Legal professional indemnity stresses push firms to consider their futures

Insurance brokers will need to provide greater support to their legal sector clients as the rising price of professional indemnity (PI) insurance premiums is threatening the future of many smaller law firms.

A Bellwether Report published in September 2021 by data company LexisNexis, which conducted in-depth interviews with lawyers in SME firms as well as online surveys with 305 solicitors in England and Wales, found that 66% of respondents cite PI insurance as the biggest threat to their business, alongside the continuing demands of compliance.

A quarter (24%) of the legal professionals polled also identified PI cover as the most significant operational cost pressure on their business in the last 12 months.

Amid this PI price stress and fears around potential new claims, many legal professionals have sought to find security in changing their business model, with independent legal practitioners becoming consultants for larger firms.

Law firm Taylor Rose MW revealed in January 2022 that it has more than doubled the number of consultant solicitors in its legal consultancy division within the past year. This momentum has been helped by an increased acceptance of home working since the Covid-19 pandemic.

Adrian Jaggard, chief executive of Taylor Rose MW, explained: “Increasing PI premiums have particularly impacted smaller firms and sole practitioners and it is having a marked impact on their appetite to keep operating independently.

“We are seeing a lot of experienced solicitors [that] no longer want the responsibilities of compliance and increasing operating costs – instead [they] are seeking the relative security and freedom of operating as consultants. This is certainly a contributing factor to the fast growth of our consultancy division.”

Terms and conditions

One of the biggest issues for law firms’ PI insurance is the strict rules around the minimum levels of cover and terms that can be offered by insurers.

For example, the Solicitors Regulation Authority requires firms to have sums insured of at least £3m for any one claim if the insured firm is a relevant recognised or licensed body. In all other cases, the minimum sum insured is £2m.

Rhian Howell, partner at RPC, noted: “For limited liability partnerships (LLPs), the minimum limit for primary cover is £3m and for more traditional partnerships, the figure is £2m.

“In the past, this would be covered by a single underwriter, but we are increasingly seeing those limits shared by a number of underwriters.

“It may simply be a case with the level of claims we have seen in the past that underwriters are looking to share their exposures.”

Plus, such are the demands of professional body the Law Society and the legal regulators that short of proving fraudulent practice by a sole trader solicitor, the ability for insurers to deny a claim is extremely difficult.

Jeremy Riley, head of the PI sector focus team at the Forum of Insurance Lawyers (Foil) and a partner at Kennedys, said this current situation is creating real problems for law firms.

He believes the PI issues for firms which undertake conveyancing work, for example, have become extremely difficult and that the market is seeing a round of M&A activity that is partly driven by the need to deliver economies of scale around PI coverage.

Claims crosshairs

There are also claims threats that the legal market may face post-Covid that is creating additional pressure around PI cover.

For example, Foil noted that firms were being squeezed to deliver conveyancing before the end of the stamp duty holiday and tapered prices, which ended in October 2021.

Howell explained that many law firms were rushing to complete conveyancing transactions before the stamp duty holiday ended, which may have led to mistakes.

Firms were further driven to complete transactions in the stamp duty holiday window in a bid to avoid claims for the loss of the stamp duty saving where transactions did not complete in time.

Howell said that clients often demanded that their house purchases should be completed in an unrealistic timescale in order to take advantage of the stamp duty saving, yet when law firms could not deliver, they were blamed for the failure.

In addition, there are growing concerns that commercial insolvencies have the ability to put solicitors and law firms in the claims crosshairs too, according to Foil.

“We are also concerned about the issues with wills and probate,” added Riley.

“Covid prohibited solicitors from meeting clients face-to-face and many of those clients will have been in a difficult position with their health, so there are fears that we may see issues around beneficiaries.

“There are also concerns around retail spaces in terms of lease agreements and we are expecting this may give rise to new claims with solicitors caught in the middle of disputes.”

However, Simon Konsta, partner at Clyde and Co, noted that law firms are already experiencing an increased number of claims.

Citing research published by Clyde and Co in July 2021, he explained: “In the 12 months to May last year, 24% of buyers had seen more PI claims brought against their organisation, while 35% said the size of claims has increased.

“Over the next two years, 95% of insurers expect to see more PI claims and 67% expect them to be more severe.

“Over the same period, 41% of buyers expect more [PI] losses and a similar number expect the size of these losses to increase.”

Konsta highlighted that renewals, however, “represent a challenge” due to escalating PI costs. “Only 52% of insurers anticipate that buyers will be able to maintain existing policy aggregates,” he said.

Riley added that brokers have a role to play in tackling this potential claims trajectory, despite the hardening market and the lack of flexibility in PI product design.

“Brokers can work with clients to enhance risk management, particularly given that there is a trend for firms to enhance the size of their excess limits, which leaves them assuming greater levels of the risks,” explained Riley.

“Risk management is becoming more important and brokers can provide support around systems, scrutiny and training.”

‘Robust’ market for insurers

Howell said the legal PI market has seen significant hardening over the past 18 months, with insurers becoming increasingly selective with the risks they are willing to assume. Conveyancing firms have been hit hardest with rate rises, she added.

But “despite the hardening market, capacity providers in the legal profession have been quite stable”, Howell continued.

“With rates rising you would expect to see new capacity entering the sector, given that the long tail nature of claims means the first three years will see some good returns for insurers,” she explained.

Konsta agreed, noting that Clyde and Co’s research found that there are still those who are optimistic about the state of the current market.

“Confidence is high and appetite strong in the London professional indemnity market, despite a trinity of challenges facing the industry,” he said.

“With 94% of insurers planning to write the same or more business in the next 12 months, recession, cyber threat from remote working and continued regulatory oversight are top of the insurance industry’s list of concerns.”

“Despite the challenging market, appetite for writing PI business remains robust.

“With prices continuing to harden after an extended soft market, underwriters are sensing an opportunity to write more restrictive cover for higher rates.”