Lambs to the slaughter

In times of financial instability property investors, building societies and lending institutions look to recoup their own property losses from those deemed 'responsible', and solicitors are among those looking likely to stand accused. Investors will blame all those who could potentially have misadvised them, maintaining that improper practices have taken place.

Such accusations will lead to the demise of the bargaining power firms once held over insurers. Many solicitors experienced a 'golden era' in the wake of the competitive professional indemnity market, but now, solicitors '“ especially those specialising in conveyancing '“ are gritting their teeth in anticipation of higher premiums. Looking back, it seems incredible that before 1974 solicitors were not even obliged to have indemnity insurance. Nevertheless, many sensible solicitors voluntarily nominated insurers to cover them against the possibility of being sued for professional negligence.

Solicitors Indemnity Fund

The Law Society however then brought in new rules that only they could supply professional indemnity insurance through the Solicitors' Indemnity Fund (SIF), which caused a huge stir among the profession and massive changes for the fates of many. The SIF monopoly was challenged on several occasions as, not only being illegal, but threatening to bankrupt many small to medium practices. In 1999 however, when SIF finally relinquished its stronghold, firms were allowed to purchase cover on the open market and it was hoped that greater competition would give firms the bargaining power to negotiate lower premiums. One firm now reports that its annual indemnity premium is now just one tenth of what was being charged ten years ago by SIF. But is all this now set to change?

Higher premiums forecast

In the current economic downturn, firms specialising in conveyancing are likely to be the hardest hit. Not only has the market downturn affected firms' billing '“ with some firms worrying that this will affect their premiums, but the potential for an increase in claims means that cover could be set to rocket.

When it comes to assessing a firm in relation to cover required, the previous year's billing has always been a consideration. However brokers at HSBC do not forecast any potential decrease in turnover to have an immediate knock-on effect on a firm's premium. Janine Parker at HSBC comments: 'Underwriters are not looking at a snapshot view of the firm's turnover. They are liable for risk spanning six years and any decline in a firm's billing will not have an impact just yet.'

However judging by market indications the so-called 'golden era' does not look set to continue, and when the going does get tough it will be interesting to see how fickle our friends the insurance brokers are.

Lessons learned

Similarities between the recession of the early1990s and the economic downturn we are experiencing today cannot be fully aligned as the outlook is by no means as bleak, but lessons can (and certainly should) be learned.

Many conveyancing claims levied against solicitors, and also against surveyors, alleged that lending institutions were not warned of the dangers of being under-secured, where properties had been overvalued and where various financial incentives had been made to inflate the purchase price. As a result, claims were made and some firms faced considerable financial losses - at worst, bankruptcy.

This situation may once again arise if some in the property sector may have failed to learn their lesson and if, as in the wake of the last recession, firms are found to have been in effect overvaluing properties by using various incentives as a means to inflate the purchase price.

Be warned

Investors are wise to such scams and in tough times will look to recoup losses and place blame. Common scams, such as making allowances for the stamp duty to be paid by the seller, or for various cash incentives to be offered, result in the price of the property being shown as artificially high, and will not go uninvestigated.

As soon as these kinds of transactions are looked into, a new raft of claims against conveyancing solicitors will see indemnity premiums rise once more.

Residential conveyancing firms are already being heavily scrutinised this year, with a lot more detailed information being required. Questionnaires will aim to get a better overview of how the practice operates as a whole as well as the firms' history of property deals (and claims), risk assessment, training and operational procedures to get all the skeletons out of the closets.

The good, the bad and the ugly

Firms which exemplify good practice (and can prove it) should, in theory, not be affected by a huge hike in their premiums.

Having measures in place to prevent and assess risk is imperative, along with well-drafted client care letters and thorough operational procedures.

At my firm, Preuveneers LLP, we have seen the highs and lows of the property market over its 30-year span and do not anticipate current market fluctuations to affect our insurance cover. As managing partner Kelly Cirillo explains: 'We have been Lexcel accredited for the past five years, which has led to a considerable ongoing reduction in our premium because we tick every risk assessment box going.'

'We use Osprey, which is a very comprehensive online case-management system and helps us provide a meticulously high level of client care and risk assessment at every stage of the matter. A good case management system means you'll never miss key dates or make serious omissions because it's built into the functionality,' adds Cirillo.

Kevin Beach, senior solicitor and notary at the firm also believes that prevention is better than cure. 'Often, claims are made because the solicitors have not operated best practice, even though they were not legally negligent,' he comments.

'Even if the claims fail, they are highly disruptive. They could be avoided by adopting a culture of best practice so that in effect the solicitors go the extra mile for the client and don't just do the minimum the law requires,' adds Beach.

Zurich Professional recognises Lexcel as a framework for good management practices. One representative says: 'It includes excellent requirements and recommendations for systems and procedures which, if complied with consistently and conscientiously throughout the practice, should significantly reduce the risk of complaints and claims.'

One broker at HSBC however believes that although best practice procedures are the safest way to hedge against risk, Lexcel is not the 'be all and end all' for firms.

'Lexcel is a good model to go by, but it's just as important to have other good structures and controls in place, and to make sure there isn't scope for errors or omission. I think, most importantly, it's about history. The relationship and understanding you have with your insurers, as well as a good claims record, offers the best underpinning evidence of good practice.'

So what can firms that may not have always exercised best practice do?

Law Society council member, Basil Preuveneers advises: 'I personally don't think now is the time to shop around for cover. Wherever possible, firms should stay with their current insurers. It doesn't reflect well on a firm to be continually switching between insurers and (perhaps I'm being optimistic) but insurers should do their best to help ride out bad times, in lieu of previous fees.

'Furthermore, brokers will go to great lengths to frighten firms to believe that if they do not meet stringent deadlines they will end up with the bad boys in the bottomless pit that is the assigned risk pool.'

Those firms that end up in assigned risk pools are insured as 'high risk' and are unable to get cover from the other 22 qualifying insurers. Such firms with atrocious claims records are usually liable for negligence claims anyway but in the current climate more so than ever. The outrageously high premiums, more often than not, bankrupt struggling firms and those that survive must otherwise prove their worth for many years.