Market: Law firms' professional indemnity

Despite optimistic talk of green shoots throughout the UK economy, many law firms continue to look vulnerable in the wake of the financial crisis, which presents a concern for their insurers.

According to research by law firm Reynolds Porter Chamberlain, the number of negligence claims against solicitors in the High Court soared by 158% last year, rising from 31 in 2007 to 80 in 2008. Small to medium-sized law firms, accustomed to soft rates and last-minute bargains, now face a hardening market as wary insurers scrutinise business books to weed out any potential risks.

Last year, a number of major insurance players took steps to actively downgrade their position in the marketplace. Industry leader Zurich sliced its client base by a fifth, reducing its market share by 3% to 17% in 2008. Elsewhere, Aviva refused to cover firms with ten partners or less, cutting its share by 39%.

Meanwhile, ACE more than doubled its minimum premium for solicitors from £20,000 to £50,000 in one working day and managed to reduce its market share by 27%. Catlin, RSA and Newline Underwriting made similar retreats, dropping their share by 42%, 5% and 47% respectively, while Novae evacuated from the market completely.

This collective withdrawal has left a lot of small to medium-sized law firms in a precarious position before the October deadline as they face a struggle to become insured at an affordable rate. Many face the possibility of ending up in the assigned risk pool (ARP), where firms unable to afford cover in the commercial market are forced to take on cripplingly expensive premiums and a permanent blot on their record. Since 2000, the number of firms in the pool had stood at an average of 20 to 30. Last year, however, this figure surged to 150.

Lockton executive director Steve Holland believes that, while rates are likely to remain flat for larger law firms, the forecast remains gloomy for many small firms. He says that although insurers have been coy about disclosing new terms and conditions, all will be adapting a similar approach to shedding unwanted business from smaller outfits.

“There is a trend for insurers to be pulling out of those markets,” he says. “We have seen significant rate rises and some firms not being offered insurance where they previously would have been.” He predicts that the number of firms ending up in the ARP could reach up to 500.

Zurich’s legal professions manager Jenny Screech believes that 2009 will see a long-awaited correction of an underpriced market. She refuses to be drawn on planned rate increases, but adds that the insurance giant will be taking a cautious approach to law firms heavily involved in conveyancing and the buy-to-let market.

“If you take a sole practitioner who does criminal law work, their premium is going to be vastly different from one who does 100% conveyancing work,” she explains. “The concern that all insurers have at the moment is in relation to lenders’ claims. As a result of the recession and the fall-out in the property market, we have a situation where lenders are looking very closely at cases where they have been required to repossess a property.”

She adds that trends during the last recession indicated that such claims were likely to increase over the next year.

Holland believes, however, that the presence of the Council of Mortgage Lenders’ handbook may help allay some fears about the extent of this exposure to legal action. “We saw that, in the 1990s, a lot of lenders were quite successful in getting claims from solicitors.

“The difference this year is that we have the CML handbook, with regulations for conveyancing. If the law firm has kept to the handbook, it is going to be very difficult for a lender to say that it is liable,” he says.

Nonetheless, he adds that many firms will still struggle. “Insurers may be in a better position to defend their solicitor clients, but they are still concerned and worried that they are going to be hit by a wave of these types of losses.”

Marsh’s European practice leader for law firms’ PI, Sandra Neilson-Moore, agrees the options for firms with four partners or less are set to shrink dramatically. “There are fewer and fewer insurers that really want to write smaller firms, and the reason that insurers are telling us is that they just don’t see how they can make any money out of them,” she says.

She adds that insurers have reacted by pricing themselves out of the market and quoting terms that firms find impossible to meet. Neilson-Moore predicts that overall rates for smaller firms will increase by 10% to 20%.

But United Insurance Brokers divisional director Simon Lovat says rates for some firms have already increased by as much as 50%. He adds that most insurers – including Quinn, which aggressively expanded its market share by 123% last year – will be cautious of growing business in this sector.

“All are looking to rationalise their accounts; none of them are looking to grow their accounts,” he says. “They are trying to increase premium spend and offload some of the business.”

Screech adds that, while Zurich will grow business “where there are opportunities”, it will mainly concentrate on renewals. “As far as new business goes, we have an extremely cautious approach to the one- to four-partner firms, and certainly more appetite for larger firms. We are focusing on ensuring that we maintain a sustainable book,” she says.

But despite the bleak outlook within the market, Lovat is optimistic about the fate of small firms unable to meet rate increases. “I’m a believer the market will take them somewhere. Rather than going into the ARP, there will be somebody who will step into the market to take them up.”

Potentially backing up his assertion is the arrival of new players in the market, which has led to speculation that this could ease the upward pressure on rates. Hannover Re has forayed into the market, writing solicitors’ PI premiums for firms with four or more partners, exclusively through broker Lockton, while XL Insurance and Allianz are also new entrants.

Lovat believes the market could yet see more new players arriving in the market before the renewals deadline. “Many are sitting and looking in and not wanting to dip their toes in the market just yet,” he explains. The Law Society’s chief executive, Desmond Hudson, said this could provide a welcome relief for smaller law firms. “Last year some small firms saw the market harden against them … any increase in the supplier base can only improve the prospect for securing cover on more reasonable terms.”

Holland, however, warns that this development is unlikely to prove a panacea for the entire sector. “None of these insurers is looking to undercut the market substantially,” he says. Neilson-Moore also believes this development will fail to provide a vital lifeline much needed by some firms.

“It will give them more options,” she says. “But from what I have heard, they shouldn’t expect those options to be less expensive than what they are paying now. These markets are coming in because they believe there is a need for them and they are going to want to charge appropriate premiums.”

“It is shaping up to be a tough year,” Holland adds. “Further pain will be suffered by solicitors and their insurers, and that is principally due to the fall-out of the credit crunch.” As the October deadline draws closer, it is clear that the solicitors’ PI market is set for a shake-up that is likely to reverberate for some time. IT

Case study: Clive Sutton, solicitor

Clive Sutton, sole practitioner

There is a worry that insurers will be taking a new view of their risks and cutting them down. And because there is a limited market, you may be left at the last minute with no cover or something very expensive.

There are only two or three big insurers in the sole practitioners’ market at the moment. Quinn has come in with some good rates and two-year deals. But in my case, that deal has come to an end and now I am obviously concerned there is going to be an increase.

Last year, there were a lot of solicitors that went into the ARP; more than usual. And it probably will be worse this year. But the ARP?premium is huge; around 25% of gross fees. It is an unmanageable amount.

Normally, going into the ARP meant you were too lackadaisical to cover yourself properly. But last year there were people in the ARP who did everything they could and they were still not presented with an appropriate offer.

Clive Sutton is a sole practitioner and honorary secretary of the Solicitor Sole Practitioners Group.