PII Focus: overview

The 2014 professional indemnity insurance (PII) renewal season was characterised as ‘benign’ when it was reviewed at the Gazette ’s recent roundtable discussion on PII. And although the Law Society’s own practice note on PII notes that the market undergoes cycles of ‘soft’ and ‘hard’ conditions, the expectation is that 2015 will present solicitors with a repeat of last year.

‘All indications are that this renewal will be relatively benign,’ Frank Maher of niche law firm Legal Risk notes.

Those conditions were achieved in the 2014/15 round ‘despite considerable uncertainties’, recalls Law Society policy officer Teresa Krajewska. Lack of certainty extended to when the official PII market would open, what the minimum terms and conditions would include and what the minimum level of compulsory cover would be (the SRA seemed poised to lower the minimum from £2m-£3m to £0.5m).

‘The Society’s greatest concern,’ Krajewska notes, ‘had been to avert a mass last-minute rush to renew – resulting in firms paying over the odds for PII or entering the extended indemnity period [EIP] because they’d missed the renewal deadline.’ Some, she says, had ‘hung on in the belief that they’d pay less if the lower compulsory minimum [of] £500,000 was implemented’.

Although it was ‘a difficult call for firms’, Krajewska adds, from mid-May 2014 the Law Society began sending reminders to practitioners not to delay, to start preparing proposal forms and to research which insurers to approach. The SRA confirmed in mid-August it would not proceed with proposals to lower the minimum cover levels, assisting the Society in its message.

Krajewska notes: ‘The vast majority of firms successfully renewed their PII before the 30 September deadline. There was no catastrophic unrated insurer failure and PII capacity increased with new rated insurer entry.’ The Law Society’s annual PII survey confirmed that there was no across-the-board premium hike – PII premiums remained broadly consistent for the third year running.

What is more, the SRA reported in March that most firms which entered the EIP did so not because of their failure to renew. Rather, it was to facilitate a merger with another firm, or to effect a planned and orderly closure so clients’ interests were protected.

The expectation is that market and regulatory conditions this year should translate into premiums that remain flat and capacity that meets demand. However, the SRA is set to place an adjustment in minimum levels of cover back on the table as part of a discussion document due to be published shortly that will also include proposals on defence costs, aggregate limits, clients’ liabilities and compensation arrangements. But lessons seem to have been learned – a picture confirmed by those who have regular communications and meetings with the SRA.

The market had been made ‘harder’ in preceding years by the sudden exit or collapse of unrated insurers which had achieved a significant market share. The presence of unrated insurers has diminished, brokers note, giving the market greater stability. At the time of writing, in the entire market just three unrated insurers have signed the Participating Insurer’s Agreement (PIA), with one offering cover for firms with 1-3 partners only.

This broadly benign picture, welcome though it is, will mask some hugely divergent experiences for solicitors. ‘A perennial issue around some brokers, confirmed again in our survey, is failure to disclose their commission,’ Krajewska notes, ‘in particular some brokers serving the small firms sector.’ She also warns that some brokers promise access to certain insurers when in fact they lack such access or have limited access only.

Different experiences are also shaped by insurers’ own perceptions of where risk lies. This means, as Maher put it: ‘There is always a handful of firms for whom it can be a very worrying time.’

That includes, he says, the ‘few [firms] every year who have discovered a ticking timebomb of circumstances which they need to notify to insurers effectively’. He adds: ‘In some cases, it can be complicated by insufficient knowledge of the detail. It is a judgement call how far you go looking for trouble without making yourself uninsurable at the same time.’

As ever, the PII process is generally most fraught for smaller firms and those whose practice areas include a significant commitment to residential conveyancing. In the latter case, the toxic combination of high demand, a relative shortage of experienced lawyers and low profit margins continue to make residential conveyancing the most solid object on insurers’ radar. It is estimated that upwards of 50% of claims against solicitors relate to property transactions.

When it comes to choice of cover for smaller firms, Krajewska notes: ‘It’s still too early to say with certainty, because the SRA is still negotiating the new PIA. The SRA has said that there won’t be any changes to the client financial protections this October.’

(The box on page 14 lists insurers which have confirmed their market participation, together with brokers used to access their cover.)

For both smaller practices and residential conveyancers, brokers and underwriters continue to urge well-run firms to tell a clear story that explains their risk profile. That means better ongoing dialogue with brokers and underwriters – likely maintained throughout the year.

Ray Crudgington, managing partner of six-partner London firm Grant Saw, tells the Gazette one of the brokers he uses invited him to his office to meet the underwriters. ‘The broker thinks that meeting me face to face may give the underwriter the confidence to offer a better deal. This is the first time such an approach has been suggested to me,’ he says.

Get the timing right

It remains a time-consuming process, Crudgington adds – a heavy commitment in a smaller practice. ‘There are two things I dislike most about the process,’ he relates. ‘The first is deciding whether to go early with what seems like a good quote or to wait until the last minute. Both of these decisions could backfire.

‘The second is the broker who takes ages to get back to you with an improved quote and then, when you say you have gone with someone else, says, “we could have beaten that”.’

Crudgington has still felt it worthwhile to shop around, and has arranged early meetings with the three brokers with exclusive deals. In doing so, he is committed to following advice to ‘tell a story’ about his firm’s risk profile: ‘I made much of our Lexcel accreditations, customer survey results and the low number of complaints and PII claims against the firm.’

This is time well spent, as he admits he is ‘very aware that we are about 35% residential conveyancing, which is seen as a higher risk area of practice – which is not something borne out by our claims history’.

The insurers to whom he and others are ultimately making that case seem set to provide adequate capacity. A Law Society straw poll of insurers, including those which serve small firms, suggests that a reduction in capacity is unlikely. ‘The Law Society’s managing general agent, Chancery Pii, which was set up to serve small firms, has capacity and appetite to build its book,’ Krajewska adds. In the more competitive larger firms sector, she relates, ‘there’s talk that a couple of brokers are working to introduce new rated insurers in the autumn’.

Also to be taken into account is the impact on insurers of the Solvency II regime, which goes fully live in the new year and is aimed at ensuring capital adequacy for insurers. ‘One might expect that resilience in the PII sector will be strengthened,’ Krajewska predicts.

It is hardly the case that residential conveyancing claims are the only risk of interest to insurers, despite forming the bulk of claims against solicitors by number. Across many practice areas, the increased use of paralegals has also been receiving attention. Has the time come to consider discrete PII cover for them?

Institute of Paralegals chief executive James O’Connell comments: ‘Insurers mostly focus on the regulated sector, with paralegals grouped with “other staff” and covered by the firm’s PII policy.

‘But it’s time that PII insurers began to understand the paralegal market. They need to unpick the work that paralegals do and see for themselves how much they contribute to transactions. There is risk there to the firm’s reputation and continued existence.’

The Home Office, the SRA and underwriters are also noticing the risk of fraud under the label of ‘cyber-risks’.

As Krajewska explains: ‘One issue which is high on our agenda concerns fraud scams. It’s a fact that the perpetrators tend to be highly sophisticated, both in their abuse of technology and [in their] manipulation of human behaviour. We’ve been updating our advice for firms on fraud avoidance and are finalising new advice on dealing with the aftermath of being scammed, including on the PII claims situation.’

‘Bank scams are a big issue this year,’ Maher notes. ‘There have been some very large claims. Victims have included City firms and high street practices. It is not just a cyber-risk issue, as many cases have involved conmen on the phone. So a number of insurers, including at least two large ones, are asking firms about staff training to prevent this.’

The focus on cybersecurity is two-way, though, he adds: ‘Many firms will be thinking about cyber-policies for the first time. They should analyse the wording critically to see whether it is really providing cover against the risks they face.’

Variable renewal dates – designed to avoid the 1 October rush and allow firms to plan PII cover over a longer period – have had a limited impact so far. As Krajewska explains: ‘Variable date policies have taken pressure out of the September renewal rush, though not all insurers seem to be fully geared up for selling throughout the year. Our survey found that around 20% of firms had moved away from the traditional 1 October-30 September policy. We can expect this trend to continue.’

With capacity stable and the market benign in the 2014/15 round, the SRA decision to first moot, then backtrack on, reform of the minimum cover requirements provided the only real ‘frisson’ for observers and participants in the market.

As the regulator looks at this again, Maher warns that ill-considered reform ‘could be disastrous’. He says: ‘What the SRA overlooked last time was that the compulsory cover includes claimants’ costs, so a reduction to [half a million pounds] would provide scant protection in many cases if they went to trial.’ This leads him to conclude: ‘The solicitors’ profession has massive buying power with £250m in premiums – vastly more than all the other branches of the legal profession combined. With that buying power comes significantly better protection for solicitors. It would be reckless to throw that benefit away for little in return.’

And in a future round where some hope lower minimum cover would lead to lower premiums, Maher counsels: ‘Anyone who thinks insurance is expensive should try a claim. We have seen a number of claims over the past couple of years with coverage problems, including several where insurers had collapsed. The stress this causes for the solicitors concerned is enormous.’ He adds: ‘Law firms have been prohibited from limiting liability for themselves and their staff below the minimum cover. It would be unjust to reduce cover below that as it would leave claimants, as well as lawyers and their staff, unprotected in ways which could not be foreseen when the limit of liability was agreed.’

There are many solicitors for whom the future conjures up not a world of cyber-risks and debates to be had over minimum cover – but retirement. And that means run-off cover needs to be in place for a solicitor who has no successor practice. A debate over whether this could ever be replaced by a levy spread over the life of the practice is beginning in earnest (see p16).

Also on the horizon is the demise of the Solicitors Indemnity fund, which estimates that it will not accept new claims beyond 1 October 2020. The profession must decide what comes in its place – it is, as Browne Jacobson partner Alan Radford argues (page 16), part of a picture of complete cover that represents the solicitors ‘covenant of trust’ with the public. That covenant is the promise that no one should make a loss through solicitor negligence.

Meanwhile, the drive for helpful practical developments continues. ‘We’ve been talking to insurers, brokers and the SRA about practical changes which could bring down claims and reduce burdens on firms,’ Krajewska says. ‘For example, standardising proposal form information by agreeing questions on commonly sought data which everyone can adopt, if only on a “cut-and-paste” use basis. This could be a low-cost but relatively high-impact benefit for firms which could be realised with the support of the SRA. We’ve also pressed for better claims data collection and sharing of claims summaries to help improve risk management.’  

Tabular information (below) correct as of 18 June. For more help and information, contact the Law Society PII helpline, tel: 020 7320 9545, or visit its website .

• The SRA will shortly publish a discussion paper on issues and options relating to the reform of professional indemnity insurance and compensation arrangements as part of its ongoing review.

Rated insurers

Insurer	Broker	1 partner	2-3 partner	4-10 partner	11+ partner
AIG Europe Ltd	Various		X	X	X
Allianz Global Corporate and Speciality SE	Declined to comment			X	X
AVIVA Insurance Limited	Various				X
AmTrust Europe Limited	JLT (1-3 partners); Howden (4-10 partners)		X	X
Axis Speciality Europe SE	Willis (1-3 partners); Howden (4-10); various (11+ partners)	X	X	X	X
Chancery Pii (underwritten by rated insurers)	None (see www.chancerypii.co.uk )	X	X	X (up to 4 partners)
Endurance Worldwide Insurance Limited	RK Harrison and Lockton (1-3 partners); Willis (4-10 partners); various (11+ partners)	X	X	X	X
International Insurance Company of Hanover	Lockton	X	X	X	X
LawSelect	Paragon	X	X	X	X
Liberty Mutual Insurance Europe Limited	Willis (1 partner); Marsh (2-3 partners)	X	X	X (4-5 partners only)
Maven Underwriters	Aon	X	X	X	X
QBE Insurance (Europe) Limited	Aon (1 partner and 4-5 partners); selected brokers (2+ partners)	X	X	X	X
QBE Syndicate 386	Selected brokers				X
Starr Insurance and Reinsurance Limited	JLT(4-10 partners); various (11+ partners)			X	X
Travelers Insurance Company Limited	All brokers with Travelers Agency	X	X	X	X
Travelers Syndicate Management Limited	All brokers with Travelers Agency				X
WR Berkley Insurance Limited	Various	X	X	X	X
XL Insurance Company SE	Aon (1-3 partners); Marsh (4-10 partners); various (11+ partners)	X	X	X	X
Zurich Insurance plc	Various	X	X	X	X

Unrated insurers

Unrated insurers

Insurer	Broker	1 partner	2-3 partner	4-10 partner	11+ partner
Alpha Insurance A/S	Brokers via Pen Underwriting	X	X
Elite Insurance Company Limited	Various	X	X	X	X
Enterprise Insurance Company Limited	Various	X	X	X	X