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Professional indemnity

PII Focus | The solicitors market: an attractive proposition for insurers from October

2012 saw the rise of the unrated insurer. It was an unhappy experience for a number of firms, as indemnity partners all over the country became experts in the eligibility criteria for the Financial Services Compensation Scheme. The Law Society published its first ever advice on “insolvency of a qualifying insurer”. Our regulators continue to make it clear that they do not vet, approve, or regulate, qualifying insurers and the benefits of a rated provider are being pressed heavily on us, by the rated providers. “Financial strength” will resonate through their typeface in the marketing material this summer. It is possible that the solicitors market will become even more attractive for both rated and unrated insurers this year. With effect from 1 October 2013, firms without insurance will no longer go into the ARP. They will have 90 days to obtain cover with a qualifying insurer; if they don’t get it they will have to cease practice. All of this, together with changes from October 2012, means that the financial burden of those firms and the ARP on qualifying insurers will continue to reduce. 2012 saw a modest reduction in the total premium income for qualifying insurers. 2013 is unlikely to see a significant change, one way- ?or the other.So who are the winners and losers and where is the smart money this year? Estimates for the 2012/3 year of indemnity suggest that up to a quarter of firms took out their insurance with unrated insurers. Almost of those were small firms – sole practitioners or two to five partner firms. In the meantime the claims experience is not getting any better in the areas typically undertaken by smaller firms. Some insurers saw increases in the number of residential property transaction, and trusts and probate claims continuing from 2011/12. Some firms will continue to feel  pressure to pay the lowest price. Whether this is enough to buy them financial strength will turn predominantly on their claims history and risk management. There are though some new factors. Insurers will be looking closely to see whether firms have embraced the introduction of COFAs and COLPs to overhaul and improve their risk and financial management systems. Client acceptance procedures and funding arrangements are the key areas to be able demonstrate strong systems and supervision in. Changes to CFAs, the introduction of DBAs and the continued expansion of third-party funding are all areas affecting a firm’s financial stability and law firm stability has shot up the agenda of insurers over the last year.For the larger commercial firms 2012 saw rates levelling out for those with a typical claims history. Fifty per cent of the total premium was attributable to the top 100 firms and the insurance was divided between just six insurers. The financial strength of the provider has not been jettisoned amongst the top 100. Those difficult conversations on premium quotes between the insurance partner and the managing partner have their limits. The greater concern is perhaps on the excess layer programme. Higher value claims are increasing for some and rates are likely to respond accordingly.  152 ABSs have now been licensed by the SRA alone and present, particular challenges for insurers in defining the scope of the cover for legal activities and integrating it with the other cover for the firm. The ABS will inevitably attract some with an entrepreneurial streak and will be the vehicle for new business models. A number of non-UK bar associations looked on askance at the development of the ABS in this jurisdiction. In July 2011 the German Federal Bar Association reported “We believe this to be a serious threat to the independent professional judgement of the lawyer employed by such a firm.” The introduction of any new regime attracts doubt and criticism but ABSs are here to stay. There will be some knocks along the way and the German Federal Bar Association will tell us “we told you so” when inevitable serious professional misdemeanour occurs. But one of the key factors in managing these particular risks, and the factor that the careful insurers will be looking out for, is the infusion of each of the big four ethical rules from the SRA’s Code of Conduct into the firm’s culture and systems. If the firm gets that right, then not much else can go wrong. If it gets it wrong, then the ingredients are all there for real trouble. The limit of the SRA’s penalty imposing powers for an ABS is a whopping £250,000,000.

PII Focus | Conveyancing: lender claims set to rise further

As renewal season looms for professional indemnity insurance (PII), solicitors firms can expect a difficult and nervous time In the past year large numbers of post credit crunch lender claims against conveyancing firms have finally come home to roost, particularly in relation to lender losses arising from the buy to let market. Professional indemnity insurance is written on a claims-made basis and claims are still only now being made consequent upon the market correction in 2008. It is likely that the end of the six year primary limitation period in late 2013 and 2014 in respect of transactions that completed in late 2007 or 2008 will result in a further round of lenders emptying out their filing cabinets and issuing claims. The prospect of this will inevitably make insurers nervous, particularly in respect of the smaller high street practice or any firm that operated a conveyor belt approach to conveyancing in the lead up to the credit crunch. Further, the imminent demise of the assigned risks pool and the prospect of forced closure if a firm cannot obtain cover within the 90 day extended insurance period from 1 October, means that the safety net for firms who cannot obtain PII on the open market will be lost. Consequently, we can expect to see further mergers and consolidations in the market between now and the New Year. So what can firms do to better manage risk and to improve their claims record? Firms can work with the SRA’s outcomes-focused regulatory regime and concentrate on process and risk management. Qualifying market insurers still report that most complaints and claims arise from process and management failures rather than poor legal advice. Firms should continue to focus on fundamentals such as (i) establishing the retainer properly, (ii) providing clear estimates on costs, (iii) managing a client’s expectations and (iv) avoiding delay. Concentrating on these issues will reduce claims over time and so improve a firm’s PI record. Not concentrating on these issues runs the risk of claims arising which, in turn, will adversely impact a firm’s ?PI record.Likewise, firms should make the most of their compliance officers for legal practice, finance, and administration; (COLPs and COFAs). The regulatory world has changed, and will continue in its current direction, so firms have no choice but to embrace the new approach. There is evidence that having one person responsible for practice management issues, such as a COLP, is beneficial. A similar system introduced in New South Wales in 2004 is credited with a one-third reduction in claims and complaints over the following four years. As for COFAs, there is clear financial pressure on firms at present and having a COFA should help to avoid a repeat of the high profile insolvencies that the legal market has seen in recent years.While improving risk management systems should help to improve the terms on which PII is offered, firms still need to think carefully about the levels of insurance that they obtain. A firm may believe that it has £3m of cover (or only £2m if a general partnership) for each and every claim, but the aggregation wording in the Minimum Terms and Conditions is wide (“similar acts or omissions in a series of related matters or transactions”) and insurers are quick to aggregate claims, for instance when they arise from the dishonesty of one rogue employee or partner. If a firm has or had departments that acted on large numbers of similar transactions, whether it be buy to lets, right to buy, purchases of holiday homes or tax advantaged investments, then if a batch of claims is aggregated, the mandatory limits of indemnity will quickly be exceeded. Similarly, the position is ?the same if the firms acted on high value property development deals or corporate acquisitions, where a single claim can far exceed £3m. Firms with such a profile should consider substantial excess ?layer insurance. All firms, but smaller firms in particular, also need to think carefully about the reputation and standing of the insurer that they are proposing to place their business with. Firms should not default to going with the lowest premium without considering the attitude of the insurer concerned to its insureds. In the post SIF world, insurers are much more inclined to investigate whether small partnerships are sham or real, or whether all the partners in a firm can properly be said to have committed or condoned some dishonesty that resulted in the claim. Insurers will also look critically at whether a particular solicitor’s activities amounted to legal services within the insuring clause. All insurers have the duty to act in good faith and to comply with the Minimum Terms and Conditions, but it will be reassuring to know that the insurer on risk has an established track record of supporting its insureds if and when claims arrive.  

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