Opening the channels of communication

Dear Sirs,

We are a legal services provider
(A Random Law Firm) operating predominantly from the Leeds post code area, but with national coverage. Our core business historically has been the provision of ‘high-street’ services – namely conveyancing, private client work and civil litigation – although over the course of the last two years we have diversified through the recruitment of specialist lawyers and a merger with another modest local practice. As a result, clients now have access to a sophisticated commercial offering. Presently Random Law
has seven directors and a further 12 solicitors
plus two fellows of the Chartered Institute of Legal Executives.

Following a series of turbulent PI insurance renewals, the board has decided to approach the market in search of a new broker because we are not satisfied with the standard of service we have received to date. The purpose of this letter is to invite you to tender for our account. Based on some initial market research, we believe that you would be a good fit for our business.

We are keen to be satisfied that you will be able to manage and protect our risk profile. With this in mind, I would be grateful if you could respond with your comments on how the following will impact on our renewal:

Legacy of rogue fee earner. Two years ago, we took on a consultant solicitor to bolster the thriving commercial property team. Despite his experience and seemingly impressive portfolio of clients, his performance was disappointing and – worse still – he turned out to be a ‘rogue fee earner’. Even though we uncovered his behaviour and severed the arrangement within six months, his legacy led to two notifications, one of which resulted in a claim that was settled (within our excess). While we are confident that the risk of reoccurrence is remote, especially as his files followed him out of the business, our premiums have since been adversely affected. I have attempted to articulate to brokers our risk mitigation in this respect but to no avail and would be grateful for a second opinion.

Merger due diligence. Competition in today’s legal marketplace is tough and we believe we may benefit from economies of scale. However, when we have approached our insurer to discuss the idea and agree a protocol for due diligence on prospective partners, they have so far demonstrated a reluctance to offer an opinion. Given our commitment to risk management and the significant sums we would invariably invest in such an exercise, this is most frustrating.

ABS conversion. Similar to the above, another option we are considering is conversion to an alternative business structure. However, when we approached our insurer with the proposed structure and asked for comments on how it might affect our risk profile, a response was not forthcoming. Again, the ABS process is fraught with difficulties and some engagement from our insurer before starting down that track would be preferable.

No reasons provided. In the past when an insurer has decided not to offer renewal terms, no reasons have been provided even on request. This seems unfair when a great deal of time has been spent completing the proposal form and preparing an accompanying risk management submission.

Quality standards. Law firms increasingly seek to differentiate themselves in a number of ways, but a common theme is quality standards, namely Lexcel, CQS, WIQS, Investors in People and the relevant ISO standards. In many cases, maintaining the quality standard carries few tangible benefits and – contrary to the view of many compliance consultants – there is no credible evidence that achieving quality standards reduces PII premiums. That said, certain quality standards are a pre-requisite of tender applications or panel membership and furnish firms with other benefits. We maintain some quality standards and have considered working towards others, but conducting a cost-benefit analysis is difficult when it is unclear how much value that particular kite mark will add to the business’ existing risk management framework. Any insight on this point would be greatly appreciated.

Articulating risk management measures. We are confident in our systems and controls for risk management. The board has pooled experience and resources to create a governance structure and balance supervision ratios which together enable effective monitoring. Further, the management information yielded is studied in meticulous detail by our risk committee. But despite our best efforts, I sometimes feel that the message is not effectively conveyed to our broker/insurer. Greater support from our broker in this respect would undoubtedly be beneficial.

Ongoing support from broker. Our experience with brokers to date is that we hear nothing for 12 months and then they come out of hibernation in time for renewal season. This may be an unfair generalisation, but we certainly have not benefitted from any additional support throughout the policy term. I am aware of other brokers that offer access to guidance documents via their website as well as admission to exclusive seminars and workshops offering practical advice. With this in mind, I would be grateful if you could briefly describe the work that you would undertake outside of the usual renewal period with a willing and co-operative business like ours, plus what benefits you extend to clients.

Financial stability. Since the SRA voiced concerns about financial (in)stability in the legal sector, some insurers have been utilising proposal forms as a means of delving deeper into the finances of its regulated firms. Generally, insured firms are advised not to limit their submission to the information requested by the proposal form, but in this case it is more difficult to decide which financial information should be treated as pertinent. We always provide comprehensive answers to the questions and are positive that none of the negative indicators – such as drawings exceeding net profit or unfavourable debt to equity ratios – apply to our business. A steer on this subject would be incredibly useful.

Provided we are confident that you will be able to alleviate these concerns, we would very much like to arrange a meeting to allow you to learn more about our business. In the meantime, should you have any questions in relation to any of the points raised above, please do not hesitate to contact me.

We look forward to hearing from you.

Yours faithfully,

Adam Entwistle

Managing director, A Random Law Firm

Adam Entwistle is a compliance consultant at Compl-i at Weightmans ?www.weightmans.com

 

Dear Adam,

Thank you for your letter. 

For context, Howden Windsor is one of the largest PII brokers in the UK. We have direct access to, and strong relations with, over 80 per cent of insurers underwriting solicitors’ PII.  For four- to ten-partner firms, like A Random Law Firm, we have an exclusive facility underwritten by A-rated insurer AmTrust Europe.

Below, I have responded to your questions based on the information provided. Once you have had a chance to look over my responses, I’d be keen to meet with you to discuss each of these issues in greater detail.

Legacy of rogue fee earner. It would be surprising if this in isolation would have had much effect on your premium. Our advice on this kind of occurrence is always to make a virtue out of a necessity; give full information to your insurer about the work you’ve done to assess and mitigate the impact of his legacy.
You should present this as a positive feature of your risk profile.

You mentioned that one of the notifications was settled within your excess, if the other matter is not expected to develop into any payment having to be made being or any costs incurred, we would look to try to persuade insurers to reverse any increase in premium.

Merger due diligence. This is almost an everyday occurrence for insurers and it’s possible that the rate of aborted deals may have led to a reluctance on the part of some to invest much time before the deal is better formed. We deal with our underwriters face-to-face and by the time we discuss an acquisition with them, we will have helped you plan:

• the best way of dealing with run off exposures and successor practice issues;
• what due diligence measures are required, not forgetting the need to apply the same principles to any acquisitions the target may have previously made, which can be a time bomb;
• risk management and integration of the new business and people into your organisation; and,
• warranty and indemnity insurance issues if a sizeable enough acquisition,

This will help your insurer to assess the impact to them and crystallise their underwriting attitude to the potential change.

ABS conversion. As time goes on, the market has become more relaxed about firms choosing an ABS structure. If this is all it is, i.e. the staff and activities are remaining the same, then there are unlikely to be any revised terms imposed.

Provided you have informed your insurer, you will continue to be covered subject to existing policy terms and conditions. If, however, this change results in you becoming a Ltd or LLP firm, then, in line with current SRA minimum terms and conditions, you will have to have a revised primary limit of £3m and this will result in some extra cost.

You should be aware, however, that even though this would mean increasing your limit by half, the additional premium for this transaction will be very much less than half, as the limit that is closer to the ground is very much more exposed and so is proportionately more expensive.

Those firms that wish to take advantage of ?the ABS rules to form a multidisciplinary practice may find arranging appropriate PII a trickier proposition, but each case will depend on its ?own circumstances.

No reasons provided. We understand that this can be frustrating. Because the vast majority of our broking activity takes place face-to-face with insurers, we are well aware of their appetites and can avoid the most obvious pitfalls.

Underwriting criteria can include the number of principals, amount of income and type/proportions of work done. There are times, however, when insurers decline to offer terms for less obvious reasons, and where this occurs we will try to understand and explain their reasoning to you.

Quality standards and risk management. Quality standards are one of many factors that make up an insurance profile and none of them will be of much value if your claims record fails to reflect their attainment. If you have a very poor record, and quality standards help you to improve over the years, then your premium may well reduce by a significant amount, but if you display the characteristics of a well-run practice already, they may only help to contain increases rather than lead to reductions.

Part of our approach is to ensure that your insurer can look behind your proposal form to see the ‘real you’. For that reason, the majority of our clients meet with their insurers regularly, away from renewal, to encourage a warm working relationship with no surprises on either side. At the very least, we seek from you a letter or an email setting out the positive features of your practice that aren’t given an airing on the proposal form. If there are any gaps in your risk management package, we are well placed to give specific assistance across the practice.

We are always looking to find ways for our clients to improve their risk management strategy while also reducing their PII premium. Clients who are insured by AmTrust Europe can save thousands of pounds on their PII by using completion monitor software on their conveyancing work.  Every time one of their insureds completes a conveyancing job using completion monitor, AmTrust will add a reduction to the following year’s PII premium.

Ongoing support from broker. Dealing with a commercial insurance programme should be a 12-month per year job. Many of our clients see us as part of their team either formally, for example, sitting on their risk management committee, or informally, such as meeting at intervals throughout the year, or just popping in for an informal chat. We try to balance your demands and needs (that difficult equation between when you ‘want’ to see us and when we feel that you ‘need’ to see us).

We support our personal service with regular engagement with our clients via e-newsletters and seminars as well as providing an insurance industry perspective in the solicitors’ press. We believe it is our job, as a broker, to bring a level of clarity to the myriad of issues that surround solicitors’ PII, putting clients in a stronger and more knowledgeable position when renewal season arrives.

In the event of a claim, our 30-strong in-house specialist PII claims team is on hand to act as ?your advocate. They make sure that your claim ?is settled rapidly, in a commercially sensitive manner and with minimum disruption to your business.

Financial stability. You are correct that insurers are paying more attention to the financial viability of their clients and prospective clients in these difficult economic times. While most insurers expect payment for the annual premium before policy inception, they still run the risk that should the insured cease trading during a current policy year, then they will also have to provide six years run-off cover while attempting to recover the additional premium which is payable in such an event. Insurers also have to recover the cost of any policy excess which might be paid out to a claimant and this can become difficult when dealing with insolvent entities.

In order to have fully effective insurance, you must provide full material disclosure and this is just as important when it comes to pertinent financial information. If you had a question as to whether you needed to provide additional information, we can advise on this as well as providing advice as to how best to present this to insurers.

I look forward to discussing your firm’s PII requirements in greater detail when we meet.

Kind regards,

John Wooldridge

Director, Howden Windsor

 

John Wooldridge is a director at Howden Windsor ?www.howdenwindsor.com/solicitors