Storm warning for solicitors' PI insurance
The competitive wind has changed in the solicitors’ professional indemnity (PI) insurance market, while regulatory changes and the ground-rent scandal could spell trouble for lawyers.
The purple patch, which saw many law firms with good loss records being fought over by insurers, looks to be over. The years of plentiful capacity and rock-bottom pricing seem to be at an end.
The writing has been on the wall for some time, but in July 2018, Lloyd’s of London demanded action from its syndicates to address their losses from PI insurance, which was one of the worst performing lines of business in the market.
This was quickly followed by the high-profile exit from the solicitors’ PI insurance market of Libra Managers, a well-regarded underwriter specialising in large law firms. Many practices insured by other MGAs backed by Lloyd’s syndicates had to wait for renewal terms, raising further doubts about the sustainability of market pricing.
Channel, Brit, Aspen, Hamilton and Pioneer have since stopped offering solicitors’ PI insurance, consolidating a trend that has gathered pace over the past 18 months.
There has not been a rush of new entrants to replace them, meaning the disappearance of so much underwriting capacity is bound to have an impact on the availability and cost of cover for many law firms this year.
Prices could rise by up to 15% across the board, suggest some insurers. Those practices with challenging loss records or that are looking to buy extra protection above the compulsory minimum levels are likely to be hardest hit.
The early signs are that with such uncertainty in the market there will be fewer early-renewal offers, while 18-month policies and cheap run-off cover will also be harder to come by.
Good and bad news on regulation
There was some welcome news at the end of last year, when the Solicitors Regulation Authority (SRA) announced it was putting on hold its proposed changes to lower the compulsory limits of PI insurance and amend the minimum terms and conditions.
Miller is opposed to these recommendations, as we did not believe they achieved their stated aims of increasing access to legal services while also reducing their cost – and were based on what we regarded to be highly dubious figures.
Our gut instinct is that these proposals will not resurface (at least for the foreseeable future), as the main architect of the reforms has now left the SRA and it seems to have heeded the strong opposition voiced by the legal profession and insurance brokers.
But there is another regulatory dark cloud on the horizon. In November 2018, the Legal Services Board gave the SRA the go-ahead to significantly ease its rules on who can provide legal services. So:
- Firms will be able to offer ‘unreserved’ legal services without being regulated by the SRA and without having to buy solicitors’ PI insurance.
- Self-employed solicitors not authorised as sole practitioners by the SRA will be allowed to offer ‘reserved’ legal services (litigation, conveyancing, probate and notarial work, along with administration of oaths), with the only requirement to buy ‘adequate’ insurance.
These changes are unlikely to come into effect until September at the earliest, but are profoundly concerning to us.
How does a member of the public know whether a solicitor is authorised by the SRA and has the full protection of mandatory PI insurance, or whether that person is outside of the watchdog’s control and has little or no protection? Unfortunately, most consumers will not know what cover their legal adviser has until there’s a problem – by which time it might be too late.
There’s a very real danger of a two-tier market being created: those practicing with gilt-edged PI cover and those working without it. These handbook changes contain all the ingredients for a real mess, and one we believe could result in the legal profession’s reputation becoming tarnished. But they seem set to go ahead.
Ground-rent clauses come home to roost
Problems concerning the controversial ground rent clauses in residential leaseholds are also starting to filter through to the legal profession.
Hundreds of thousands of homeowners are affected by such clauses, which could render their houses unsaleable. Since the problem came to light, many solicitors have combed through their files to find if they acted in any property deals that involved ground rent clauses. Some firms have found they have dozens of such cases on their books.
Our claims team has received word from clients that they might face negligence claims resulting from conveyancing work involving these clauses – either from homeowners or mortgage providers. But, as this problem has only come to light in the past couple of years we’ve not seen any claims so far and are unaware of any payouts made by insurers that could offer an indication of how they would react.
The solicitors’ liability in such cases is unclear. Were they negligent in not spotting something that wasn’t recognised as being a problem until after the contracts were signed? It will probably take a test case in the courts to establish how much blame the solicitor must shoulder in these disputes. Even then it will likely differ from case to case, as no two of these clauses are quite the same.
Law firms involved in conveyancing should be prepared to provide insurers with extra information ahead of renewals, as this issue is now on underwriters’ radars. Insurers have added questions on their proposal forms about whether law firms were involved in any such deals, and what due diligence they did at the time.
What should you do?
With the market in such a state of flux, law firms should expect some turbulence when renewing their professional indemnity insurance. It’s no longer a buyer’s market, so you can’t take it for granted that your insurer will offer to roll over your existing policy on the same terms. You can’t guarantee your insurer will even be in the market come April or October, so it’s important you start looking for cover three or even six months ahead of when your existing policy expires. Late buyers may discover that all the best deals have already gone.
You will want to look for quotes from more than one insurer, so you should make sure your proposal form stands out from the crowd. Underwriters will read thousands of submissions during the busy October renewal time, so you need to make it clear why your law firm is a good risk to take.
You’ll need expert advice to help you to navigate this tough market. Finding the right broker can save you time, hassle and money. Not every broker has access to every insurer that covers your type of law firm, so find one that works with a broad range of the market. With all the signs that capacity is likely to be in shorter supply, you might find fewer insurers will offer you cover. So, having more choice could be crucial.