to enter the market has meant that premiums are once again likely to increase.

Nonetheless, brokers remain optimistic that things are improving.

‘The lack of new capacity is disappointing, but existing providers do want to write more firms, so that’s encouraging,’ says Patrick Bullen-Smith of Hera Indemnity. ‘Overall, things are getting better, and if you don’t do much conveyancing and have a good claims record you should get some offers.’

He adds that premiums are up by around 5% on average, and while this is still a rise, he notes it is a far smaller one that in 2021.

John Wooldridge, executive director of the legal practices group at Howden Insurance Brokers, agrees: ‘We’re seeing a glimmer of light at the end of what’s been a very long tunnel. The 1 April renewal saw rate increases that were lower than we’ve experienced over the last three years.’

Wooldridge adds that there has also been ‘a shift in appetite among primary insurers of the compulsory minimum terms and conditions (MTC) layer, with more competition and more stable premiums for those firms that insurers perceived to be a good risk due to their work split, claims record and financial strength’.

A ‘jump in appetite’

There is a sense of positivity in the air, concurs Rob Crossingham, partner in the professional disputes team at Clyde & Co, ‘despite the various economic and geopolitical challenges which are on the horizon’.

The firm’s London Market Indemnity Report, published in July, noted a ‘jump in appetite for the legal profession’ with 42% of the respondents to its survey reporting that they ‘expected to underwrite more of that business in 2022’. (The report was based on interviews with 89 London market insurance practitioners.)

One of the most notable challenges has been the Ukraine war. In April renewals, insurers’ focus turned to the extent to which firms were acting for sanctioned clients, with many ‘seeking a broader understanding of any exposure to Russian individuals and entities, or work that had involved property or activities in Russia’, says Wooldridge. ‘This may affect insurers’ appetite at renewal and could affect premiums.’

Historically, conveyancing and other property work has tended to generate the highest volume of claims, and firms with property practices are generally facing higher premiums.

‘This has always been the position, even when you look at claims data going back to the days of the Solicitors Indemnity Fund,’ notes Wooldridge. ‘Losses arising from failed buyer-funded developments have been a particular concern in recent years and that’s why insurers ask so many questions about that issue.’

While the stamp duty land tax (SDLT) holiday in 2020/21 meant that conveyancing practices had a bumper year, this too led to concerns among insurers. ‘Insurers are nervous about the fallout of claims that could arise from work completed under pressure during the SDLT holiday and more generally from pandemic-related issues,’ says Wooldridge.

This anxiety is inevitably translated into rate rises, but as Hera’s Bullen-Smith explains, there may be some room for negotiation: ‘Solicitors have definitely done quite well post-Covid, and conveyancing turnover has gone up due to the SDLT holiday. Premiums have also consequently gone up. What some conveyancers have started doing is to charge more for conveyancing in order to cover their costs. If they can argue on their claim form that while their conveyancing turnover has gone up, their transactional volume has actually stayed the same, then their premiums might also stay the same.’

Financial stability

While the picture is generally improving for firms with a good track record, recessionary pressures and economic uncertainty are starting to bite.

For insurers this raises many concerns. An increase in the number and severity of claims, particularly in the property market, is one. Clyde & Co’s report found that 56% of respondents said that economic uncertainty, including wage and cost inflation, would be one of the top three factors to ‘materially influence claims’.

But it is not just an increase in claims that is of concern. As they deal with rising premiums and the wider impact of the cost of living crisis, the viability of some firms and sole practitioners will be called into question.

The added investment in IT infrastructure required as a result of remote working, as well as coronavirus business interruption loans (CIBLs) taken out during the pandemic, which now have to be repaid, have put many firms under financial strain.

Insurers may start asking hard questions about a firm’s operational and financial resilience, says Crossingham.

Wooldridge notes: ‘Insurers are aware of the pressures that some firms are currently under and are sensitive to the potential for a firm to fail on their watch, leaving them to provide six years of run-off cover, whether the run-off premium is paid or not.’

Consolidation

Paul Bennett, a professional practices solicitor at Bennett Briegal, agrees that there is increasing anxiety among his clients about rate rises.

‘It’s the start of a squeeze by insurers,’ he says. ‘There are particular pockets of concern around the consumer end of the market, where the economic forecast is poor and fees per transaction are modest. Some smaller firms and sole practitioners have had to make difficult decisions as PII premiums increase. Mergers are one trend, while others are leaving the market.’

Wooldridge also observes that consolidation activity is on the up: ‘We expect that we are going to see more of this, given that some firms are finding the current environment challenging. The windfall of fees arising from the SDLT holiday is over, CBILs need to be repaid, recruitment is reported to be difficult, overheads are rising and PII premiums are at an all-time high. PI insurers are scrutinising each firm’s financial position very closely.’

‘We’re seeing frequent reports of firm mergers at all levels of the profession, including some very sizeable ones just in the last few months,’ says Crossingham. ‘I suspect that, particularly in the SME sector and mid-market, firms will see consolidation as an opportunity to gain security and stability, and to find new efficiencies in the post-Covid world.’

‘Firms that try and operate on a shoestring will really struggle moving forward,’ adds Bennett. ‘We see firms undercharging, and they aren’t really explaining to their clients why they charge what they do. We now offer an introduction to a fee training or pricing consultancy to our clients, to help them justify their fees. We really see that as part and parcel of advising our clients.’

Cybersecurity

The sensitive nature of their work means that law firms are particularly attractive targets for cybercriminals. In June the Solicitors Regulation Authority issued a warning in its Risk Outlook 2021/2022 report that law firms’ increasing dependence on IT systems is creating more opportunities for cyber-attacks. This dependence has only increased due to remote working, and insurers are concerned. The SRA report notes that in 2021, 18 ransomware attacks were reported to the regulatory body.

‘There’s no doubt that the market is already seeing an increase in cyber-related claims and the [predicted] growth in frequency and severity of cyber losses is a real concern,’ says Clyde & Co’s Crossingham. ‘While 18 months ago, we were concerned that new working practices and remote working may bring increased risk due to reduced opportunity for supervision and training, that concern seems to have subsided somewhat.

‘Insurers will want to see firms demonstrating an awareness of cyber-risks and how to mitigate them,’ he adds.

While third-party cover for cyber-related incidents is available under PII cover, it will not respond to any first-party risks. The ambiguity around this issue in policies, referred to as ‘silent cyber’, led to both Lloyd’s of London and the Prudential Regulation Authority introducing mandates requiring underwriters to make clear in their policies whether cyber coverage is expressly provided. The Legal Services Board responded by approving a change requested by the SRA to the minimum terms and conditions (MTCs) of PII policies in November 2021, which now permit the exclusion of cyber-cover exposures.

'Insurance is not a substitute for good [cybersecurity], but an additional safeguard to cover certain costs and losses in the event of a cyber-attack'

I. Stephanie Boyce, Law Society

Purchasing separate cyber insurance remains the safest course, say brokers, and many insurers are now requiring standalone cyber cover in addition to PI insurance. The Law Society, which in August published guidance on how firms can protect themselves in the event of a cyber-attack, also recommends that firms take out separate cyber cover.

‘Protection and prevention should be a firm’s priority, to guard against damaging cyber-attacks. Insurance is not a substitute for good protection, but an additional safeguard to cover certain costs and losses in the event of a cyber-attack,’ says Law Society president I. Stephanie Boyce.

‘It’s not a strict regulatory requirement for solicitors to purchase cyber insurance – but it’s a sensible precaution,’ Boyce continues. ‘Failure to purchase such cover may conflict with solicitors’ regulatory responsibility to have “adequate and appropriate insurance”, or leave them exposed to regulatory action for data breaches.’

She explains: ‘When considering whether to purchase cyber insurance, it’s wise for firms to understand the potential threat and exposure and develop [their] own risk management strategy should a cyber-attack occur. Look at what risks are already covered by your PII policy and other existing insurance policies, which should highlight the limits of cover in existing policies.’

Boyce advises that solicitors talk to their brokers about what the changes to the SRA’s MTCs mean for their business, and to ‘purchase cover as necessary’.

‘They should also take this as an opportunity to examine their cybersecurity arrangements more broadly and consider seeking a cybersecurity accreditation, such as Cyber Essentials,’ she says.

However, some cyber insurers are already becoming wary of providing cyber insurance to law firms, notes Wooldridge, and are ‘insisting that law firms have some fundamental protections in place such as multi-factor authentication (MFA) for cloud-based services and for all remote access to their network, a virtual private network (VPN) for remote access, segmented back-up solutions, and robust cyber-awareness training programmes.’

A well-ordered house

As ever, law firms are advised to get their renewal forms in early. ‘Get a meeting arranged with your broker, tell them what your expectations are,’ says Bennett.

‘The claims form doesn’t give you the opportunity to show how you are managing your risk, so it’s always worth using an additional sheet to do that. Tell the insurer about the steps you are taking. That’s what the underwriter is ultimately looking for,’ he adds. ‘The broker/underwriter relationship is critical, so make sure you build a relationship with the broker, so they really understand who you are.’

Bullen-Smith advises firms to take their claims form seriously: ‘If you’ve got an issue, whether that’s a claim or an SRA investigation, don’t try and hide it. Say what you are doing to mitigate this happening again.’

Wooldridge adds: ‘We always advise firms to agree a timeline with their broker for submission of their proposal form. They take longer to complete than people usually anticipate. Often those tasked with responsibility to complete the forms are reliant on others in the firm for information. You should always set deadlines for the delivery of information so you can ensure that you get your submission in on time.

‘A great deal of detail is needed to complete proposal forms and sometimes firms find that they don’t collect this in a way that enables them to answer the questions – or certainly not without a great deal of effort including hours reviewing records. In this situation we always recommend that firms discuss the issue with their broker. It might be that you are able to provide an alternative response that will nonetheless satisfy the underwriter’s query, and save a great deal of time manually collating information.’

 

• For more information on renewing your firm’s PII, click here.

 

Maria Shahid is a freelance journalist